Merger with Gruh Finance was at expensive valuations (one year forward multiple at 13x P/BV for Gruh vs. 5.4x for Bandhan) even after considering strong return profile for Gruh (FY19: RoA at 2.7%).
Bandhan Bank, a NBFC/MFI-turned-universal bank, is uniquely positioned with a high-yielding asset book, robust liability franchise and significantly better operating efficiencies vs peers. As a universal bank, Bandhan is poised to fully exploit the benefits in terms of liability franchise, scalability, diversification, leveraging ability, and widening of non-core income base that will potentially result in a long runway for growth and a superior business model.
While its product/geographic concentration could have been a challenge, the planned merger with Gruh Finance will suitably address the concerns (balanced mix of secured/ unsecured assets, better ALM and geographical diversification). We expect the merged entity to deliver 27% earnings CAGR over FY19-21, leading to 20%+ RoE and 3.7% ROA. We initiate coverage with ‘add’ rating and target price of Rs 625 (upside of 12% from CMP) valuing it at 4.8x FY21E P/ABV.
Merger with Gruh Finance was at expensive valuations (one year forward multiple at 13x P/BV for Gruh vs. 5.4x for Bandhan) even after considering strong return profile for Gruh (FY19: RoA at 2.7%). However, we believe the merger will help Bandhan Bank to achieve much needed product and geographic diversification.
Similarly, Gruh will also benefit from wider distribution network, a larger customer base and low-cost deposit franchise of Bandhan. With under four years of operating as a bank, Bandhan has been able to successfully build granular deposit base (FY19: retail deposit mix at 77%, with CASA share at 41%) as also reflected in low-cost of funds at 6.3% (FY19), which offers superior leverage compared to other MFIs/peers. It has successfully been able to continue operations with a low-cost business model through the transition period.