This article on Bandhan Bank is written and researched by Amrit Mark Brar & Thillai Palanichamy.
India comprises of 60% rural population to which formal banking services are completely inaccessible and fall prey to informal banking sector. With an aim to reaching out to the unbanked and under-banked population of the country and providing the rightful access to basic banking and financial services Bandhan Bank, a recently listed bank, seeks to resolve this challenge by ensuring that every individual falls under the purview of formal banking which drastically reduces the financial burden on the meager wage earners.
The growth number are pretty solid clocking 37.91% CAGR in advances, 32.49% in PAT and around 10.18% in average NIMs for the last three years. But there comes a slight risk in lending to the unbanked and under-banked, the inability to ascertain their repayment ability. This is also the reason the major big banks have shrugged off from this territory leaving the whole market to the likes of Bandhan Bank. The bank closely works with its borrowers and follows an incremental lending system. The Gross NPAs have increased from 0.51% to 2.04% which is solely on the account of taking provision on one large corporate account. With the exclusion of that one account the Gross NPA stands at 1.07%. With this the management has decided to stay away from the large corporate accounts and to focus on its key strengths.
Bandhan Bank has 95% of its assets in priority sectors and the loan book comprises majorly of micro finance lending which forms about 86.23% of the total loan book and the rest is occupied by the nonmicro finance. The non-micro finance book comprises of SME, retail & NBFC exposures combined.
The liabilities profile is also impressive. The bank has shown 36.42% CAGR in deposit growth, 60.53% CAGR in CASA growth over last three years with CASA ratio standing at 40.75% which drastically brings down the cost of funds. It is also worth noting that the bank has 4.23% ROAA (Return on Average Assets) which are among the highest in the world and definitely highest in India. Higher NIMs to also to provide a high margin of safety and above average cash flows which can be reinvested in business. CARs (Capital Adequacy Ratios) are well above the RBI's limit and suggest that the bank can take more hits in terms of provisions than any other bank with current provisions standing at 17% of the net profit.
Bandhan has announced a merger with GRUH Finance which is a Housing Finance company in order to pursue its aim to cater to Affordable Housing segment and can be the next growth opportunity. Although, the merger ratio suggests that GRUH is being merged at a premium but the market for Housing in India is enormous and GRUH can assist Bandhan in tapping it perfectly. GRUH Finance has minimal exposure to Construction Loans and so there are minimal chances of the merged entity with surprises post merger.
Some near term headwinds could be the RBI's decision to decrease promoter stake to 40%. Post merger promoter stake stands at 60% which needs to be reduced further. But with the value in bank which comes from high margin of safety due to high NIMs and controlled NPAs despite lending to un and under banked, near term headwinds can be ignored if anyone is committed to stick with Bandhan Bank for long-term.
This article first appeared on ValueWalk Premium