IPO Note: Bandhan Bank Ltd. Industry: Finance Reco: Subscribe Date: March 09, 2018 Company Name Bandhan Bank Ltd. Issue Snapshot Issue Opens March 15, 2018 to March 19, 2018 Price Band Rs. 370 to Rs. 375 Bid Lot The Offer Issue Size IPO Process Face Value Rs. 10.00 Exchanges BRLM Registrar 40 Equity Shares and in multiples thereof. Public issue of 119,280,494 Equity shares of Face value Rs. 10 each, (Comprising of fresh issue of 97,663,910 Equity Shares (Rs. 3662.4 cr) and Offer for Sale of 21,616,584 Equity Shares (Rs. 810.6 cr) by Selling Shareholder). Rs. 4413.4 4473.0 Crore 100% Book Building NSE & BSE Objects of the Offer Kotak Mahindra Capital Company Limited, Axis Capital Limited, Goldman Sachs (India) Securities Private Limited, JM Financial Limited and J.P. Morgan India Private Limited Karvy Computershare Private Limited Issue Break up Issue Size Allocation Equity Shares* QIB ex Anchor 20% 23,856,099 Anchor Investor 30% 35,784,148 HNI 15% 17,892,074 RII 35% 41,748,173 Total Public 100% 119,280,494 Equity Share Pre Issue (Nos. Cr.) 109.5 Fresh Share (Nos. Cr.) 9.8 OFS Share (Nos. Cr.) 2.2 Equity Share Post Issue (Nos. Cr.) 119.3 Market Cap (Rs. Cr.) 44,730.2 Dilution 10.0% Fresh 8.2% OFS 1.8% * Based on Higher Price Band @ 375 Offer for Sale The Company will not receive any proceeds from the Offer for Sale by the Selling Shareholder. (up to 14,050,780 Equity Shares by IFC and up to 7,565,804Equity Shares by IFC FIG). Fresh Issue To augment Bank's Tier-I capital base to meet future capital requirements. Company Highlights Bandhan Bank Ltd. (BBL) a micro finance company that got RBI license in 2015 for Bank has transited itself into a bank on 23rd August 2015. It had a mandate to bring IPO within three years of starting banking operation; it is coming much before that with its maiden IPO. BBL is a commercial bank focusing on serving under banked and underpenetrated markets in India. Bandhan Bank has a banking license that permits it to provide banking services pan-india across customer segments. It currently offers a variety of asset and liability products and services designed for micro banking and general banking, as well as other banking products and services to generate non-interest income. BBL s strength lies in microfinance and has strength of 2,633 DSCs and 9.86 million micro loan customers as of December 31, 2017. It also opened Greenfield network of 501 bank branches and 50 automated teller machines ( ATMs ), which as of December 31, 2017 has grown to 887 bank branches and 430 ATMs, together serving over 2.13 million general banking customers. Bank s distribution network is particularly strong in East and Northeast India, with West Bengal, Assam and Bihar together accounting for 56.37% and 57.58% of its branches and DSCs as of December 31, 2017, respectively. It currently offers a variety of asset and liability products and services designed for micro banking and general banking. Its asset products consist of retail loans including a substantial portfolio of micro loans, as well as micro, small and medium enterprise ( SME ) loans and small enterprise loans. As of December 31, 2017, 1
96.49% of its Gross Advances were in priority sector lending ( PSL ) compliant with the Reserve Bank of India ( RBI s ) PSL requirements. As of December 31, 2017, BBL s retail-to-total deposit ratio stood at 85.07%. As on the same date, bank s deposits and Gross Advances (including IBPC/Assignment) stood at Rs. 25294 crore and Rs. 24364 crore respectively. View Incorporated on December 23, 2014, Bandhan Bank started operations on August 23, 2015 after Bandhan Financial Services Limited ( BFSL ), parent company offloaded the entire microfinance business. BFSL was then the largest microfinance company by number of customers (6.77 million) and by advances (Rs 77,687.90 million). The sole purpose of listing is on account of mandatory listing of banks within three years of commencement of operations. The strength of the bank lies in its microfinance business with a network of 2,633 DSCs and 9.86 million micro loan customers as of December 31, 2017. Moreover, it has a strong presence in East & North East India comprising of 65% of branches, 69% of DSCs and 81% of total advances. As of December 2017, 87.56% of net advances consist of micro finance loans and is followed by small enterprise loans of 5%. The bank will expand its portfolio in retail segment (comprising of affordable housing loans, personal loans, two wheeler loans and gold loans) together with SME segment and small enterprise loans. However, the core strength and focus lies in the microfinance business which translates to 96.49% of gross advances of the bank being PSL compliant against the mandatory norm of 40%. This allows Bandhan bank to undertake sale arrangements under IBPCs and PSLCs to other banks, thus providing opportunities to earn interest income or fee income respectively. Most of the loans for the bank have been sold under the PSLC route and will be the preferred choice going ahead. The bank has not only driven a successful microfinance business over the years, but maintained its asset quality with GNPAs (as % of gross advances) being one of the lowest at 0.51% as of FY17. However, the same has crept up to 1.67% as of December 2017 largely on account of demonetization. Nevertheless, Bandhan bank maintains standard asset provision of 1% on its MFI portfolio against mandatory norm of 0.25% resulting into provision coverage of 52.34% as of December 2017. Besides, it is adequately capitalized with Capital Adequacy ratio (CRAR) as of December 31, 2017 standing at 24.85%, against the regulatory requirement of 13%. What s notable is that the bank has grown its deposits base from zero to 25,294 crore and bumped up its CASA ratio to a respectable 33% (as of December 2017) in a short span of time. Although, 70.62% of term deposits are under one year in duration, however 75.8% of net advances of the bank is also due in one year or less. Since deposits have replaced bank borrowings, cost of funds has also reduced from 9.05% in FY16 to 7.21% for nine months ended December 31, 2017 (annualized). However, Bandhan bank has passed on the lower cost of funds and lowered interest rates on micro loans from 22.4% to 21.0% in August 2015 to 18.52% to 18.40% as of December 31, 2017, the lowest in the industry. Bandhan bank earns net interest margins (NIM) at 10% to 11% mark. For the nine months period December 2017, the bank has earned NIM of 9.86% as against 10.34% in the same period last year. Besides, the bank also operates under a lean cost structure and having borne the cost of setting up the bank and opening up of branches, the cost structure has been stable as justified by the cost to income ratio of 35.38% for nine months ended December 31 2017 as against 36.72% in the same period last year. This has enabled Bandhan bank to earn superior return on assets (ROA) at 4.07% for nine months ended December 31 2017 and the management is fairly confident of holding onto these levels. Since March 31, 2016, Gross Advances (including IBPC/Assignment) have grown from Rs 15578 crore to Rs 24364 crore as of December 31, 2017, growth of 56%. On a yoy basis, from nine months ended Dec 2016 to Dec 2017, gross advances increased by 33% while net interest income grew by 27% and profit after tax increased by 21%. Bandhan bank is a unique model and is an ideal case of financial inclusion drive by the government considering 55% of the branches are in rural region. Post issue, ROE of the bank will come down to 14% (on post issue networth and annualized nine months net profit); however, given the strong business growth and return matrix, the ROE of the bank is all set for improvement. At the higher end of the price band, the bank is valued at P/BV of 4.93x book value (post issue) of Rs 76 and we advise our investors to SUBSCRIBE to the issue considering the business model, superior growth and return ratios and the ability of the management. 2
Financial Statement (In Rs. Cr) FY15 FY16 FY17 9MFY18* Capital & Liabilities Capital 501.1 1,095.1 1,095.1 1,095.1 Net Worth 501.6 3,334.5 4,446.5 5,404.2 Deposits - 12,088.7 23,228.7 25,294.0 Borrowings - 3,051.6 1,028.9 1,330.7 Other liabilities and provisions 25.3 1,281.6 1,532.0 1,190.5 Total Liabilities 526.9 19,756.5 30,236.1 33,219.3 Assets Cash and balances with Reserve Bank of India 0.0 810.3 6,012.1 1,258.7 Balance with Banks and Money at call and short notice 401.3 2,363.1 1,352.9 1,133.2 Investments - 3,758.0 5,516.5 7,291.2 Advances - 12,437.5 16,839.1 22,930.7 Fixed Assets 108.6 237.2 251.8 233.0 Other Assets 17.0 150.3 263.7 372.5 Total Assets 526.9 19,756.5 30,236.1 33,219.3 Interest Earned - 1581.4 3908.7 3451.7 Interest Expended - 648.5 1505.2 1282.9 Net Interest Income - 932.8 2403.5 2168.8 Other Income 8.0 149.9 411.4 502.8 Operating Expenses 5.6 615.9 1022.0 945.3 Provisions & Contingencies - 53.3 88.4 265.1 Profit before tax 2.3 413.5 1704.5 1461.2 Tax Expenses 1.7 138.3 592.5 503.5 Profit after tax 0.6 275.2 1112.0 957.7 Earnings per Share 0.0 3.4 10.2 8.7 Source: RHP, Ashika Research *Pre-issue Cash Flow Statement (In Rs. Cr) FY15 FY16 FY17 9MFY18 Cash flow from Operations Activities 0.5 6953.7 8885.2-3948.0 Cash flow from Investing Activities -101.5-3718.2-2670.9-1396.8 Cash flow from Financing Activities 501.1-3722.6-2022.7 301.8 Net increase/(decrease) in cash and cash equivalents 400.0-487.2 4191.6-5043.1 Cash and cash equivalents at the beginning of the year 0.0 400.0 3173.1 7364.7 Cash and cash equivalents at the end of the year 400.0 3173.1 7364.7 2321.7 Source: RHP 3
FY16 FY17 9MFY18* Net asset value per equity share (Rs.) 30.45 40.6 49.35 CRAR (%) 26.72 24.77 23.53 Gross NPAs to Net Advances (%) 0.15% 0.51% 1.67% Net NPAs to Net Advances (%) 0.08% 0.36% 0.80% Provision coverage ratio 45.46% 29.09% 52.34% Return on net worth 8.25% 25.01% 17.72% Return on assets 1.88% 4.46% 3.01% Interest income as a percentage to working funds 10.77% 15.67% 10.99% Non-interest income as a percentage to working funds 1.02% 1.65% 1.60% Operating profit as a percentage to working funds 3.18% 7.19% 5.45% Business per employee (Rs. Mn.) 10.3 17.05 18.09 Profit per employee (Rs. Mn.) 0.1 0.5 0.37 * Not Annualised Comparison with listed industry peers Co Name Bank EPS (Rs.) RONW (%) P/E (x) P/BV (x) NAV (Rs.) Market Cap (Rs. Cr.) Bandhan Bank 9.3 14.1 35.0 4.9 76.0 44730 HDFC Bank 59.4 18.4 29.1 5.1 358.2 480118 Kotak Mah. Bank 26.7 13.8 48.8 5.5 209.1 206257 ICICI Bank 17.1 11.8 25.9 2.0 174.3 188078 Axis Bank 16.5 7.2 39.1 2.2 235.4 129664 IndusInd Bank 48.0 15.3 29.1 4.4 338.7 101888 Yes Bank 73.2 18.7 18.3 3.1 482.8 69827 RBL Bank 11.9 10.3 36.2 3.4 115.6 19138 IDFC Bank 3.0 7.2 21.3 1.2 43.2 17002 Small Finance Bank AU Small Finance 26.8 22.3 66.5 9.5 69.9 16815 Equitas Holdings 4.7 8.9 29.7 3.0 66.0 4750 Ujjivan Fin.Ser. 17.4 11.8 222.1 2.7 147.0 4122 NBFC Bajaj Fin. 33.6 21.6 42.7 6.8 175.6 95608 GRUH Finance 8.1 30.5 53.6 15.8 30.5 20073 Source: RHP, Capitaline, Ashika Research Note: BBL fig. are calculated based on post issue diluted, higher price band. All other company fig. are of FY17 except P/E and P/B are inttm basis 4
Research Team Name Designation Email ID Contact No. Paras Bothra President Equity Research paras@ashikagroup.com +91 22 6611 1704 Krishna Kumar Agarwal Equity Research Analyst krishna.a@ashikagroup.com +91 33 4036 0646 Partha Mazumder Equity Research Analyst partha.m@ashikagroup.com +91 33 4036 0647 Arijit Malakar Equity Research Analyst amalakar@ashikagroup.com +91 33 4036 0644 Tirthankar Das Technical & Derivative Analyst tirthankar.d@ashikagroup.com +91 33 4036 0645 Ashika Stock Broking Limited ( ASBL ) or Research Entity has started its journey in the year 1994 and is engaged in the business of broking services, depository services, distributor of financial products (Mutual fund, IPO & Bonds). This research report has been prepared and distributed by ASBL in the sole capacity of a Research Analyst (Reg No. INH000000206) of SEBI (Research Analyst) Regulations 2014. ASBL is a wholly owned subsidiary of Ashika Global Securities (P) Ltd., a RBI registered non-deposit taking NBFC Company. Ashika group (details is enumerated on our website www.ashikagroup.com) is an integrated financial service provider inter alia engaged in the business of Investment Banking, Corporate Lending, Commodity Broking, Debt Syndication & Other Advisory Services. There were no significant and material disciplinary actions against ASBL taken by any regulatory authority during last three years. Disclosure ASBL or its associates, its Research Analysts (including their relatives) may have financial interest in the subject company(ies). However, the said financial interest is not limited to having an open stock market position in /acting as advisor to /having a loan transaction with the subject company(ies) apart from registration as clients. 1) ASBL or its Research Analysts (including their relatives) do not have any actual / beneficial ownership of 1% or more of securities of the subject company(ies) at the end of the month immediately preceding the date of publication of this report or date of the public appearance. However ASBL's associates may have actual / beneficial ownership of 1% or more of securities of the subject company(ies). 2) ASBL or their Research Analysts (including their relatives) do not have any other material conflict of interest at the time of publication of this research report or date of the public appearance. However ASBL's associates might have an actual / potential conflict of interest (other than ownership). 3) ASBL or its associates may have received compensation for investment banking, merchant banking, and brokerage services and for other products and services from the subject companies during the preceding 12 months. However, ASBL or its associates or its Research analysts (forming part of Research Desk) have not received any compensation or other benefits from the subject companies or third parties in connection with the research report. Moreover, Research Analysts have not received any compensation from the companies mentioned herein in the past twelve months. 4) ASBL or their Research Analysts have not managed or co managed public offering of securities for the subject company(ies) in the past twelve months. However ASBL's associates may have managed or co managed public offering of securities for the subject company(ies) in the past twelve months. 5) Research Analysts have not served as an officer, director or employee of the companies mentioned in the report. 6) Neither ASBL nor its Research Analysts have been engaged in market making activity for the companies mentioned in the report. Disclaimer The research recommendation and information herein are solely for the personal information of the authorized recipient and does not construe to be an offer documents or any investment, legal or taxation advice or solicitation of any action based upon it. This report is not for public distribution or use by any person or entity, where such distribution, publication, availability or use would be contrary to law, regulation or subject to any registration or licensing requirement. We will not treat recipients as customer by virtue of their receiving this report. The report is based upon the information obtained from public sources that we consider reliable, but we do not guarantee its accuracy or completeness. ASBL shall not be in anyways responsible for any loss or damage that may arise to any such person from any inadvertent error in the information contained in this report. The recipients of this report should rely on their own investigations. 5