Bandhan Bank: A relationship worth trying

Bank offers moat to investors but IPO needs to be rightly priced

Bandhan Bank as an entity has always invoked right investor interest. It caught many by surprise when it received a universal banking licence in 2014, with IDFC Bank. As it readies to hit the bourses, it is worth exploring how far it has travelled as a universal bank.
 
On some parameters, such as building its deposit base from scratch the bank has seen decent headway. However, it could have done more to fortify the loan book. Deposits at Rs 254 billion as of September 30 appear decent and the bank has benefited from events such as demonetisation and formalisation of financial savings. Though it seems to lag IDFC Bank’s deposit base of Rs 390 billion, Bandhan’s show is still worth a mention. With a CASA (current account, savings account) ratio of 28 per cent, Siddharth Purohit of SMC Global feels this is perhaps the best show by a newly commenced bank in recent times.
 
Again, the ability to curtail the cost-to-income ratio, despite massive branch expansion, at 35.4 per cent in the September quarter (down from 57 per cent in FY16) is noteworthy. This has helped the bank generate return on equity and return on assets (on an annualized basis) of 29 per cent and 4.3 per cent, ahead of IDFC Bank’s 18 per cent and 2.4 per cent, respectively. According to Purohit, these ratios could compress as the bank introduces new products.
 

Source: Draft red herring prospectus

On the flip side, the loan book at Rs 193 billion doesn't paint a convincing picture. Despite over two years of operation as a universal bank, Bandhan hasn't made too much inroad into diversified products. Almost 97 per cent its loan book is derived from small loans, mainly micro finance. It has only recently forayed into loans to small and medium enterprises. The dependence on micro finance loans isn't very comforting and it hasn't done enough justice as a universal bank.
 
Addressing this asset-liability mismatch is crucial, as it could eventually impact cash flows, a concern already flagged off in the draft prospectus. Excessive dependence on microfinance loans has lately impacted its otherwise healthy asset quality, as the sector is still under the pressure of farm loan waiver and demonetisation.
 
Sanjiv Bhasin, EVP-market and corporate affairs, IIFL, feels stress might remain elevated for Bandhan Bank in the next few quarters, too. Bringing asset quality back to FY17 levels is another task. Any adverse change in the trend with respect to farm loan waiver could have a bearing on the business of banks, including Bandhan’s.
 
Bhasin believes the bank’s initial public offering (IPO) should be well received, given the paucity of good banking franchisees. “Bandhan Bank would come with no past history and a lot of cleansing would have happened before the IPO.” However, the key aspect is that it be rightly priced.