Bandhan Bank IPO: Short-term investors can easily avoid this 'tie-up'

Although the bank's business outlook seems strong, expensive valuations are the key issue, say analysts

On fundamentals, the prospects for Bandhan Bank (Bandhan), which is coming out with its initial public offering (IPO) on March 15, remain robust -- it has a strong asset quality, high profitability as well as growth rates. However, the asking rate is on the higher side, say most analysts, who believe that there is nothing left on the table from the short-term perspective. Moreover, some analysts are also sceptical of Bandhan's short stint of 3-4 years as a bank.

Enviable track record

Started as a microfinance company in 2001, Kolkata-based Bandhan received a banking licence from the Reserve Bank of India (RBI) in 2014 and is now aiming to raise up to Rs 36.63 billion through its IPO via fresh issue of shares. The existing shareholders, such as IFC, are looking to sell part of their holdings, worth Rs 8.11 billion, through an offer for sale.

The IPO will also help the bank meet the RBI’s licensing requirements. According to the RBI guidelines, all the newly licensed banks are required to get listed within three years from the date of licensing.

With this capital infusion, the bank will look to sustain its loan growth, which however may not necessarily come through expansion of its branch network. “We have done most of investments in terms of expansion of branch network. Going forward, growth rate in terms of branch network will be much slower as the bank has enough branch network capacity (as of now),” says Sunil Samdani CFO (chief financial officer) of Bandhan.

The bank’s loan book grew at a CAGR (compounded annual growth rate) of around 51 per cent in the past 17 years, which slowed down, yet strong, to 33 per cent as on December 31, 2017, and the trend of strong growth is likely to persist in the near future.

“In the past 17 years this (the current year) was the toughest year for the bank due to issues like GST (goods and service tax) rollout. Despite this, we could achieve 33 per cent loan growth. In next two-three years as well, a 33-35 per cent growth in advances can easily be achieved,” says the CFO and Chandra Shekhar Ghosh, founder, MD and CEO (chief executive officer) of the bank.

Notably, Bandhan has also proven itself as one of the strongest banks in terms of asset quality, profitability, etc. While the bank’s net NPA (non-performing assets) stood at 0.8 per cent as on December 31, 2017, its return on equity (RoE; a profitability measure relative to the investment made by equity shareholders) was hefty at 25.6 per cent.

Valuations a worry

No doubt, the bank’s past performance and its future business potentials have also wooed the analysts. However, the bank's micro-lending focused business model (mainly undertakes unsecured lending) is also making analysts sceptical about the valuation as compared to other established private-sector banks that majorly lend on a secured basis.

“Business potential of the bank is very strong. But, its 96 per cent loan book is unsecured. However, it is demanding 4-5 times valuation for its IPO, which is at par with a strong private sector bank (such as HDFC Bank, which trades around 3.5 times its estimated FY19 book value) that has around 80-90 per cent of its loan book under the secured segment with a satisfactory long track record of over three decades. Therefore, such a high valuation, in case of Bandhan, is unjustifiable,” says Rajesh Gupta, AVP-retail research at SBICAP Securities.

Besides, “with such a high valuation, whether the investors will adequately be rewarded is also questionable. Only investors with high-risk appetite can go for the IPO,” he added.

What’s more, RoE can come under pressure going ahead. Firstly, even after the IPO, the promoter’s stake in the bank will be over 82 per cent, leading to the bank struggling to comply with the RBI’s guideline of reducing the promoter’s stake to 40 per cent within the three years from the date of commencement of business as a bank. While the bank is approaching the regulator for relaxation on this front, intermediate pressure on RoE cannot be ruled out during times when the bank issues fresh shares to comply with this rule. The pressure can be avoided only if promoters sell their holdings instead of the bank issuing fresh shares, which is an unlikely scenario. net interest margin of about 10 per cent. So, it will be interesting to see how the bank manages from hereon.

Nevertheless, the management is very optimistic about the bank’s growth in future. “It’s a high growth bank an

“Business potential of the bank is very strong. But, its 96 per cent loan book is unsecured. However, it is demanding 4-5 times valuation for its IPO, which is at par with a strong private sector bank (such as HDFC Bank, which trades around 3.5 times its estimated FY19 book value) that has around 80-90 per cent of its loan book under the secured segment with a satisfactory long track record of over three decades. Therefore, such a high valuation, in case of Bandhan, is unjustifiable,” says Rajesh Gupta, AVP-retail research at SBICAP Securities.

Besides, “with such a high valuation, whether the investors will adequately be rewarded is also questionable. Only investors with high-risk appetite can go for the IPO,” he added.

What’s more, RoE can come under pressure going ahead. Firstly, even after the IPO, the promoter’s stake in the bank will be over 82 per cent, leading to the bank struggling to comply with the RBI’s guideline of reducing the promoter’s stake to 40 per cent within the three years from the date of commencement of business as a bank. While the bank is approaching the regulator for relaxation on this front, intermediate pressure on RoE cannot be ruled out during times when the bank issues fresh shares to comply with this rule. The pressure can be avoided only if promoters sell their holdings instead of the bank issuing fresh shares, which is an unlikely scenario.d has every potential to grow at a faster pace,” said the bank's CFO. A few other analysts also said the IPO looks quite reasonable from the long-term perspective given the business outlook, promoters, etc.

The key hitch is the IPO's expensive valuations. Analysts thus recommend that investors wait till the market captures the fair price for the bank’s shares.