Bandhan Bank

“Best in the industry margins & strong fundamentals, makes it a strong investment case”

As per the licensing condition for Bandhan Bank, shareholding of Non Operative Financial Holding Company (NOFHC) was to be brought down to 40% within three years from August 2015 but it failed to do so and currently it holds ~82% in the bank. RBI acting against this violation withdrew the general permission to open new branches, but it said that new branches could be opened with RBI approval. In addition, the regulator has mandated to freeze the remuneration of the MD & CEO at the existing level (Rs. 2.4 crore as of FY18 annual report), till further notice.

As per Sebi rules, the promoter has a lock in period of one year post listing. Hence, the NOFHC is not in a position to sell its shareholding. The bank is taking necessary steps to comply with the licensing condition to bring down shareholding of NOFHC to 40% and is continuously engaging with RBI. Though lowering the stake to 40% is difficult and will require time, progress in the direction could lead to easing of the restriction.

Bandhan has 937 branches & 2,764 DSC and it had plans to reach 1,000 branches and then consolidate. The bank handles ~3,000 customers per branch, which is lower compared to other commercial banks handling ~20,000 to 25,000 customers. Hence, there is huge scope for improvement in efficiency and hence the restriction on opening of new branches is not seen having a substantial impact on balance sheet growth.

It can reduce the stake in the following ways:

1) Going for an acquisition:

wherein a share swap can lead to a natural dilution and should be least impactful for existing shareholders if they get a good deal. The management has indicated micro finance, MSME & affordable housing are key areas of focus for the bank. Also, the bank will have to gradually build slightly longer tenure assets to match its liabilities profile, which is also building fast

2) Non Banking Businesses:

After 3 years of licensing, NoFHC can enter into non-banking businesses. Hence, windows for acquiring a life/general insurance or any other non-banking business is open to venture from NOFHC diversification perspective and thereby achieve stake reduction.

3) Fresh Issue/ Stake sale:

Any stake dilution, via fresh issue or stake sale to bring down stake can be highly EPS and RoE dilutive.

Fundamentals better than industry, stake sale can lead to short term volatility:

Any of these events of acquisition can be margin and RoA dilutive to some extent, though profits may surge with size. Accordingly, we reduce our target multiple and assign 4.7x on FY21E ABV (vs 6x earlier) to arrive at a target price of Rs. 650. In the short term, the stock could hover at corrected level till there is clarity from management. We continue to remain positive and recommend gradually accumulating as the decline settles. We maintain BUY rating on the stock. Robust growth, better than banking margins and low cost to income still continue to remain strong attributes of the bank.

Highest margins in industry and a Unique Business model:

Bandhan Bank has a unique business model of high yielding micro finance loan and low cost deposit franchise with 35% CASA offered in the ambit of a commercial bank (only MFI to receive universal banking licence in 2014). Hence, it garners highest margin among banking peers at ~9-10%.

Source: ICICI Direct Report

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