Bandhan Bank is a commercial bank concentrating on selling its financial products to underbanked and unpenetrated markets in India. It has a banking license that allows it to give banking facilities pan India across customer segments.

Bandhan Bank presently gives a range of asset and liability products and services made for micro banking and general banking, as well as other banking products and services to create non-interest income.

Its strength lies in microfinance, including a network of 2,022 doorstep service centers and 6.77 million microloan clients that BFSL transferred to it, which it has grown to 2,546 doorstep clients and over 9.47 million microloan clients as of September 30, 2017.

Issue Object: Bandhan Bank IPO

In terms of the RBI New Bank Licensing Guidelines, the Equity Shares of Bank are needed to get listed on the stock exchanges within 3 years from the date of start of business of its Bank, i.e., on or before August 22, 2018.

In light of the above, since the Bank is needed to get listed on the stock exchanges on or before August 22, 2018, the Bank is undertaking this Issue.

The objects of the Fresh Issue are to expand the Bank’s Tier I capital base to achieve the Bank’s future capital needs.

Qualitative Factors:

  1. Operating model concentrating on serving underbanked and underpenetrated markets;
    2. Consistent track record of growing a quality asset and liability franchise;
    3. Extensive, low cost distribution network;
    4. Customer-centric approach; and
    5. Experienced and professional team, backed by strong independent board.

Promoters:

  • Bandhan Financial Holdings Limited,
  • Bandhan Financial Services Limited,
  • Financial Inclusion Trust
  • North east Financial Inclusion Trust

Financials: Bandhan Bank 

Total Income of 2016-17 INR 432.01 Crore
Total Income of 2017-186M INR 261.81 Crore
Net Profit of 2016-17 INR 111.20 Crore
Net Profit of 2017-18 6M INR 65.77Crore
Earnings per Share (EPS) INR 10.15
Earnings per Share 2017-18 6M INR 6.01
Equity Capital as on 30.9.2017 INR 109.51 Crore.

Lead Managers: Bandhan Bank 

Kotak Mahindra Capital
Company Limited
Axis Capital Limited
Goldman Sachs (India)
Securities Private Limited
JM Financial
Institutional Securities
Limited
J.P. Morgan India Private
Limited

Management Team:

  1. Ashok Kumar Lahiri – Independent Director (part-time Chairman)
  2. Chandra Shekhar Ghosh – Managing Director and Chief Executive Officer
  3. Bhaskar Sen – Independent Director

Bandhan Bank Details

Bandhan Bank is the first bank to be set up in the eastern part of India since Independence.

Equity shares of Bandhan Bank are intended to be listed on Bombay Stock Exchange and National Stock Exchange.

Bandhan Bank Limited is set for an initial public offer (IPO) consisting 11.9 crore equity shares next fiscal year. The Kolkata based bank informed that it had filed a Draft Red Herring Prospectus with Securities and Exchange Board of India (SEBI).

This Bank, which is owned by Bandhan Financial Holdings Ltd, will issue up to 9.76 crore fresh equity shares and offer for sale, 1.4 crore equity shares by International Finance Corporation (IFC) and up to 75.6 lakh equity shares by IFC FIG Investment Company.

According to the bank, it is the first bank to be set up in the eastern region of India since Independence.

Started by Chandra Shekhar Ghosh who is also the managing director, the bank posted net profit of INR1,111.9 crore on a top line of INR4,320.1 crore in the latest financial year ended 31 March 2017.

This Bank is the first micro finance institution in India becoming a universal bank. Given the good response to earlier micro finance lenders turning into small finance banks such as Ujjivan and Equitas, Bandhan Bank IPO is also expected to get a good response.

Things to Know: Bandhan Bank IPO

1) The equity shares are intended to be listed on stock exchanges BSE and NSE. Kotak Mahindra Capital, Axis Capital, Goldman Sachs (India) Securities, JM Financial Institutional Securities and J.P. Morgan India are the lead book running managers of the Bandhan Bank IPO.

2) In a statement, Bandhan Bank said it intends to offer up to 11.92 crore equity shares of face value of Rs. 10 each at a price to be decided through a book building process including premium.

3) This Bank began as micro finance company in 2001 and got in approval of the Central Bank to set up a pan India bank in 2014. The company got its final banking license in June 2015.

4) Presently the savings account at Bandhan Bank gives an interest rate of 6 % for balance above Rs. 1 lakh and 4 % for balance up to Rs. 1 lakh. For term deposits, the maximum interest rate is 7.15 % for one year with an additional 0.5 % for senior citizens.

5) Bandhan Bank’s public shareholders include International Finance Corporation (IFC), Small Industries Development Bank of India (SIDBI), Caladium Investment Pvt. Ltd. (a company managed by GIC Special Investments Private Limited), Bandhan Employees Welfare Trust, and some individuals.

Prospects and Financials: Bandhan Bank

  1. This Bank began functioning on August 23, 2015 when Bandhan Financial Services Limited (BFSL), its parent company, transferred whole microfinance business to the bank. Since then, the bank has geographically expanded to 864 branches giving service to about 11 million clients in 33 states as of September 30, 2017.

The number of ATMs and committed Door step Services Centres (DSCs) was 386 and 2,546 as of September 30, 2017, respectively in contrast with from 50 and 2,022 as of August 23, 2015.

  1. Interest generated during financial year 2017 constituted 90.48 % of its total income (interest earned plus other income). The bank’s gross advance to deposit ratio as of September 30, 2017 was 76.54 %.

The bank had a good Capital Adequacy Ratio (CAR) of 26.24 % in September 2017. The RBI needs a minimum capital adequacy ratio of 13 % of a bank’s total risk weighted assets. The capital adequacy ratio (CAR) evaluates percentage of a bank’s risk weighted credit exposures.

  1. The bank had net interest margins (NIMs) of 10.01 % and 10.39 %, for the half years ended September 30, 2017 and 2016. Net interest margin is measured by dividing the difference of investment income and interest expenditure by the average earning assets.

Its Return on Equity (RoE) was 27.23 % and 28.79 %, respectively for the above tenure.

  1. The bank’s deposits have grown from zero as of August 23, 2015 to Rs 254,421.70 million as of September 30, 2017, with its CASA ratio standing at 28.18 % and retail to deposit ratio standing at 76.09 % as of September 30, 2017.

CASA ratio is the ratio of deposits in current and saving accounts to total deposits. A higher CASA ratio indicates a lower cost of funds.

  1. The bank’s net interest income in FY 2017 was Rs 24,034.98 million relative to FY 2016 of Rs 9,328.36 million.

Bandhan Bank’s Growth:

Since it became a full time bank, Bandhan Bank has seen a vigorous growth both in terms of amount of deposits and number of new clients. According to the Bandhan Bank, it has extended to each part of the country from the very start of the bank.

Bandhan’s chief executive officer and managing director Chandra Shekhar Ghosh said that last year has been a year of expansion for the bank. The bank has reached out to every corner of the 33 states and union territories of India.

Started on 23 August 2015, Bandhan has quickly extended its branch network all over India. The bank presently has 887 branches and is now serving 12 million customers and trying to meet their financial needs with the help of 27,000 employees. He also thanked clients for reposing trust in Bandhan.

According to Ghosh, the bank has deposits worth Rs 24,600 crore and loan book is at Rs 24, 350 crore. The bank also has a mobile banking app, mBandhan.

Ghosh further said that besides regular banking services, they have also started third-party products like general insurance, life insurance and mutual funds to give a 360-degree suitable service to all the esteemed clients.

It is to be noted that what helped the bank get the license was its rural exposure as a heavily successful microfinance company.

It is heavily believed that the rural background of Bandhan caught the Reserve Bank of India’s eyes as it wanted to end the lack of banking facilities in Indian villages. This also supports the government’s financial inclusion initiative.

The Central Bank had also mentioned its goal was to include a higher number of rural population in India’s banking sector, a concept that was later popularised as financial inclusion by the prime minister of India after he took over the office in 2014.

Future Growth Strategies:

Maintain focus on micro lending while expanding further into other retail and SME Lending:

As the country’s largest micro lender in terms of overall advances, Bandhan Bank’s goal is to maintain their leading position in the micro lending space while expanding further into other retail and Small and Medium Enterprises lending in order to capitalise on growth opportunities in the country’s micro lending and banking industries.

Diversified product offering:

Bandhan Bank gives a complete pack of products integrating micro finance as well as general banking.

Asset products includes retail loans including micro loans, Small Medium Enterprise loans and small enterprise loans. Bandhan Bank has found out newer areas like affordable housing, MSME and gold loans as future development areas. With a client base of 12 million, cross selling should be a big opportunity.

Liability products consist of savings accounts, current accounts and fixed deposit accounts. Bandhan Bank is also offering other products and services to generate non interest income like distribution of third party life insurance or mutual funds. Since approx 98 % of its advances qualify for Priority Sector Lending (PSL), this constitutes a strong source of fee income for the bank by selling PSL certificates.

Uniqueness of the business model:

The bank has made quick progress in extending its reach and has an extensive footprint with 887 branches and 2633 doorstep service centres that are majorly present in rural and semi urban areas. As the bank uses its existing assets more efficiently, cost income ratio which has began trending down should moderate further.

Three to four doorstep service centres are linked to a branch to stay connected with customers in a low-cost model. Most of the employees hired are also local who are very well aware with the area.

Healthy asset quality:

The bank has maintained perfect asset quality despite several disruptions in the micro finance industry like the crisis in Andhra Pradesh starting in 2010 that led to hige pressure on the micro lending industry as also the recent demonetisation.

Well capitalised & well managed:

Bandhan Bank was well capitalised before issue and after issue Rs 3662 crore capital infusion through the public issue the capital position will nourish further where CAR to touch 40 % which will take care of organic as well as inorganic growth needs. Finally the bank is managed by a strong management team with years of experience especially in micro lending.

While micro finance lending is not collaterised and prima facie looks like a risky conept, few in the industry boasts of a track record maintained by Bandhan Bank. The development beyond its known geography remains a key risk.

To Expand Geographical Footprint:

Bandhan Bank’s strategy is to increasingly diversify their geographical footprint. Accordingly, they have increased their footprint to 33 State and Union Territories from 24 State and Union Territories since they began banking operations.

Targeting New Products & Customers:

In addition to expanding their branch network, the bank also have plans to make products and services designed for rural and urban mass retail clients, as well as by continuing to actively promote their accounts and deposits, and by offering attractive interest rates.

For example, recently they came out with additional products and services designed for Non Resident Indians (NRIs) and foreign currency payments, in order to expand their business with the large Indian clients.

Moreover, the bank believes that their broad micro banking platform gives them with chances to receive deposits from comparatively underbanked and unbanked segments of Indian society as they become increasingly prosperous over time.

Boost share of Non-Interest Income:

Company plans to complement income from core asset products with non interest income from other sources in order to diversify their income stream and better the profit margins.

Additionally, last year they entered into arrangements to start distributing third party insurance products and third party mutual funds, in return for which they get a commission based upon the value of insurance product or mutual fund sold.

Company will also start distribution of life insurance products as a corporate agent in December last year, for which they have got a license from Insurance Regulatory and Development Authority of India.

As the bank enlarged their network, they anticipate to increase the size of their PSL compliant loan portfolio as well as increase the distribution of third party products, thereby raising their income stream from both sources.

The bank has also started inward and outward foreign currency payments. The service is made available to Non Resident Indians (NRI) and resident Indian clients within defined regulatory guidelines. These remittance services will give a further stream of non interest income.

The Bank is the largest player in the Micro Finance sector. It has the largest overall gross micro banking asset portfolio, with Rs.21,380 crores as of March last year.

Amongst the private and public sector banks, the outstanding loans given by the bank is more than three times higher than its closest competitor, the State Bank of India.

Positives for the Bank:

  • The bank has experienced and professional team which are supported by strong independent board.
  • Operating Model concentrated on Serving Underbanked and Underpenetrated Markets.
  • Bandhan Bank has a steady track record of growing a Quality Asset and Liability Franchise.
  • The bank also has an extensive, low cost distribution network.
  • Steady financial performance and strong capital base.

Branch Network

Presently the bank provides a variety of asset and liability products and services made for micro banking and general banking. Their asset products includes retail loans including a substantial portfolio of micro loans, as well as SME loans and small enterprise loans.

Bandhan Bank’s products includes savings accounts, current accounts and a range of fixed deposit accounts. Since starting banking operations, the bank has built a strong base of current account and savings account deposits, which together stood at Rs. 7,170 crores as of September 30, 2017, a CASA ratio of 28.18 %.

In addition to loan and deposit related offerings, the bank also offered other banking products and services to generate non interest income and cater towards the additional requirements of their clients.

These products and services include debit cards, internet banking, mobile banking, online bill payment services and the distribution of third party general insurance products and mutual fund products.

Valuations

After the issue, Bandhan Bank will be trading at P/BV of 4.3x, considering the highest price band of Rs 375 and book value of Rs 86 per share. The valuations look in line with its private competitors, which are presently trading at high valuations. ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Indusind Bank are trading close to 4x their book value, while other private sector banks like Yes Bank and Axis bank are trading at cheaper valuations of 2x.

Our views on the IPO:

Bandhan Bank’s purpose for coming out with Initial Public Offering is to follow the central bank norms. The bank boasts of strong presence in micro finance lending and aims to concentrate on micro finance lending and expand in retail and SME lending. Further, Bandhan Bank also aims to raise its presence across the country to 33 states and Union territories. The enlargement in SME lending will decrease the dependence on micro finance lending. Further, this is anticipated to yield higher returns. After the IPO, Bandhan Bank’s capital adequacy ratio would be 40 %, which is best in class. With enough capital adequacy, we see the growth in advances to speed up further in future years. In the past 3 years, the year on year growth of credit has been 51 %, while deposits have grown 91 % (zero base). In FY 2017-18 in the three quarters, investors have already seen credit growth of 31 % and the past quarter growth is usually high. It also aims to collect more non interest income to decrease the dependency on the main interest income. The bank looks quite stable in terms of asset quality even as some of its competitors are struggling with high Non Performing Assets. With more micro and Micro Small Medium Enterprises lending, the portfolio looks granular and gives required boost to asset quality improvement. The higher CASA share of 33 % gives enough low cost funding. Also, retail deposits of the bank which are lower than Rs 1 crore comprise 86 % of total deposit. Going forward, we see the growth story to continue as the bank concentrates to grow in under penetrated and un banked areas. It can be recommended to the investors to subscribe to the IPO with limited exposure considering the confusion in the banking system. However, historically banking Initial Public Offerings have made huge returns after listing for investors. It is anticipated this issue to give limited returns considering recent market volatility.

 

Banks P/BV
Bandhan Bank 4.3
HDFC Bank 4.7
Yes Bank 2.83
Axis Bank 2.29
Indusind Bank 4.4
Kotak Mahindra Bank 4.8

Analysts:

Analysts are doubtful of the valuations demanded by the Bank’s public issue which is priced at a level greater or equal to its private sector competitors.

However, even after this 10 % dilution, Bandhan is struggling to follow with the central bank direction to decrease promoter’s share to 40 %. The sale will decrease the holding company Bandhan Financial Holdings Ltd (BFHL)’s share to just above 82 % from 89.76 %.

Krishnan ASV, lead banking analyst at SBI Cap Securities said that despite a very unique business model, the 4x book looks to be a steep ask for a bank that is in transition and with limited headroom for further betterment in performance vectors. As the bank enlarged into general banking, lending yields and other performance vectors may be hard to support.
Loans to micro and small enterprises constitute 12 % of Bandhan Bank’s Rs 24,364 crore advances and are likely to increase faster than the high yielding micro finance loans.

Founder’s words:

The bank’s founder and Managing Director Chandra Shekhar Ghosh, said that Bandhan Bank’s valuation cannot be compared to other peers because the business model is unique. He further said that it is not an apple to apple comparison with any other full service bank or small finance bank or even a micro finance institution. He said that they are a different bank which cannot be compared to any of the present banks. We are in eastern part of the country with a rural economy which has a huge prospect for growth. Investors will decide after this point of view by investment bankers.

The founder said he will seek more time to follow with the central bank’s direction to decrease promoter holding to 40 %. He said that they will talk with central bank after the public issue and will take suggestions on how to go about it. They are aware of the situation being the regulator. They have not yet thought about how to decrease the holding.

World Bank arm IFC which is selling a total of 2.15 crore shares in the IPO will make Rs 806 crore for half its holding in the bank if the sale happens at Rs 375 per share. It had invested Rs 341 crore in a second tranche in 2015 just before the bank got the final approval from the central bank. IFC also has 11 % stake in the holding company.

IPO vs Mutual Funds

If you have no knowledge of the equity markets but are looking to gain from the equity markets, mutual funds are ideal. Investments can be made in Mutual Funds since they provide a wide variety and also the amount of investment can vary as per investor’s preference.

Many mutual funds invest in IPOs – many times at discounted rates that are not available to retail investors.

It is necessary to not get carried away by the hype surrounding IPOs. Don’t jump into IPO if you do not have the necessary skills.

In a mutual fund, a skilled and trained professional handles all investments for you and therefore, you can benefit from the equity markets without spending too much time gaining the skills needed to understand the markets.

Different Funds:

  • Large Cap Funds– Here the investment is made in large cap companies. These companies offer 12-18% return. Moderate risk is involved and it is suggested to invest here for 4 years or more.
  • Mid Cap Funds– Here the investment is made in mid cap companies. These companies are offer 15-20% return. Moderately high risk is involved and it is suggested to invest here for 5 years or more.
  • Small Cap Funds– Here the investment is made in small cap companies. These companies offer 15-20% return. High risk is involved and it is suggested to invest here for 6 years or more.
  • Balanced Fund– This fund is a combination of equity and debt in its portfolio. Depending on the proportion of investment made in Equity and Debt, the risk and returns are accordingly determined. It is suggested to invest here for 2 to 3 years. Returns in this fund range from 11-14%.

Investment can be made via lump sum investment or through SIP (Systematic Investment Plan) mode in any of these funds.

Moreover return is something that cannot be promised but these return estimates have been given on the basis of past performance.

Mutual Funds for 2018

Large Cap Fund:

These funds invest in large companies that have a history of good performance and stable balances.

Mid Cap Fund:

These are funds that are high risk – high return. They’re a bit riskier than large cap funds.

Small Cap Fund:

These are the funds that you can invest in if you want very high growth. They are a very high risk too.

If you want to see more funds to invest in 2018, check out: 30 best funds to invest in 2018.

Happy investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.