On path to build a strong franchise March 15, 2018 Pritesh Bumb priteshbumb@plindia.com +91 22 66322232 R Sreesankar rsreeshankar@plindia.com +91 22 66322214 Vidhi Shah vidhishah@plindia.com +91 22 66322258 Rating Price Band Subscribe Rs370 Rs375 IPO Fact Sheet Opening Date March 15, 2018 Closing Date March 19, 2018 BRLMs Kotak IB, Axis Cap, Goldman Sachs, JM Financial, JP Morgan Issue Size Rs. 44,730mn Fresh Issue Rs. 36,624mn OFS Rs. 8,106mn Objects of the Issue To augment capital base for future growth prospects, offer for sale and listing requirements under RBI s new licensing guidelines prior to three years of commencing operations Issue Details Pre issue equity (m shares) 1,095.1 Post issue equity (m shares)* 1,192.8 Post issue Market Cap (Rs bn)* 447.3 Bank, a new aged private bank commenced operations in Aug 2015. Since then, in a short span of time it has been able to build up a decent deposit franchise and maintained strong opex control, much better than many private peers. Bank stressed on building its business around micro finance customers and focuses on becoming a retail centric bank. At the upper band of the issue price range of Rs370 375, bank will trade at 3.4x FY20 BV of Rs111 which is equivalent to large private peers and is fully priced in our view. But given the return ratios, liability buildup and the large opportunity of scale up, we recommend to subscribe to the Bank with a longer term horizon. Loan mix to shift from microfinance to SME & Retail: Current loan mix is concentrated towards MFI which at 88%, but has been coming off due to strong growth in small enterprise loans (1.5x YoY growth) & retail (2.5x YoY growth) and although growth was slightly impacted in the MFI business due to demonetisation but growth has resumed again. Strategy of management is to build business around the Micro loans segment like affordable housing, gold loans and other retail which will help stronger loan growth momentum of +35% CAGR till FY20. Deposit build up has been good: has been able to display traction in deposits reaching Rs252.9bn (CD Ratio 90%) as on Dec 2017 of which CASA is 33.0%. Although CASA market share amongst banks is miniscule, it is catching up on CASA efficiency per branch to immediate private peers and is much higher than SFBs. has been able to display this decent deposit attraction due to focus of its +850 branches only on liabilities, under penetration in the East & NE India and much focused offering coupled with higher SA rate. Capital Return ratios better than private peers: Due to MFI biz, margins have been much higher at 9 10%, coupled with fee income from PSLC sell down and strong opex control, keeping ROAs at +4% & ROEs at +25%. Going ahead, optimum capital deployment will be crucial, while we believe margins will be under pressure and opex control will be a challenge and hence return ratios are likely to be better than immediate private peers but lower than current levels. Key financials (Y/e March) 2016 2017 2018E 2019E Net interest income (Rs m) 9,328 24,035 30,602 42,329 Growth (%) 157.7 27.3 38.3 Non interest income (Rs m) 1,499 4,114 6,788 9,164 Operating Profit (Rs m) 4,668 17,929 24,447 33,941 PAT (Rs m) 2,752 11,120 13,364 19,829 EPS (Rs) 2.5 10.2 11.2 16.6 Growth (%) 304.0 10.3 48.4 Book Value (Rs) 30.4 40.6 79.2 92.8 IPO Note Share Holding (%) Pre IssuePost Issue* Promoters 89.6 82.3 Public & Others 10.4 17.7 *Equity issuance calculated on higher band price Profitability & Valuation 2016 2017 2018E 2019E Spreads / Margins (%) 9.8 11.4 9.3 8.5 RoAE (%) 14.4 28.6 19.2 19.3 RoAA (%) 2.7 4.4 3.5 3.8 P/E (x) 148.8 36.9 33.5 22.6 P/BV (x) 12.3 9.2 4.7 4.0 P/ABV (x) 12.3 9.4 4.7 4.0 Source: RHP; PL Research Note Valuations based on upper band Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Business Description Bank is the new age full service private sector bank which acquired license from RBI under new licensing guidelines in FY14. The Bank commenced operations in Aug 15 post which the current parent company Financial Services transferred its Microfinance business to Bank. Bank has divided its business in two parts (i) Micro lending which is centered around the under banked & under penetrated area and (ii) General banking segment. Currently, Bank has Rs243.6bn in loan assets which is dominated by Micro Finance at 88% but has been diversifying into other segments and has Rs252.9bn in deposits of which 33% is CASA. Bank focus will continue to be on micro lending segment but has more given more thrust on the Retail & SME segment. Exhibit 1: Bank has been able to scale up well post commencing operations 300 250 200 150 100 50 Gross Advances (Rs bn) 156 121 235 232 Deposits (Rs bn) 254 244 253 221 Exhibit 2: Bank has been slowly winding down its assignment book On Book Advances Off Book Advances 20% 12% 5% 28% 80% 88% 95% 72% Exhibit 3: Gross loan book break up: Bank has been shifting its loans towards retail and small enterprises Micro loans Small enterprise loans SME loans Other retail loans 0.6% 0.4% 99.0% 1.7% 2.7% 3.0% 3.0% 4.4% 3.7% 4.5% 5.5% 5.0% 90.8% 87.4% 88.3% March 15, 2018 2
Exhibit 4: Micro Loans break up: Equal purpose of MFI loans within Agri & Business loans Agri Biz Loans Health & Education Exhibit 5: Retail Loans break up: Personal loans dominate, but bank moving towards secured lending segments LAD PL LAP Housing 2W Gold loan Yuva Loan 2.4% 6.0% 11.7% 3.8% 2.0% 4.6% 4.5% 3.0% 14.4% 13.6% 45.8% 49.8% 52.0% 52.7% 86.2% 43.2% 50.7% 54.2% 53.5% 49.9% 47.9% 47.2% 39.6% 26.6% 23.3% Source: Company Data, PL Research Source: Company Data, PL Research has an advantage on the PSL requirement due to lending to under banked lower income segment. Currently, 97% of loans are PSL compliant which is much above the regulatory requirements and has helped garner strong fee income from PSLC sell downs. Also, PSL compliance has helped the bank avoid drag on margins by investing in lower yielding assets to achieve targets especially from direct Agri, which other banks continue to face challenges. Bank has been able to diversify its offering in the retail lending towards LAP, housing especially on affordable housing, gold loans and 2W, but geography wise, business remains highly concentrated in East & NE areas at 81%. Bank has started diversifying into other geographies selectively and depending on business segment with focus on west and central India. Exhibit 6: High concentration of lending in East & North East geography East North East Central West North South 5.4% 5.3% 8.4% 8.7% 22.2% 22.7% 58.7% 58.2% H1FY18 9MFY18 March 15, 2018 3
Exhibit 7: Bank has been improving its network presence at much faster level Exhibit 8: Incremental branch presence has been towards Metro & Urban geographies 5000 4000 3000 2000 1000 0 Branches DSCs ATMs 282 386 430 228 2,443 2,546 2,633 2,022 656 840 864 887 Urban Metro Semi urban Rural 37.2% 32.7% 31.8% 31.0% 25.6% 24.9% 24.4% 23.9% 10.5% 15.4% 16.0% 17.0% 26.7% 27.0% 27.8% 28.1% DSC Door Step Centres Ratios and Financial Parameters Exhibit 9: Margins have been coming off on shift in loan mix and pass on off rates to MFI customers NIM (%) Exhibit 10: Lowering cost of funds benefit has been passed on to customers by lowering MCLR rate Yield on Loans (%) Cost of Funds (%) 11.02% 20.6% 17.3% 18.6% 21.3% 18.9% 18.0% 10.39% 10.34% 10.44% 10.01% 9.86% 8.6% 7.2% 7.1% 7.6% 7.3% 7.2% Exhibit 11: Cost management has been much more effective Exhibit 12: Bank has showcased tremendous improvement in CASA Opex/assets C/I (RHS) CASA Ratio (%) 7.0% 6.0% 5.0% 4.0% 60% 50% 40% 21.6% 16.7% 27.2% 29.4% 28.2% 33.2% 3.0% 2.0% 30% 1.0% 20% March 15, 2018 4
Exhibit 13: ROEs have been much better than any private peer despite leverage being low Exhibit 14: ROAs has been much better on stronger margins and opex control RoE (%) RoA (%) 28.8% 27.9% 28.5% 27.2% 25.6% 3.1% 4.6% 4.4% 4.5% 4.3% 4.1% 16.0% Exhibit 15: Asset quality has deteriorated in recent quarters mainly in the MFI business GNPA (%) NNPA (%) Exhibit 16: Capital has always remained adequate, post raising improves much higher than requirement CRAR (%) Tier I (%) 0.15% 0.08% 0.31% 0.20% 0.48% 0.31% 0.51% 0.36% 0.76% 0.80% 1.43% 1.67% 29.0% 26.7% 26.6% 24.8% 28.7% 26.9% 26.4% 24.8% 26.2% 24.9% 24.9% 23.5% March 15, 2018 5
Stacking up with peers stacks up well with the immediate private peers and also with some of the large private banks. Bank s margins have been much stronger complimented by its microfinance business and coupled with strong opex control its opex/assets (Exhibit 21) & C/I (Exhibit 22) is among the lowest, leading to strong return ratios. Also, CASA efficiency has been catching up and our interaction with management had indicated that branche addition will be slow which will further increase CASA efficiency and position it better than most peer banks. Exhibit 17: enjoys superior margins due to its MFI business 10.7%10.4% 9.9% 8.7% NIM Exhibit 18: s fee income though lower than peers, has improved on PSLC sell down Fees/Total Income 7.6% 7.5% 5.6% 33.9% 30.4% 25.9% 24.8% 4.1% 3.7% 3.4% 2.8% 19.9% 16.7% 16.3% 8.7% BhaFin Ujjivan MMFS SHTF Source: RHP, Company Data, PL Research IDFC Bk IIB KMB HDFCB Source: RHP, Company Data, PL Research IDFCB Exhibit 19: remains still has to do lot of catch up on SA efficiency Exhibit 20:..but has been improving CASA efficiency from last few quarters SA per Branch CASA per Branch 425.2 417.5 406.5 320.0 212.0 146.4 78.0 24.0 648.8 621.8613.7 474.4 376.8 334.9 175.8 94.7 44.9 30.8 7.4 KMB HDFCB IIB IDFCB HDFCB KMB IIB IDFC Bk Ujjivan Source: RHP, Company, PL Research Source: RHP, Company, PL Research March 15, 2018 6
Exhibit 21: Opex/assets is better than SFBs and close to large new private banks Exhibit 22: C/I remain the lowest amongst banks as enjoys high loans spreads and low opex model 10.0% 8.5% 6.5% Opex / Assets 9MFY18 4.2% 2.8% 2.1% 2.1% 1.9% 1.9% 1.8% 1.4% 1.0% 81.4% 71.7% Ujjivan BhaFin IIB KMB HDFCB IDFC Bk 61.2% 53.6% 53.1% C/I 9MFY18 Ujjivan BhaFin 53.1% 51.3% 47.8% 45.9% 41.2% 40.2% IDFC Bk 35.4% KMB IIB HDFCB Source: RHP, Company, PL Research Exhibit 23: scores much strong on asset quality despite being in risky MFI business 5.6% 2.5% IDFC Bk 5.0% 1.6% 4.6% 0.2% BhaFin 4.2% 1.0% 2.8% 1.9% 1.9% 0.7% 1.7% 0.9% 1.7% 0.8% 1.6% 1.0% Ujjivan GNPA NNPA Source: RHP, Company Data, PL Research Source: RHP, Company, PL Research Exhibit 24: Return ratios has been much better than peers 4.1% 4.0% 2.4% 1.8% 1.8% RoA 1.7% 1.3% 1.2% 1.2% 0.1% BhaFin SHTF IDFC Bk MMFS Source: RHP, Company Data, PL Research Ujjivan 0.9% March 15, 2018 7
Key Risk Factors Bank has a high concentration in micro finance business (though it is diversifying) and past trends have indicated MFI business faces high risk from external factors which could impact asset quality and earnings. Incremental ticket size in MFI has been also moved up for the bank and hence improper risk management can make borrower over leveraged and disturbing credit culture. Banks has higher concentration in East & North east area in terms of business and hence any adverse impact economically, socially and politically in these areas in turn is likely to impact s business. Post issue, Bank will carry high Tier I of ~40% and in ability to deploy capital due to slowdown from macro economic factors or limited growth opportunities will be a drag on return ratios. Bank has comparatively lower operating costs and as bank focus and diversifies towards retail, higher investment in technology and feet on street will be needed which can translate to higher opex ratios and impact improvement of return ratios. March 15, 2018 8
Valuation At the upper band of Rs375, bank will trade at 4.9x FY18 BV of Rs76 and 3.4x FY20 BV of Rs111 which is equivalent to large private peers and is fully priced in our view. But given the return ratios, liability build up and the large opportunity of scale up, we recommend to subscribe to the Bank with a longer term horizon. Exhibit 25: Valuation Table 9MFY18 9MFY18 Post Issue FY18E FY20E Networth (Rs mn) 54,042 90,666 94,466 132,170 PAT (Rs mn) 9,577 9,577 13,364 25,767 EPS (Rs) 8.7 8.0 11.2 21.6 BV (Rs) 49.3 76.0 79.2 110.8 ROE 23.6% 14.1% 14.1% 19.5% P/E (x) 42.9 46.7 33.5 17.4 P/BV (x) 7.6 4.9 4.7 3.4 Valuations calculated at Upper Band of Rs375 Exhibit 26: Valuations remains fairly valued but has superior return ratios than peers RoA (%) FY19E 4.0 3.5 3.0 2.5 Ujjivan IIB KMB 2.0 Yes 1.5 ICICI HDFCB 1.0 IDFC BK DCB Axis 0.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0 P/BV FY19E (x) Source: Company Data, Bloomberg Consensus, PL Research Exhibit 27: Issue details Values in million No. of Shares Value @ Lower Band @ Upper Band Rs.370 Rs.375 Total Issue 11,92,80,494 44,134 44,730 Fresh Issue 9,76,63,910 36,136 36,624 Offer for sale by existing holders 2,16,16,584 7,998 8,106 IFC 1,40,50,780 5,199 5,269 IFC FIG 75,65,804 2,799 2,837 March 15, 2018 9
Exhibit 28: Shareholding Pattern of Financial Services Private Limited (BFSL) Shareholding of the Company No of Shares % holding Promoters 5,20,61,424 40.73 FIT 4,20,61,424 32.91 NEFIT 1,00,00,000 7.82 Public 7,38,24,212 57.74 Caladium 2,13,50,912 16.70 Employees Welfare Trust (BEWT) 1,86,80,922 14.61 IFC 1,73,68,339 13.59 SIDBI 1,03,93,489 8.13 IFC FIG 36,46,937 2.85 Angshuman Ghosh 23,83,613 1.86 Total 12,58,85,636 98.47 Total O/s Shares 12,78,21,101 100.00 Exhibit 29: Shareholding pattern of Financial Holdings Limited (BFHL) The Holding Company Shareholding of the Company No of Shares % Promoters 2,59,36,04,000 100.00 Financial Services Pvt Ltd (BFSL) 2,59,36,04,000 100.00 Source: Company Data, PL Research Exhibit 30: Shareholding pattern of Bank Shareholding of the Company Pre Offer Post Offer (at Upper Band) No of Shares % No of Shares % Promoters 98,14,83,046 89.62 98,14,83,046 82.28 Financial Hldg Ltd (BFHL) 98,14,83,046 89.62 98,14,83,046 82.28 Public 11,36,57,988 10.38 9,20,41,404 7.72 IFC 3,51,26,951 3.21 2,10,76,171 1.77 IFC FIG 1,89,14,511 1.73 1,13,48,707 0.95 Caladium 5,46,48,030 4.99 5,46,48,030 4.58 SIDBI 34,94,060 0.32 34,94,060 0.29 Chandra Shekhar Ghosh 14,74,436 0.13 14,74,436 0.12 Total 1,09,51,41,034 100.0 1,07,35,24,450 90.0 Total O/s Shares 1,09,51,41,034 100.0 1,19,28,04,944 100.0 Source: Company Data, PL Research March 15, 2018 10
Company Background Exhibit 1: About the company Employees (Full time) 27,176 No. of customers 12 mn Branches 887 DSCs 2,633 Bank Limited was incorporated on December 2014 at Kolkata and commenced operations in August 2015 post getting license from RBI under the new licensing rules. The Bank is promoted by Financial Services Limited which transferred its microfinance business to the bank post commencing operations and currently holds 89.6% (post issue 82.3%) in the Bank through a 100% holding company. s strength lies in microfinance, including a network of 2,633 doorstep service centres ( DSCs ), 887 branches and 9.86 million microloan & 2.13 million general banking customers as of Dec 17. Key Management Personnel Mr. Chandra Shekhar Ghosh is the MD & CEO of the bank. In 2001, he started a NGO catering to the under banked, under privileged micro finance loans in the east part of India. Mr. Ghosh holds a master degree in science (statistics) from Dhaka University. Mr. Sunil Samdani is the CFO having 21 years of experience and is with the bank since April 2015. He previously worked with Development Credit Bank, Karvy Financial services and Financial Services. Mr. Rahul Johri is the Head Retail Banking having +26 years of experience in banking industry and is with the bank since March 2016. He previously worked at DBS Bank Limited. Other personnel Arvind Kanagasbai Head Treasury Biswajit Das Chief Risk Officer Nand Kumar Singh Head Banking Operations & customer services Exhibit 31: Board of Directors Mr. Chandra Shekhar Ghosh Mr. Ashok Kumar Lahiri Mr. Bhaskar Sen Mr. Boggarapu Sambamurthy Mr. Chintaman Mahadeo Dixit Mr. Krishnamurthy Venkata Subramanian Mr. Sisir Kumar Chakrabarti Mr. Thekedathumadam S Raji Gain Ms. Snehomoy Bhattacharya Ms. Georgina Elizabeth Baker Dr. Holger Dirk Michaelis Mr. Ranodeb Roy Managing Director & CEO & Part time Chairman Nominee Director Nominee Director Non Executive Director March 15, 2018 11
Income Statement (Rs m) Int. Earned from Adv. 12,828 31,214 38,393 50,426 Int. Earned from Invt. 1,312 4,281 6,078 14,355 Others 1,674 3,592 4,502 3,129 Total Interest Income 15,814 39,087 48,973 67,911 Interest expense 6,485 15,052 18,371 25,581 NII 9,328 24,035 30,602 42,329 Growth (%) 157.7 27.3 38.3 Treasury Income 20 217 550 600 NTNII 1,479 3,897 6,238 8,564 Non Interest Income 1,499 4,114 6,788 9,164 Total Income 10,827 28,149 37,390 51,494 Growth (%) 160.0 32.8 37.7 Operating Expense 6,159 10,220 12,943 17,553 Operating Profit 4,668 17,929 24,447 33,941 Growth (%) 284.1 36.4 38.8 NPA Provisions 21 477 2,425 2,711 Investment Provisions 19 420 Total Provisions 533 884 3,887 3,434 PBT 4,135 17,045 20,560 30,506 Tax Provisions 1,383 5,925 7,196 10,677 Effective Tax Rate (%) 33.4 34.8 35.0 35.0 PAT 2,752 11,120 13,364 19,829 Growth (%) 304.0 20.2 48.4 Balance Sheet (Rs m) Par Value 10 10 10 10 No. of equity shares 1,095 1,095 1,193 1,193 Equity 10,951 10,951 11,928 11,928 Networth 33,345 44,465 94,466 110,708 Adj. Networth 33,243 43,853 94,466 110,708 Deposits 120,887 232,287 325,201 439,022 Growth (%) 92.2% 40.0% 35.0% Low Cost deposits 26,056 68,373 94,959 128,194 % of total deposits 21.6% 29.4% 29.2% 29.2% Total Liabilities 197,565 302,361 451,870 594,938 Net Advances 124,375 168,391 235,747 306,471 Growth (%) 35.4% 40.0% 30.0% Investments 37,580 55,165 165,858 238,530 Total Assets 197,565 302,361 451,870 594,938. Key Ratios CMP (Rs) 374 375 375 375 Equity Shrs. Os. (m) 1,095 1,095 1,193 1,193 Market Cap (Rs m) 409,583 410,678 447,315 447,315 M/Cap to Advances (%) 329.3 243.9 189.7 146.0 EPS (Rs) 2.5 10.2 11.2 16.6 Book Value (Rs) 30.4 40.6 79.2 92.8 Adj. BV (Rs) 30.4 40.0 79.2 92.8 P/E (x) 148.8 36.9 33.5 22.6 P/BV (x) 12.3 9.2 4.7 4.0 P/ABV (x) 12.3 9.4 4.7 4.0 DPS (Rs) 2.5 Dividend Yield (%) 0.7 Profitability & Spreads (%) NIM 9.8 11.4 9.3 8.5 RoAA 2.7 4.4 3.5 3.8 RoAE 14.4 28.6 19.2 19.3 Efficiency Cost Income Ratio (%) 56.9 36.3 34.6 34.1 C D Ratio (%) 102.9 72.5 72.5 69.8 Business per Emp. (Rs m) 11.9 16.5 22.1 27.9 Profit per Emp. (Rs m) 0.1 0.5 0.5 0.7 Business per Branch (Rs m) 373.9 477.0 623.3 768.5 Profit per Branch (Rs m) 4.2 13.2 14.8 20.4 Asset Quality Gross NPAs (Rs m) 188 863 3,074 4,790 Net NPAs (Rs m) 102 612 829 1,789 Gr. NPAs to Gross Adv. (%) 0.15 0.51 1.30 1.56 Net NPAs to Net Adv. (%) 0.08 0.36 0.35 0.58 NPA Coverage (%) 45.5 29.1 73.0 62.7 Network Employees 20,548 24,220 25,431 26,703 Branch 656 840 900 970. Note Valuation metrics based on the upper band of the issue price March 15, 2018 12
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 43.8% 44.5% 11.7% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Pritesh Bumb (MBA, M.com), Mr. R Sreesankar (B.Sc ), Ms. Vidhi Shah (CA) Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. 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