Is there any "bhala" investing in the over Rs 4000 crore Bandhan Bank IPO?

Last Updated: Wed, Mar 14, 2018 19:40 hrs
Bandhan Bank (Image Courtesy: Bandhan Bank)

Bandhan Bank, the bank with the 'Aapka Bhala, Sabki Bhalaai' slogan (good for you is good for all) has received SEBI's consent to ​float an IPO. The IPO will commence from March 15 and close on March 19 2018.

The Kolkata based private lender had filed draft papers on January​ ​1. Kotak Mahindra Capital Co. Ltd, Axis Capital Ltd, Goldman Sachs (India) Securities Pvt Ltd, JM Financial Institutional Securities and JP Morgan India Pvt. Ltd are the book-running lead managers to the issue. The equity shares are proposed to be listed on the BSE and NSE.

Bandhan Bank, post the IPO​,​ will be the 41st bank to list on the exchange. The IPO is currently touted among merchant bankers as the biggest of banking IPOs​ ​- estimated to fetch nearly Rs 4479 crore.

​The IPO comes at a time when​ ​b​anking stocks are already taking a hit, and even a Rs 80000​-​crore grand recapitalisation plan from the ​finance ​ministry and additional provisions have failed to ease the banking woes. In case you are keen to invest ​i​n the IPO, you may well research and at least be aware on all the nitty-gritties of the IPO.

The Grand IPO:

  • The bank is regulated by an RBI compliance to go public and reduce promoter shareholding to 40%, hence the IPO. The Reserve Bank of India's guidelines mandated the bank to get itself listed within three years from the commencement of banking operations. The bank started operations in August 2015.
  • The ​Bandhan ​NGO ​​has​,​ so far, supported about 55000 families across nine states since its launch in 2001, Chandra Shekhar Ghosh the mentor and founder of the NGO, said.
  • Bandhan Bank's shares of face value of Rs 10 will be issued in the price-range of Rs 370-375 per share. The Issue will be live between 15- 19 March 2018.
  • 11.9 crore shares estimated at Rs 4479 crore are up for sale in the issue. The bank will garner Rs 3663 crore from the fresh issue and the shareholders ​putting up their shares for sale ​will receive nearly Rs 806 crore.
  • Market lot ​and​ Minimum Order Quantity: 40 shares and multiples.
  • The sale involves both OFS (​O​ffer ​For ​Sale) and fresh issuance of stocks in the company. The issue includes fresh issue of 9.77 crore shares and an offer for sale of 2.16 crore shares of its shareholders International Finance Corporation, a World Bank arm​,​ and IFC FIG, which collectively hold ​a ​4.94 per cent stake in the company.
  • IFC​,​ the investment arm of World Bank​,​ had infused Rs 341 crore in Bandhan in 2015. It will reap Rs 806 crore at a sale price of Rs 375 per share.

About the Bank:

  • Bandhan Bank was incorporated on December 23, 2014, and began operations by August 23, 2015, with the micro-finance parent company transferring ​the ​entire micro finance business to the bank and the bank simultaneously commencing general banking activities. The RBI granted Bandhan a universal banking license in 2014.
  • During the transfer, Bandhan microfinance was India's largest micro finance company by number of customers and size of loan portfolio.
  • The company's network spans across 2546 doorstep service centres (DSCs) and 9.47 million micro finance loan customers. The bank currently operates through 864 branches and 386 ATMs together serving 1.87 million general banking customers. It has a strong presence in northeast West Bengal, Assam and Bihar, which account for 57.75 per cent of the branches and 58.13 per cent of the DSCs.
  • The bank's 97% loan portfolio comprises of priority sector lending, although it's core strength is in micro finance as well as micro, small and medium enterprises loans and small loans. In addition, the bank also offers other banking products to the customers and earns non-interest income from these products. These include debit cards, internet banking, mobile banking, EDC- POS terminals, online bill payment services and distribution of third party general insurance products, mutual fund products, etc.

Financial performance

  • The company has reported strong financial performance since inception and has had a healthy portfolio.
  • Advances for the quarter ending December 2017 stood at Rs​ ​ 24400 crore as against Rs​ ​ 15578.4 crore in March 2016. It has a CASA ratio of 33%, giving it benefit of low cost borrowing.
  • Total deposits for the quarter stood at Rs 25500 crore (86 per cent retail) in December 2017 as against Rs​ ​ 12088.7 crore in March 2016. The bank's net interest income grew to Rs​ ​ 2403 crore in Q2FY17 versus Rs 932 crore in March 2016.
  • The bank's NIM (Net interest margin) of 10.01 per cent for Q3FY18, can be considered as a good number. Net interest margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets.
  • Stable asset quality with GNPAs (Gross Non Performing Assets) of 1.43 per cent in Q3FY17. Provisions for quarter stood at Rs 132.4 crore.

Valuations

Post this IPO, the 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 peers, which are currently trading at high valuations. HDFC Bank, ICICI Bank, Kotak Mahindra 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.

The Company has posted its observations in its Draft Red Herring Prospectus, available here for download.

Here are some of the interesting observations from the DRHP:

Top Risks:

  • We cannot effectively compare our financial statements for fiscal years 2015, 2016, and 2017 due to irregular terms of duration.
  • A substantial portion of our operations are located in East and Northeast India, making us vulnerable to risks associated with having geographically concentrated operations.
  • Microcredit lending has its own unique risks and as a result, we may experience increased levels of non-performing loans and related provisions and write-offs that negatively impact our results of operations. (87.56% of net advances consists of microloans)
  • Micro-finance loan portfolio is not supported by any collateral that could help ensure repayment of the loan, and in the event of non-payment by a borrower of any of these loans, we may be unable to collect the unpaid balance.

Top Strengths:

  • Operating model focused on serving underbanked and underpenetrated markets: Our focus on underbanked and underpenetrated markets allows us to meet certain regulatory requirements. in Particular, the RBI requires that banks locate at least 25% of banking outlets in unbanked rural areas and at least 40% lending to priority sectors which includes micro loans. While traditional commercial banks may not be well suited to targeting unbanked rural areas or providing PSL-compliant lending, and thus see a drag on their profitability and yields as a result of these requirements, we do not. Rather, we targe these segments by choice, operating a low-cost network designed to cost-effectively and profitably reach these segments.
  • Extensive Low Cost Distribution Network
  • Consistent Financial Performance and Robust capital base: We have since our inception delivered consistent financial results for our shareholders and are currently in a robust financial position that, we believe, will enable us to grow our business quickly. Our Net Interest Income in FY 2016 amounted to Rs 9,328.36 million, while Net Interest Income in FY 2017 amounted to Rs 24,034.98 million. Our net interest margin for the nine months ended December 31, 2017 was 9.86%, while our return on assets and return on equity were 4.07% and 25.55%, respectively (each on an annualised basis). Our cost-to-income ratio for the nine months ended December 31, 2017 was 35.38% (on an annualised basis). Additionally, since beginning operations we have generated increasing non-interest income as a percentage of our overall income, improving from 8.66% for March 2016 to 35.38% for the nine months ended December 31, 2017. This increase in non-interest income has helped to improve our margins and returns.
  • Rural areas account for half of GDP, but less than 10% of banking credit. As of fiscal year 2016, there were almost 640,000 villages in rural India, inhabited by some 850 million consumers, who make up 65-70% of the population and contribute around half of the country's gross domestic product (GDP). Although rural India contributes 47% of India's GDP, its share in total credit outstanding is just 10%, in comparison with 90% for urban India as of fiscal year 2016. This extreme divergence in the share of rural areas in India's GDP and banking credit is an indicator of the very low penetration of banking in rural areas.

  • Share-holding pattern: BFHL, the holding company owns 89.62% stakes, while IFC, IFC FIG, Caladium, and SIDBI own Chandra Shekhar Ghosh own the remainder.

    Here are the other statements and accounting ratios:

    Comparison with Peers Bandhan's Basic EPS is the 10th highest in the industry. Here is the Net Asset Value calculation from the bank.

    Dilip Davda, writing for Chittorgarh.com suggests a Subscribe. He writes on his blog page, if we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 35 plus. Thus issue appears reasonably priced. Industry composite P/E is 35 plus and some of its listed peers are trading at a P/E of around RBL Bank (30), Ujjivan Finance (194), Equitas Holdings (1173), AU Small Bank (79). It is also considering Kotak Bank, Axis Bank, IndusInd Bank, Yes Bank, Bajaj Finance as its peers. Although current market sentiment on finance sector in doldrums, this bank has nothing of that sort and is having a niche play in micro financing where it will continue to dominate. Investment may be considered for short to long term.

    Market analysts concede:

    1. Subscribe for the long term (at least one year).

    2. Valuation is 4 times the book value, and is way too high. Others in the list include IndusInd Bank, Kotak mahindra bank, both were calculated at over 3.6 times of their book value.

    3. A handful optimists concede that the business model was unique and an ideal case of financial inclusion. Analysts at Ashika Trading, evaluated the IPO offering. They analysed the price to book-value (P/BV) of 4.93x at the higher end of the price band, and advise investors to "SUBSCRIBE".

    4. Given the bad news amid banking stocks, there have also been a section of investors who have exercised caution against investing for the short term. With the availability of other IPOs to invest for March, you can either invest with caution or forget this IPO. The other IPOs in March include Bharat Dynamics, Hindustan Aeronautics, and Karda Construction.

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