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%, respectevely (FY18). Also, it has garnered sizeable retail liabilities within three years 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 m, 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 two years. 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.
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. The bank has has replaced all the high cost borrowings with low cost deposits — from nearly nil deposits in FY15, it has reached sizeable base of Rs 307 billion (Q1FY19). Total retail liabilities & CASA form 80% of total deposits.
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 q-o-q to 9.6% — money raised via IPO were utilised to reduce high rated term deposits.