(BSE Code: 541153) (CMP: Rs.456.80) (FV: Rs.10) By Amit Kumar Gupta
Incorporated in 2014, Kolkata-based Bandhan Bank is a subsidiary of Bandhan Financial Holdings Ltd and offers commercial banking services. It operates through the following segments: Treasury; Retail Banking; Corporate/Wholesale Banking; and Others. It offers savings and current accounts as well as deposits. It provides retail loans such as home loans, two-wheeler loans, loans against property (LAP) and term deposits as well as personal and gold loans; MSME (micro, small & medium enterprises) loans including business, equipment, commercial vehicle, working capital and term loans; microloans for home-based businesses; and agriculture loans. In addition, it invests in sovereign securities and trading operations; offers liability products as well as card, internet and mobile banking, ATM and NRI services; distributes third party products as well as provides other banking services. It operates through 936 bank branches, 2,764 doorstep service centers and 460 ATMs.
As per Bandhan Bank’s licensing condition, NOFHC’s (Non-Operative Financial Holding Company) stake in the bank should have been reduced to 40% by August 2018. However, the NOFHC was unable to adhere to this condition and currently holds ~82% stake in the bank. Due to this violation, the RBI has withdrawn Bandhan Bank’s right to open any new branches without its prior approval. The regulator has also mandated to freeze the remuneration of the MD and CEO till further notice.
As per SEBI rules, the promoter has a lock-in period of one year post listing. Hence, the NOFHC is not in a position to sell its stake. The bank is taking necessary steps to comply with the licensing condition to bring down NOFHC’s shareholding to 40% and is continuously engaged with the RBI. Though lowering the stake to 40% is difficult and will require time, progress in this direction could lead to easing of the restriction. These are the available options with the bank to pare down stake in the bank:
1. Inorganic growth, which will reduce promoter stake in the bank; 2. Pursuing non-banking business (under NOFHC) could dilute promoter holding; 3. Restructuring of holding company through merger with the bank and/or defining the promoter.
If the bank goes for an acquisition, a share swap can lead to a natural dilution and will be least impactful for existing shareholders if they get a good deal. The management has identified micro finance, MSME (micro, small & medium enterprises) and affordable housing as key areas of focus. Also, the bank will need to gradually build slightly longer tenure assets to match its liabilities profile, which is also building fast. NOFHC can enter into the non-banking businesses post three years of licensing. Hence, windows for acquiring a life or general insurance company or any other non-banking business are open to venture from NOFHC’s diversification perspective and thereby achieve stake reduction. Any stake dilution via fresh issue or stake sale by NOFHC directly to bring down stake can be highly EPS and RoE dilutive. Bandhan Bank has a unique business model of high yielding micro finance loans and low cost deposit franchise with 35% CASA (current account savings account) offered in the ambit of a commercial bank. Hence, it garners the highest margin among banking peers at ~9-10%. It is the only MFI to receive a universal banking licence in 2014.
We expect NIM to sustain at ~9% even as the bank starts building nonmicro loans. GNPA (gross non-performing assets) excluding IBPC/assignment was at 0.51%. We expect asset quality in micro loans to remain stable with GNPA at ~1.2% over FY18-21E. It had the lowest
CI (cost:income) ratio at ~35% in FY18 and hence, superior return ratios.
Technical Outlook: The stock looks good on the daily chart for medium-term investment. It trades below its listing price. This is a good time to accumulate the stock before it starts its rally. Start accumulating at this level of Rs.456.80 and on dips to Rs.417 for medium-to-long term investment and a possible price target of Rs.530+ in the next 12 months.