Bandhan Bank Initiating Coverage Research Report By ICICI-Direct

Best yields with lower cost of funds; unique model

Bandhan Bank is a unique business model of high yielding micro finance loan portfolio (94% priority sector fulfilment) and low cost deposit franchise with 34.3% CASA offered in the ambit of a commercial bank. It was the only MFI to receive a universal banking licence from the RBI in 2014 led by Founder, MD and CEO, Chandra Shekhar Ghosh, who has 37 years of experience in the Indian microfinance industry.

Bandhan Bank, with 13-14% market share, operates 936 branches and 2,764 dedicated doorstep services centres servicing ~1.3 crore customers in 33 states. East and northeast (West Bengal, Bihar, Assam) are its stronghold. FY18 AUM was at Rs 32340 crore a PAT at Rs 1346 crore.

Investment Rationale

Consistent track record of quality growth, banking adds positive leg

Bandhan MFI was one of the few institutions to sail through the AP crisis (2011), demonetisation (2016), farm loan waivers, etc. It has demonstrated stellar growth at ~90% CAGR in those 10 years. Even in the last five years, advances grew at 51% CAGR. In bank, AUM has grown from Rs 15,578.4 crore as of FY16 to Rs 32,340 crore as of FY18 while customer base has increased to ~1.3 crore. Micro credit forms 86% of loan book while retail, SME together are still small. Asset quality is strong at 1.2% GNPA ratio. We expect 38% CAGR in loans to Rs 61546 crore by FY20E.

Strong deposit franchisee in short span, high CASA offers low CoF

Bandhan Bank has focused on building a strong deposit base and has grown from zero as of August 23, 2015, to Rs 33,869 crore in FY18. Current and savings account deposit (CASA) was at Rs 11,617 crore, constituting 34.3% of deposits. CASA provides stable low-cost funding with CoF now at 6.7%. We expect deposits growth at ~31% with CASA ratio ~36%. Only 6% of deposits come from MFI clients. Majority of deposits come from bank branch customers while 80% of the same is retail.

Strong NIMs, low cost-to-income lead to above par return ratios, BUY

Net interest margin (NIM) was at 9.8% for FY18. With low cost funds, we expect NIM to sustain at ~9% even as the bank starts building non-micro loans. Along with higher NIM, low operating cost at ~35% C/I ratio remains its key differentiator, high RoA driver. Its opex to AUM ratio was at 4% for FY18. We expect high RoA of 3.5-4%, RoE >20% to sustain.

With almost double NIM, RoA vs. HDFC Bank & lower C/I ratio, with no legacy corporate portfolio pains, we believe Bandhan Bank will command higher premium to HDFC Bank. At CMP of Rs 490, the stock is available at 4.4x FY20E ABV of Rs 111.

On P/E basis, it is available at 22.4x FY20E earnings of Rs 22 EPS. Valuing the bank at 5.4x FY20E ABV, we arrive at a target price of Rs 600. We initiate coverage with a BUY recommendation.