Bandhan Bank Ltd-IPO Note

Issue Opens: March 15, 2018
Issue Closes: March19, 2018
Face Value: Rs10
Price Band: Rs370-375
Issue Size: ~Rs4,473cr
Public Issue: 11.93crore shares
Bid Lot: 40 Equity shares       
Issue Type: 100% Book Building

Source: RHP

Company Background

Bandhan Bank started general banking operations on August 23, 2015. It has India’s largest microfinance lending portfolio with a total loan book size of ~Rs24,400cr as on 9MFY18. Its asset products for 9MFY18 comprise of retail loans including a substantial portfolio of micro loans (~88% of loan book, whereas small enterprise loans, SME loans and other retail loans account for 5%, 4% and 3% respectively of its advances). It has a distribution network of 2,633 DSCs (Door Service Centre) and 887 bank branches serving 21.3 lakh general banking customers. As of Q3FY18, 96.49% of its gross advances were in priority sector lending (PSL). Its distribution presence in India is particularly strong in East and Northeast, with West Bengal, Assam and Bihar together accounting for 56.37% and 57.58% of its branches and DSCs respectively (Q3FY18).

Objective of the Offer

The issue comprises of a fresh issue (Rs3,662cr) and an offer for sale (Rs811cr). The existing shareholders IFC and IFC FIG would offer 1.4 cr and 75.65 lakh shares for sale through this issue. The object of the fresh issue is also to augment bank’s Tier-I capital base to meet its future capital requirements.

Financials

Source: Company, 5 Paisa Research; *On non-diluted basis at upper band; ^FY16 nos. are only for ~7 months and FY17 is the first full year of banking operations; #9MFY18 nos. are not annualized.      **non-annualized numbers

Key Points

1. Bandhan Bank, over the years, has consistently delivered sound financial performance. For 9MFY18, its RoA and RoE stood at 4.1% and 25.5% respectively on annualized basis. The gross advances of the bank have gone up by ~56% (from ~Rs15,578cr in FY16 to Rs24,364cr as of Q3FY18) owing to (a) robust capital adequacy ratio (CAR) and (b) extensive distribution network of branches and DSCs. The bank is adequately capitalized with CAR at 24.85% (Q3FY18). Moreover, much of its IPO funds will be used to improve its Tier I capital aiding the bank to improve advances going ahead.
2. The bank’s strategy is to tap the lower cost retail deposits. Its ratio of retail deposits to total deposits has increased from 37.95% in FY16 to 85.07% in Q3FY18. The bank’s CASA ratio has improved from 21.55% to 33.22% over the same period. The growth in CASA ratio and retail deposits has led to reduction in cost of funding. The focus on lower cost liability profile with improving micro lending loans provides it competitive advantage over its peers (maintaining profitable spreads and improve market share)

Key Risk

1. The bank faces concentration risk (81% of its total advances and substantial number of branches and DSCs are concentrated in East and Northeast India). Bandhan Bank’s financial performance could be adversely impacted if there is penetration of other banks in this area.
2. The bank has replaced majority of its bank borrowings with deposits and enjoys lower funding cost. Any inability to generate sufficient funding to support its micro banking activities could result in higher cost of funding and consequently lower yields, impacting the business and financial condition of the bank.

Conclusion

At the upper price band, the stock, post dilution is available at 4.1x and 3.5x on FY19E and FY20E P/BV respectively. We recommend SUBSCRIBE from a long-term perspective.

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