August , 2020
Bandhan Bank Ltd.
13:12 pm

Rajesh Agarwal

Company Background

Bandhan Bank Ltd. (BBL) incorporated in 2014 as a wholly owned subsidiary of Bandhan Financial Holdings Ltd. (BFHL), headquartered in Kolkata.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 Mr. 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 had undergone two transformations: first, from a not-for-profit NGO to a for-profit non-banking finance company and finally a Bank in FY14.

Investment Rationale

Eighteen years down the line, 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 4,559 serving 20.31 million customers (Micro Banking – 15.46 million; General Banking 4.85 million). The network consists of 1,018 branches, 3,541 doorstep service centers (DSC) and 485 ATMs as on June 30, 2020.

BBL’s current focus is on serving the rural and under-banked population. Nearly~60% of its banking units and branches are located in Eastern and North eastern regions. The sectors that drive employment in these regions are mining, textile, leather processing, tourism, cement, agriculture, steel etc. 

Despite substantial challenges widespread across industries due to lock down as a measure for Covid19 pandemic & floods/ Cyclones in Assam and West Bengal, BBL Net interest income grew by ~15.05% YoY to Rs. 1,811.53 crores and PAT de-grew by 31.58% YoY to Rs. 549.83 crores in Q1FY21. The bottom-line of the bank was impacted due to additional Covid 19 related provision on standard advances of Rs.750 crores.  On annual basis for FY20, BBL reported a rise of 54.94% YoY in Net Profit to Rs. 3023.74 crore. NIM of the bank stood at 8.20% Vs 8.6% YoY in Q1FY21.

Total Advances for Q1FY21 grew by 17.7% YoY to Rs. 74,331 crores and Micro Banking loan in total advance stood at 61% at Rs.47,500 crores, excluding individual loan portfolio amounting to Rs.2200 crores. This growth was driven by 21% increase in the Micro Banking Asset. Deposits grew by 35.3% YoY to Rs.60610 crores during the same period led by 47% YoY increase in CASA deposits to Rs22473 crores. 

BBL’s Capital Adequacy Ratio stood at 26.45% in Q1FY21. Asset quality of the bank remained stable, with Gross & Net NPAs recorded at 1.43% & 0.48% vs. 1.7% & 0.6% YoY. The overall collection efficiency of the bank has significantly improved post unlock 1 phase from 29% in April FY21 to 76% in June FY21.

Recommendation – Bandhan Bank’s unique business model with immense growth potential in microfinance segment and expansion into housing loan business with the acquisition of Gruh Finance will create one of the largest rural and semi urban  lending platform in the country. With ROE hovering in the range of 19-24% during FY18-FY20 & Cost to Income ratio of 27.9% in Q1FY21, better margins, higher other income growth and improvement in operating efficiency aids best return ratios. Rural & semi-urban which contributes 79% of micro business have negligible Covid-19 impact. 80% of BBL borrowers are largely from Agriculture and Allied, Food processing & retail, Pharma & medical, Computer,Cable/DTH provider etc. Hence, we recommend a BUY on the stock with a Target Price of Rs. 361 with an upside potential of ~25% from the current level with an investment horizon of 9-12 months.


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