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Company Background

Bandhan Bank Ltd. (BBL) was incorporated in 2014 as a wholly owned subsidiary of Bandhan Financial Holdings Ltd. (BFHL). Kolkata- headquartered BBL is the first bank to be set up in the eastern part of India after Independence and is promoted by its founder, MD and CEO Chandra Shekhar Ghosh. BBL provides pan-India services with focus on micro banking and general banking services majorly serving urban, semi-urban and rural markets in India.

BBL is the first microfinance entity and the first in a decade that was transformed into a universal bank in India.

BBL started its operation as an NGO in 2001 which was transferred into India’s largest microfinance company by number of customers and size of loan portfolio and later converted into a bank in 2015.

Investment Rationale

l BBL has spread its presence to 34 of the 36 states and union territories in India. BBL’s strength lies in microfinance. The total banking outlets stood at 4,000 serving 16.56 million customers (Micro Banking – 13.1 million; General Banking 3.46 million). The network consists of 986 branches, 3,014 doorstep service centers (DSC) and 481 ATMs as on March 31, 2019.

l  BBL’s distribution network is particularly strong and largest in East and Northeast India. West Bengal, Assam and Bihar together accounting for ~65% of their total banking outlets, though their focus is to expand across India.

l  Bank has received approval from RBI, SEBI & CCI for the proposed acquisition of Gruh Finance, the affordable housing finance arm of HDFC Ltd. in a share-swap deal where shareholders of Gruh Finance will get 568 shares of Bandhan Bank for every 1,000 shares held. The deal will reduce stake of BFHL in BBL to about 61% from the current

82%. BFHL further may take the Offer for Sale (OFS) route post the proposed merger to reduce its stake in the new private sector lender.

l  In Q4 FY19 BBL showed strong performance led by strong asset growth, margin expansion and cost control. Its Net Interest Earned grew by ~36% YoY to Rs. 1,833 crore and PAT jumped substantially by 68% YoY to Rs. 651 crore. On annual basis for FY1819 BBL reported a rise of 45% YoY in Net Profit to Rs. 1,952 crore.

l   Strong AUM and NII growth resulted into sharp uptick in NIM to 10.69% against 9.32% YoY in quarter ended March 2019. Liabilities of the bank are gaining more traction – Deposits grew by 28% YoY to ` 43,232 crore where CASA touched 41% and retail to total deposits forming 77%.

l   Total Advances for Q4FY19 grew by 38% YoY at Rs. 44,776 crore in which it has 86% of amount in the micro credit and 14% in others.

l   BBL’s Capital Adequacy Ratio stood at 29.20%. Banks’ Gross & Net NPAs came off to 2% & 0.6% vs. 2.4% & 0.7% QoQ. In Q3FY19, the bank had undertaken full provisioning of Rs. 385 crore for IL&FS exposure, thus there was no impact on the loan book in Q4.

Recommendation – Bandhan Bank’s unique business model with immense growth potential in microfinance segment and expansion into other retail and SME lending provides attractive and profitable opportunities. Strong NII growth, better margins, higher other income growth and improvement in operating efficiency aids best return ratios. Its extensive & low cost distribution network with enhancement in digital platform, pristine asset quality, improving funding and increasing average loan size makes Bandhan an outlier in the microfinance segment. Hence, we recommend a BUY on the stock with a Target Price of Rs. 680 with an upside potential of ~25% from the current level with an investment horizon of 9-12 months.