A different approach to overall banking
Bandhan Financial Services had received in principle approval from RBI to set up a Bank and it began its banking operations in August 2015 with the name Bandhan Bank Ltd (Bandhan). The bank has grown remarkably in a very short span of time. It primarily focuses on serving underbanked and underpenetrated markets in India (East and North East India). As on Q3FY2018, the bank's advances stood at Rs. 22,932cr, deposits at Rs. 25,294cr (95% of the funding mix) and CASA ratio was at 33.22%.
No. 1 lender in the micro lending space: Bandhan, since its inception has been lending to underbanked and underpenetrated markets. This is a high yield business (NIM - 10.7% for 9MFY2018) and also enjoys the priority sector lending (PSL) benefits. As on 3QFY18, advances stood at Rs. 22,931cr, up 41.3% yoy. We expect that Bandhan would continue to grow at healthy rate and maintain higher NIM owing to management's focused approach toward targeted market.
Healthy return ratios: Bandhan has reported ROE/ROA of 26.8%/4.2% for 9MFY2018. Higher return ratios are largely driven by lower Cost to Income(C/I; 35.4%) and higher net interest margin. C/I has declined from 57% in FY2016 to 35.4% in 9MFY18, and we believe C/I would continue to decline further.
Strong asset quality, sufficient CAR to support growth: Robust credit assessment process and understanding of targeted market has aided in lower GNPA (1.67% 9MFY2018). As on 3QFY18, CAR was 24.85% and post IPO it would increase further. Given the strong internal capital generation ability, high CAR and IPO proceeds, Bandhan would not require equity dilution in the near term.
High valuations underpinned by high growth potential and profitability: At upper end of the IPO price band, Bandhan is valued at 8.3x 3QFY18 book value (preIPO) and on Post dilution basis at 5x of BV. Though valuations are on the higher side, we expect such premium valuations to persist given (a) healthy return ratio (25%+ RoE for FY17 and 9MFY18), (b) balance sheet strength (24.8% CAR ratio, CASA - 33.2%) and (c) experienced and focused management. Considering the above positives, we recommend SUBSCRIBE on the issue.