Band­han Bank

Money Times - - Best Bet -

(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.

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