IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Bandhan Bank Ltd / Equity Capital Markets

<p>Bandhan Bank is a commercial bank focused on microfinance services in the underbanked and underpenetrated markets in India. Bandhan is targeting a March IPO primarily to meet Reserve Bank of India’s (RBI) New Bank Licensing Guidelines to IPO three years from the date it began operations. According to press reports, Bandhan has started pre-marketing its IPO this week, seeking to raise at least Rs25 billion ($400 million) and potentially up to Rs45 billion ($710 million). This wide range would result in a market cap range of $4.8-8.6 billion.</p><p>Bandhan has superior growth, profitability, and asset quality metrics in comparison to its peer group of new private sector banks and microloan-focused small finance banks. Our view is that the IPO is attractive and we would participate up to a valuation of FY18 P/B of 8x due to:</p><ol class=""><li>Bandhan’s net interest income growth of 30% in 1H18 is the second highest in its peer group. In terms of loan advances growth, Bandhan’s growth of 35% of FY17 and 15% in 1H18 is the highest among its peer group. Bandhan’s strong profitability metrics are due to a combination of a high net interest margin (NIM) and a low cost-to-income ratio. Bandhan’s NIM at 10.0% is the highest among its peers in 1H18.</li><li>As 91% of Bandhan's loan book is microloans, Bandhan avoided the ill-advised lending of the public and private sector banks. Demonetisation had an impact, with Bandhan Bank’s GNPA ratio increasing from 0.5% in FY17 to 1.4% in 1H18. However, Bandhan’s GNPA ratio in 1H18 is significantly below Equitas (5.8%) and Ujjivan (5.6%). Consequently, Bandhan has a low NPA ratio and top quartile asset quality in comparison to its peers.</li><li>Based on our estimates, at a raise of Rs25,000 million, Bandhan trades at a significant 117% premium to its peers on a 2018 P/B basis. However, Bandhan’s P/B valuation needs to be put in the context of its superior ROE and ROA metrics. At a raise of Rs25,000 million, Bandhan lies below the linear trend line for P/B vs ROE and Market cap/Assets vs ROA, i.e. trades at a discount to fair value for the ROE/ROA it delivers. Consequently, to trade at a fair value for the ROE/ROA it delivers, Bandhan needs to raise at most Rs33,000 million, implying an FY18 P/B of 8x.</li></ol>

Bandhan Bank is a commercial bank focused on microfinance services in the underbanked and underpenetrated markets in India. Bandhan is targeting a March IPO primarily to meet Reserve Bank of India’s (RBI) New Bank Licensing Guidelines to IPO three years from the date it began operations. According to press reports, Bandhan has started pre-marketing its IPO this week, seeking to raise at least Rs25 billion ($400 million) and potentially up to Rs45 billion ($710 million). This wide range would result in a market cap range of $4.8-8.6 billion.Bandhan has superior growth, profitability, and asset quality metrics in comparison to its peer group of new private sector banks and microloan-focused small finance banks. Our view is that the IPO is attractive and we would participate up to a valuation of FY18 P/B of 8x due to:Bandhan’s net interest income growth of 30% in 1H18 is the second highest in its peer group. In terms of loan advances growth, Bandhan’s growth of 35% of FY17 and 15% in 1H18 is the highest among its peer group. Bandhan’s strong profitability metrics are due to a combination of a high net interest margin (NIM) and a low cost-to-income ratio. Bandhan’s NIM at 10.0% is the highest among its peers in 1H18.As 91% of Bandhan's loan book is microloans, Bandhan avoided the ill-advised lending of the public and private sector banks. Demonetisation had an impact, with Bandhan Bank’s GNPA ratio increasing from 0.5% in FY17 to 1.4% in 1H18. However, Bandhan’s GNPA ratio in 1H18 is significantly below Equitas (5.8%) and Ujjivan (5.6%). Consequently, Bandhan has a low NPA ratio and top quartile asset quality in comparison to its peers.Based on our estimates, at a raise of Rs25,000 million, Bandhan trades at a significant 117% premium to its peers on a 2018 P/B basis. However, Bandhan’s P/B valuation needs to be put in the context of its superior ROE and ROA metrics. At a raise of Rs25,000 million, Bandhan lies below the linear trend line for P/B vs ROE and Market cap/Assets vs ROA, i.e. trades at a discount to fair value for the ROE/ROA it delivers. Consequently, to trade at a fair value for the ROE/ROA it delivers, Bandhan needs to raise at most Rs33,000 million, implying an FY18 P/B of 8x.

Bandhan Bank IPO Preview: Poor People, Rich Returns

India

Bandhan Bank Limited operates as a commercial bank. The Bank provides accounts checking, savings deposits, money market, mortgage, and term loans services, as well as card facilities and Internet banking services. Bandhan Bank serves customers in India.

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Bandhan Bank Ltd (BANDHAN IN)

Bandhan Bank IPO Preview: Poor People, Rich Returns

Bandhan Bank is a commercial bank focused on microfinance services in the underbanked and underpenetrated markets in India. Bandhan is targeting a...

Arun George

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