IPO Note | Financials

March 14, 2018

Bandhan Bank Limited

sue Open: March 15, 2018

A different approach to overall banking

Issue Close: March 19, 2018

Bandhan Financial Services had received in principle approval from RBI to set up

a Bank and it began its banking operations in August 2015 with the name

Bandhan Bank Ltd (Bandhan). The bank has grown remarkably in a very short

Issue Details

span of time. It primarily focuses on serving underbanked and underpenetrated

Face Value: `10

markets in India (East and North East India). As on Q3FY2018, the bank’s

Present Eq. Paid up Capital: `1095cr

advances stood at `22,932cr, deposits at `25,294cr (95% of the funding mix)

and CASA ratio was at 33.22%.

Offer for Sale: **2.2cr Shares

No. 1 lender in the micro lending space: Bandhan, since its inception has been

Fresh issue: `3,662cr

lending to underbanked and underpenetrated markets. This is a high yield

business (NIM - 10.7% for 9MFY2018) and also enjoys the priority sector lending

Post Eq. Paid up Capital: `1,192cr

(PSL) benefits. As on 3QFY18, advances stood at `22,931cr, up 41.3% yoy. We

Issue size (amount): *`4,413cr -

expect that Bandhan would continue to grow at healthy rate and maintain higher

**44,73 cr

NIM owing to management’s focused approach toward targeted market.

Price Band: `370 - `375

Healthy return ratios: Bandhan has reported ROE/ROA of 26.8%/4.2% for

Lot Size: 40 shares and in multiple

9MFY2018. Higher return ratios are largely driven by lower Cost to Income(C/I;

thereafter

35.4%) and higher net interest margin. C/I has declined from 57% in FY2016 to

Post-issue implied mkt. cap:

35.4% in 9MFY18, and we believe C/I would continue to decline further.

*`44,134cr - **`44,730cr

Promoters holding Pre-Issue: 89.62%

Strong asset quality, sufficient CAR to support growth: Robust credit assessment

process and understanding of targeted market has aided in lower GNPA (1.67%

Promoters holding Post-Issue: 82.28%

9MFY2018). As on 3QFY18, CAR was 24.85% and post IPO it would increase

*Calculated on lower price band

further. Given the strong internal capital generation ability, high CAR and IPO

** Calculated on upper price band

proceeds, Bandhan would not require equity dilution in the near term.

Book Building

High valuations underpinned by high growth potential and profitability: At upper

QIBs

50% of issue

end of the IPO price band, Bandhan is valued at 8.3x 3QFY18 book value (pre-

IPO) and on Post dilution basis at 5x of BV. Though valuations are on the higher

Non-Institutional

15% of issue

side, we expect such premium valuations to persist given (a) healthy return ratio

Retail

35% of issue

(25%+ RoE for FY17 and 9MFY18), (b) balance sheet strength (24.8% CAR ratio,

CASA - 33.2%) and (c) experienced and focused management. Considering the

above positives, we recommend SUBSCRIBE on the issue.

Post Issue Shareholding Pattern

Promoters

82%

Key Financials

Others

18%

Y/E March (` cr)

FY16

FY17

9MFY18

NII

933

2,403

2,169

YoY Growth (%)

158%

PAT

275

1,112

958

YoY Growth (%)

304%

EPS

Book Value

P/E

149

P/BV

Jaikishan J Parmar

ROE (%)

+022 39357600, Extn: 6810

ROA (%)

1.4

4.4

4.3

[email protected]

Source: RHP, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band

Please refer to important disclosures at the end of this report

Bandhan Bank Ltd | IPO Note

Company Background

Bandhan Bank Ltd began its journey in 2001 by forming a non government

organisation (NGO) named Bandhan Konnagar to provide microfinance services

to socially and economically disadvantaged women in rural West Bengal.

It started microfinance business in 2006 and the NGO transferred its microfinance

business to BFSL in 2009, and thereby, the entire microfinance business was

undertaken by BFSL. During Q1FY2015, IDFC and Bandhan Financial Services

Private Ltd have been selected by the Reserve Bank of India to set up banks, from a

field of 25 aspirants. Bandhan Bank Limited (“Bandhan”) is a commercial bank

focused on serving underbanked and underpenetrated markets in India. Bandhan

launched its general banking business on Q2FY2016 by opening a greenfield

network of 501 bank branches and 50 automated teller machines (ATMs), which

as on 3QFY2018 grew to 887 bank branches and 430 ATMs, together serving

over 2.13 million general banking customers.

The bank majorly operates in Eastern and North Eastern parts of India with Assam

and West Bengal contributing to major operations of the bank.

Exhibit 1: Asset Profile

Particular

FY17

9MFY18

Micro

213.9

90.9

215

88.3

Retail

3.9

1.7

7.2

3.0

SME Loans

7.1

3.0

9.1

3.7

Small Enterprise Loan

10.5

4.5

12.3

5.0

Total

235.4

100.0

243.6

100.0

Source: RHP

Exhibit 2: Break-up of branches, DSCs and advances in East and Northeast region

State/ Union Territory

Branches

DSCs

Total Advances

East India

54%

52%

58%

Northeast India

11%

17%

23%

East & Northeast India Total

65%

69%

81%

Source: RHP

Key Management Personnel:

Chandra Shekhar Ghosh is the MD and CEO of Bandhan Bank. He has

significant years of experience in the field of microfinance and is awarded

‘Outstanding Leadership Award’ by the Dhaka University. He has been a

director of the bank’s board since July 2015.

Sunil Samdani is the Chief Financial Officer of the bank. He has 21+ years of

experience in the finance sector. Previously, he has worked at Development

Credit Bank and at Karvy Financial Services Limited.

Biswajit Das serves as the Chief Risk Officer of Bandhan Bank. He has 23+

years of experience in the banking industry. He has worked at ICICI Bank prior

to joining Bandhan.

March 14, 2018

Bandhan Bank Ltd | IPO Note

Issue details

This IPO is a mix of OFS and issue of fresh shares. The issue would constitute fresh

issue worth of `3,662cr and OFS worth of `8,10cr. OFS largely would offer partial

exit to investors namely International Finance Corporation and IFC FIG Investment

Company I.

Exhibit 3: Pre and Post-IPO shareholding pattern

No of shares (Pre-issue)

% No of shares (Post-issue)

Promoter

98,14,83,046

Investor/Public

11,36,57,988

21,13,21,898

1,09,51,41,034

100

1,19,28,04,944

100

Source: RHP Note: Calculated on upper price band

Objects of the offer

 To achieve benefits of listing equity shares on stock exchanges and to carry out

the offer for sale. Listing of equity shares will enhance Bandhan Bank’s brand

name and provide liquidity to existing shareholders.

 To meet Reserve Bank of India’s licensing guideline. According to the RBI’s

new bank licensing guidelines, the equity shares of Bandhan Bank are

required to get listed on the stock exchanges within three years from the date

of commencement of business i.e. on or before August 22, 2018.

 To augment the Bank’s Tier-I capital base to meet the future capital

requirements.

March 14, 2018

Bandhan Bank Ltd | IPO Note

Outlook & Valuation

At upper end of the IPO price band, Bandhan is valued at 8.3x 3QFY18 book

value (pre-IPO) and on Post dilution basis at 5x of BV. Though valuations are on

the higher side, we expect such premium valuations to persist given (a) healthy

return ratio (25%+ RoE for FY2017 and 9MFY2018), (b) balance sheet strength

(24.8% CAR ratio, CASA - 33.2%) and (c) experienced and focused management.

Considering the above positives, we recommend SUBSCRIBE on the issue.

Risks

Unsecured Portfolio

Bandhan Bank’s operations involve transactions with relatively high risk borrowers

(Unsecured Loan). Any default from the customers could adversely affect the

business, results of operations and financial condition.

Limited historical track record and relatively very less experience in banking

business

Bandhan Bank has reported healthy financials for FY2017 and 9MFY2018. But

this is a very short period of record to evaluate the bank’s business and its future

risk.

Income Statement

Y/E March (` cr)

FY16

FY17

9MFY18

NII

933

2,403

2,169

- YoY Growth (%)

157.7

Other Income

150

411

503

- YoY Growth (%)

174.5

Operating Income

1,083

2,815

2,672

- YoY Growth (%)

160.0

Operating Expenses

616

1,022

945

- YoY Growth (%)

65.9

Pre - Provision Profit

467

1,793

1,726

- YoY Growth (%)

284.1

Prov. & Cont.

265

- YoY Growth (%)

65.9

Profit Before Tax

414

1,704

1,461

- YoY Growth (%)

312.2

Prov. for Taxation

138

593

503

- as a % of PBT

Reported PAT

275

1,112

958

- YoY Growth (%)

304.0

March 14, 2018

Bandhan Bank Ltd | IPO Note

Balance Sheet

Y/E March (` cr)

FY16

FY17

9MFY18

Capital

1,095

Reserves & Surplus

2,239

3,351

4,309

ShareHolder Fund

3,335

4,446

5,404

Deposits

12,089

23,229

25,294

- YoY Growth

Borrowings

3,052

1,029

1,331

- YoY Growth

(66)

Other liab and prov

1,282

1,532

1,190

Total

19,757

30,236

33,219

Cash and Equivalent

3,173

7,365

2,392

Investments

3,758

5,516

7,291

Advances

12,438

16,839

22,931

- YoY Growth

Fixed Assets

237

252

233

Other Assets

150

264

372

Total

19,757

30,236

33,219

- YoY Growth

DuPont Analysis

Y/E March (` cr)

FY16

FY17

9MFY18

Interest Income

7.8

15.6

Interest Exp

3.2

6.0

5.8

Net Interest Income

4.6

9.6

9.8

Prov

0.3

0.4

1.2

Adj NII

4.3

9.3

8.6

Other Income

0.7

1.6

2.3

Total Income

5.1

10.9

10.8

Opex

3.0

4.1

4.3

Tax

0.7

2.4

2.3

ROA

1.4

4.4

4.3

Leverage

10.6

6.4

6.2

ROE

14.4

28.6

26.8

March 14, 2018

Bandhan Bank Ltd | IPO Note

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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March 14, 2018