Bandhan Bank- Initiating Coverage - LKP Research

The Bandhan Bank has successfully transitioned itself from largest micro finance lender to universal banking franchise. It is one of the most profitable universal bank currently - ROE & ROA of the bank is at 19.5% and 3.6% resp (FY18). Also, it has garnered sizeable retail liabilities within 3 yrs of its operations which is the key strength of the bank. Bank's business model is unique in many ways -1) lowest micro distribution model, cost ratios (35%) are one of the best in the industry 2) asset quality is impeccable 3) strong & vast loyal micro-loan borrower base of 11 mn 4) deeper presence in under-penetrated East/North Eastern markets giving strong visibility of asset growth 5) best in class margin profile.

In the scenario of dwindling profitability among banks, we expect Bandhan to report strong profitability - net profits to grow at a CAGR of 39% over FY18-21E. Return profile is also estimated to be robust - ROE/ROA 19%/3.7 over the next 2 yrs. Although valuations looks expensive (trading at 6.8x FY19E and 5.2x FY20E ABV), but rightly so given superior return ratios & strong visibility of asset growth. We initiate a coverage on the stock with BUY rating with target price of Rs. 760 (target multiple of 6x on FY20X ABV) giving upside potential of 15% from the current levels.

Strong asset growth given dominance presence in under penetrated eastern markets

We estimate total AUMs to grow by 35% CAGR over FY18-21E led by micro loans growing by 30% and non-micro loans by 62% over the same period. Huge under penetration in eastern & north eastern markets, higher demand, potential to increase the average ticket size of the loans - all these factors put together will boost the overall advances growth of the bank (which will nearly 3x of industry credit growth). Interestingly, within 3 years of banking history, the bank has progressed exceptionally well on deposit growth, it has replaced all the high cost borrowings with low cost deposits - from nearly nil deposits in FY15, it has reached sizeable base of ?307 bn (Q1FY19). Total retail liabilities & CASA form 80% of total deposits - robust mobilization of retail deposits is perquisite to successful operations as a bank.

Best in class margin profile

Bank draws one of the highest margins in the industry at 8.3% (calc - FY18) which is led by high yielding micro loans coupled with lower funding costs. This is one of the reason it enjoys healthy return profile. We expect margins would be sustained at current levels of 8.3% over FY18-20E given more downside to lending rates is limited and CASA & retail deposits growth would be healthy. Surprisingly, Q1FY19 spreads of the bank improved by 120 bps qoq to 9.6% - money raised via IPO were utilized to reduce high rated term deposits.

Asset quality well placed

Despite micro-loans being unsecured in nature, bank has maintained sound asset quality with the gross NPAs and net NPAs at 1.3% & 0.6% respectively (Q1FY19). Strong NPA position is largely driven by its group-based lending model, focus on income generating loans, strong systems to track loan utilization, monitoring credit & ensuring collection, extensive risk management practices (such as lending progressively higher amounts only to members who have built up a track record of good repayment) which taken together have led to low rates of default. Going forward, with the strong growth in the assets we assume marginal increase in NPAs - gross NPAs to surge to 2.3% in FY20E from 1.3% in FY18.

Source : Equity Bulls

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