Bandhan Bank (BANDHAN) has strengthened its positioning as one of the key financial institutions in east/north-east India. It has maintained a healthy marketshare of ~19% in MFI loans with a CAGR of 35% since FY15. The merger with Gruh Finance (GRUH) will help improve asset diversification and provide ample opportunities to cross-sell varied asset products. Moreover, a leaner cost structure will ensure sustained cost leadership of the merged entity. BANDHAN has built a strong deposit franchise (53% CAGR over FY16-19) with a focus on granularity, with retail deposits forming ~76% of total deposits and CASA at 34.3%. With its share of volatility, the stock offers a great long-term opportunity as it has corrected significantly owing to concerns about promoter shareholding and recent state-level issues.We nevertheless expect the bank to deliver industry leading RoA/RoE of 3.7%/23.4% for FY22. Valuations appear reasonable and reflect near-term risks emanating from Assam. Initiate with a Buy rating and a TP of Rs 500 (3.8x Sep’21e BV).
MFI leader with high customer vintage; funding cost advantage aids lowest lending rate: BANDHAN is a leader in MFI with a market share of ~19% by loans and ~18% by number of micro borrowers. It has delivered 35% loan CAGR since FY15 and enjoys a strong brand recall with 50%+ market share in east and north-east regions. Around 54% of the bank’s borrowers have vintage of >4 cycles (~6% for the industry), which allows it to operate on higher ticket size compared to peers. It has the lowest lending rate of ~18% among MFIs owing to its strong funding franchise.
Merger with GRUH to ensure sustained cost leadership: The merger with GRUH has helped improve product diversification, reduce concentration risk and increase cross-sell opportunities (~68% of GRUH’s book has a ticket size of less than Rs 1 m). BANDHAN has best cost-ratios among peers, which, along with synergies from the merger with another cost leader (GRUH), will ensure sustained cost leadership and robust return ratios. We estimate a stable C/I ratio of ~33% over FY20-22.
Asset quality witnessing cyclical volatility; Assam – the key monitorable: BANDHAN has a long track record of successfully handling events like demonetisation and GST. The bank has witnessed asset quality issues in one of its core states, Assam, owing to recent protests; however, collection efficiency has improved to ~93.6% after hitting lows of ~80%. BANDHAN has made prudential provisions of Rs 2 bn in Q3FY20, and our scenario analysis suggests that the impact on ABV would be ~5% (assuming 10% delinquency).
Valuation and view: The bank has demonstrated a strong track record in growing its balance sheet/earnings and maintained a robust market share/cost leadership with its low-cost DSC network. It has also deftly handled external events like demonetisation/GST, wherein it restored the normal delinquency rate within three months. We estimate loan book/earnings CAGR of 26%/24% over FY20-22.
