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Piramal Enterprises

The rural economy has been the saviour of India Inc. during the on-going phase of pandemic. Be it an automobile company or an FMCG business, corporate houses have been witnessing robust demand from the rural areas, as Q2FY21 numbers suggest. Interestingly, some rural-focused financial services players have not only reported improved performance in Q2FY21 sequentially, but have also guided for a better show going forward. For instance, a case in point is Bandhan Bank—a Kolkata-headquartered bank largely focused on serving the under-banked population.

Bandhan Bank derives nearly 71% of its revenue from semi-urban and rural areas. At the end of the quarter gone by, the bank had a loan book of Rs 76,600 crore, of which 62% were the advances given to Emerging Entrepreneurs (erstwhile microfinance unit). Home loans and commercial loans constituted 25.4% and 8.6% of the loan book, respectively.  Retail loans have still been a tiny part of Bandhan Bank’s business. At the end of Q2FY21, the bank had 1.12 crore active borrowers.

Bandhan Bank has a dominant presence in eastern India, which makes up 47% of its geographical reach while the north east contributes another 13%.

Bandhan Bank: report card…

(Source: Company records)

The bank has demonstrated an impressive performance in Q2FY21 with the collection efficiency of the micro-banking book improving to 94% in September. It’s noteworthy that the bank has managed to maintain the same momentum in October.

Net Interest Income (NII) grew at an impressive 25.8% on a Year-on-Year basis in the quarter gone by. Profit After Tax (PAT) fell 5.3% due to COVID-19 related provisioning of Rs 300 crore.

Reacting positively to Bandhan Bank’s Q2 numbers, the stock has jumped nearly 15% in November so far. Last week, our technical expert discussed the chart pattern of Bandhan Bank and explained why it could rally over 50% from the current levels.


This is what may work in favour of Bandhan Bank

  • The amalgamation of Gruh Finance, which happened last year has helped Bandhan Bank reduce its dependence on micro finance loans from 86% in June 19 to 62% at present. As guided by the management, Bandhan Bank intends to further reduce this dependence to 30% by 2025.
  • Crisil has assigned ‘AA’/stable rating to Bandhan Bank’s Non-Convertible Debentures and Certificates of Deposits. The rating acknowledges the bank’s leadership position in the microfinance business, its comfortable capital position, healthy asset quality and its ability to garner low-cost deposits.
  • Merger of Gruh Finance has offered Bandhan Bank an exposure to semi-urban and rural mortgage markets in western India. The government’s focus on affordable housing may help Bandhan grow its home loan portfolio and further reduce the dependence on unsecured lending in future. Over the next-five years, Bandhan Bank aims to increase the contribution of mortgage loans in the overall loan book to 30% from 25% at present.
  • Bandhan Bank endevours to grow its retail loan franchise 10 times in the next 5 years and the contribution of the commercial banking book is also expected to improve to 30% in 2025 as compared to 9% at present.
  • By 2025, Bandhan Bank aims to reduce its dependence on eastern and north eastern regions from 65% at present to 27%. Bandhan Bank has plans to grow its PAN India presence with major expansion coming from northern and southern regions. It seems microfinance may still remain the entry-level product for the acquisition of a client but other verticals may help increase the engagement with customers.
  • Bandhan Bank has a network of banking outlets consisting of 1,045 branches and 3,656 banking units. It aims to expand the branch network 3 times by 2025.
  • Bandhan Bank has managed to steadily increase the proportion of Current Account-Savings Accounts (CASA) in the total deposits from 32.9% in September 2019 to 38.2% in September 2020.
  • The bank is adequately capitalized as denoted by a high Capital Adequacy Ratio (CAR) of 25.7% as on September 30, 2020, Tier-1 capital stood at 22.2%.

Breather from the stake dilution overhang…

As part of licensing guidelines, Bandhan Financial Holdings (BFHL)— the promoter, was supposed to bring down its stake in the bank to 40% within 3 years from the commencement of banking business operations; i.e. by August 2018.

Since Bandhan Bank failed to comply with the shareholding rules, it faced regulatory restrictions which included a curb on automatic branch expansion and restrictions on the MD & CEO’s remuneration in the past. Consequent to Bandhan Bank complying with the licensing norms, RBI lifted restrictions it had imposed earlier in August 2020.

According to RBI guidelines, the bank must further reduce the promoter’s stake to 20% in 10 years and 15% in 12 years from the date of commencement of business. The stake sale for meeting regulatory norms may not always happen at a price commercially attractive to the promoter of a bank.

As you must have noticed, there won’t be any overhang of stake dilution on Bandhan Bank for the next five years.

In the past, the promoter of the bank has opted for the Merger and Acquisition (M&A) route to reduce its stake and has taken the secondary market route as well. Will it keep the M&A route open for diluting stake in future? It will be crucial to watch especially when consolidation in the banking and NBFC space looks eminent, post pandemic.

Interestingly, non-promoter shareholding has some marquee names, such as HDFC (9.9% stake), LIC (1.4%), and SBI Large and Midcap Fund (2.48%) amongst others, as per the shareholding disclosures dated September 30, 2020.

In summary…

Despite the recent rally, the stock is still down more than 50% from the all time high it made in August 2018. If Bandhan Bank manages to accelerate the collections in its microfinance business and continue to register higher credit and deposit growth, the coming quarters may indeed result in sabki bhalai.

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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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