BANDHAN IPO: A TIE-UP SHORTTERM INVESTORS CAN AVOID

Bank’s business outlook remains strong, but stock valuations are expensive

The prospects of Bandhan Bank, which is coming out with its initial public offering (IPO), remain robust with strong asset quality, high profitability as well as growth rates. However, the asking rate is on the higher side, say most analysts, who believe there is nothing left on the table from a near-term perspective.

Enviable record

Started as a microfinance company in 2001, the Kolkata-based Bandhan Bank received a banking licence from the Reserve Bank of India (RBI) in 2014. The lender is now aiming to raise up to ~36.62 billion through the public offer via fresh issuance of shares. Existing shareholders such as IFC are also selling part of their holdings worth ~8.11 billion (at the upper price band) through an offer for sale.

The maiden offer will help the bank meet the RBI’s licensing requirement that mandates newly licensed banks to list within three years from commencement of operations.

The latest capital infusion will also enable it to sustain growth rates. Most of it can be used to lend, as branch investments have already been done. “We have done most of the investment in terms of expansion of branch network. Going ahead, the growth rate in terms of branch network will be much slower, as it has enough network capacity (as of now),” said Sunil Samdani, chief financial officer. The lender had 887 branches and 430 ATMs at the end of December 2017. Bandhan Bank’s loan book has grown at a compounded annual growth rate (CAGR) of around 51 per cent in the last 17 years (includes over two years of operations as a bank), which slowed down, yet strong, to 33 per cent as of December 31, 2017. This trend is likely to persist in the near future.

“In these 17 years, this (the current year) was the toughest year for the bank due to issues like the rollout of the goods and services tax (GST). Despite this, we could achieve 33 per cent loan growth. In the next twothree years, 33-35 per cent growth in advances can easily be achieved,” said founder, managing director, and CEO Chandra Shekhar Ghosh. Bandhan also has a strong record on asset quality and profitability.

Valuations a worry

The past performance and future business potential are impressive. However, analysts are sceptical about its microlending-focused business model (mainly unsecured lending) and high valuations compared with established private sector banks, which mostly lend on a secured basis, have good track record and command relatively lower valuations.

“The business potential is very strong. But, 96 per cent of its loan book is unsecured. However, it is demanding 4.6 times price-to-book valuation for its IPO, at par with a strong private sector bank (such as HDFC Bank; trades four times estimated book value for FY18) that has 80-90 per cent of its loan book under the secured segment with a satisfactory long track record of over three decades. Therefore, Bandhan’s high valuation is unjustifiable,” said Rajesh Gupta, AVPretail research at SBICAP Securities. “Only investors with high risk appetite can go for the IPO,” he said.

The bank’s return on equity (RoE), a key financial parameter, can also come under pressure. First, even after the share sale, the promoters’ stake will be over 82 per cent. So, the bank may struggle to comply with the RBI’s guideline of reducing promoters’ stake to 40 per cent within three years of commencement of operations (August 2018). While the bank might approach the regulator for relaxation, intermediate pressure on RoE cannot be ruled out when fresh shares are issued to comply with this rule.

“The bank, in the near future (post issue), will again dilute its shares to comply with the RBI’s guidelines, which will bring down its RoE till the funds are deployed productively,” said an analyst with a leading brokerage. Its net interest margin, a profitability gauge, has inched lower despite a rise in low-cost current and savings account share to 33.2 per cent.

Second, as the bank expands its loan portfolio to other segments, there is a likelihood of profit margins declining, which could weigh on its RoE. Currently, it earns a high yield on loans, leading to net interest margin of about 10 per cent, which though is nearly double that of top private sector banks. It will be interesting to see how it manages from hereon. Moreover, cost of funds has been rising of late. Nevertheless, the management remains optimistic. “It’s a high growth bank and has every potential to grow at a faster pace,” said Samdani. A few other analysts also said the IPO looked quite reasonable from the long-term perspective. But, the key hitch is its expensive valuation.