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MOSL: BANDHAN BANK (INITIATING COVERAGE)-Braving the challenges! Return ratios strong; asset diversification to drive sustainable growth

Bandhan Bank (initiating coverage): Braving the challenges! Return ratios strong; asset diversification to drive sustainable growth

(BANDHAN IN, Mkt Cap USD8.8b, CMP INR400, TP INR500, 25% Upside, Buy)

 

• Bandhan Bank (BANDHAN) has strengthened its positioning as one of the key financial institutions in east/north-east India. It has maintained a healthy market share of ~19% in MFI loans with a CAGR of 35% since FY15.
• The merger with Gruh Finance (GRUH) will help improve asset diversification and provide ample opportunities to cross-sell varied asset products. Moreover, a leaner cost structure will ensure sustained cost leadership of the merged entity.
• BANDHAN has built a strong deposit franchise (53% CAGR over FY16-19) with a focus on granularity, with retail deposits forming ~76% of total deposits and CASA at 34.3%.
• With its share of volatility, the stock offers a great long-term opportunity as it has corrected significantly owing to concerns about promoter shareholding and recent state-level issues.
• We nevertheless expect the bank to deliver industry leading RoA/RoE of 3.7%/23.4% for FY22. Valuations appear reasonable and reflect near-term risks emanating from Assam. Initiate with a Buy rating and a TP of INR500 (3.8x Sep'21E BV).

 MFI leader with high customer vintage; funding cost advantage aids lowest lending rate

BANDHAN is a leader in MFI with a market share of ~19% by loans and ~18% by number of micro borrowers. It has delivered 35% loan CAGR since FY15 and enjoys a strong brand recall with 50%+ market share in east and north-east regions. Most of its competitors are secondary lenders and provide top-up loans. Around 54% of the bank’s borrowers have vintage of >4 cycles (~6% for the industry), which allow it to operate on higher ticket size compared to peers. It has the lowest lending rate of ~18% in MFI owing to its strong funding franchise.

 Merger with GURH to ensure sustained cost leadership

The merger with GRUH has helped improve product diversification, reduce concentration risk and increase cross-sell opportunities (~68% of GRUH’s book has a ticket size of less than INR1m). BANDHAN has best cost-ratios among peers, which, along with synergies from the merger with another cost leader (GRUH), will ensure sustained cost leadership and robust return ratios. We estimate a stable C/I ratio of ~33% over FY20-22.