RESEARCH REPORT

Sector: Banking/Finance
Company: Bandhan Bank

About the company

Bandhan is the latest of those financial institutions that was able to get a banking license from
RBI. It all started in 2001, when Bandhan was conceptualized as a microfinance institution -
NGO in rural Bengal. The company has expanded since then manifold to be recognized as the
largest MFI in the country in 2010. In 2015, Bandhan received the universal banking license
from the RBI on June 17 and started operations on August 23 in the same year. In 2018, Bandhan
marked a remarkable debut into the stock markets. On the basis of market capitalization, it
emerged as the 8th most valued bank on the day of listing itself.

With listing Bandhan Bank diluted around 10% of its stake, valuing the company at around
Rs40,000 crore ($6.15 billion).

Since then, its network has expanded from 501 branches to 986 branches in 2019 with presence
across the country. The company has an employee base of 32,342. It has a loan book size of Rs.
39,643 crore and has also mobilised Rs.43,231 crore in deposits. Even today most of the
company’s business is made up of the small loans extended to small entrepreneurs.

Products: The company has various type of loans offered based on the needs of the customers.
Its loan portfolio comprises of Housing loans, Vehicle loans, Personal loans, Gold loans, MSME
loans, Agri loans, Credit card facilities among other types of loans. However, around 84% of the
loan portfolio is made up of Housing loans.

The promotor
Chandra Shekhar Ghosh, founded Bandhan Financial Services in 2001 when most established
banks turned away from lending to small borrowers without credit history. Mr. Ghosh has earlier
worked with micro-finance companies and it helped him gain understanding of his business
model.

SWOT Analysis

STRENGTHS
 Positive image: The company’s transformation from the micro-finance institution to a
full-fledged bank is a remarkable story and has earned a positive image for the Bank.
Also, the promoter and the management of the company so far contributed to it.
 Good credit rating history: Bandhan has a stable and good credit ratings across all its
securities indicating its high credit worthiness. Bandhan’s CoD are rated [ICRA]A1+,
 term loans & NCDs are rated [ICRA]AA Stable, and Unsecured Subordinated NCDs
rated [CARE]AA- Stable, [ICRA]AA Stable by the credit rating agencies.
 Expansionary network: The company is expanding into other markets apart form focus
on north-eastern India. It currently has 986 branches in 2019 with presence across the
country with an employee base of 32,342.
 Fast growth rates: The company has exhibited a CAGR of 37.17% in its business over
the past 3 years. The Total Income of Bandhan grew at a CAGR of 40.53%, whereas its
PAT grew at 32.49% during the same period of 3 years.
 Growing loan size & deposits: Bandhan has a loan book size of Rs. 39,643 crore that
grew at a CAGR of 37.91% over 3 years. Its deposits grew at a CAGR of 36.42% to
Rs.43,231 crore in 2019.
 High CASA ratio: The CASA ratio, which is the key in ensuring high margins and
profitability of banking companies, is high for Bandhan and stood at 40.75%.
WEAKNESS
 Low corporate loans: Bandhan’s customer base is highly concentrated towards salaried
employees with around 55.85% of the total customers. Bandhan’s corporate portfolio of
loans are low.
 Highly concentrated assets: Bandhan’s loans are highly concentrated in few segments.
For instance, the priority sector lending comprises of about 90% of the total loan
portfolio of the Bank; around 61% of the lending concentrated in SME segment; around
70% of banking outlets are concentrated in rural and semi-urban areas.
OPPORTUNITIES
 Favorable growth rates for banking penetration in India: India is a underbanked
country where the penetration of banking in rural and remote areas are still low. The
scheduled commercial banks in India are growing at a year-on-year growth rate of 12.2%
in gross bank credit which is higher than 8.2% during the previous year. The aggregate
deposit growth rates have been growing at a year-on-year growth of 9.4% in FY19 as
compared to 6.8% in FY18. The deposit growth rate of around 10.9% was highest in rural
centers and this creates a great opportunity for Bandhan.
 Government schemes and initiatives: The Government of India has undertaken various
measures to promote financial literacy and banking culture in India. These measures
include the JAM trinity, the MSME loans melas, the loans for self-help groups, Housing
for All schemes, Smart cities project etc. Also, in order to promote the financial liquidity
in the country and financial stability of the banks the government has taken various
initiatives include identification and resolution of stressed assets in time-bound manner,
implementation of the Insolvency and Bankruptcy Code (IBC), recapitalization of public
sector banks, among others. These measures are expected to create a positive sentiment
among the Banking industry.
 Demand for affordable housing: The loan portfolio of Bandhan is highest in Housing
loans. With various initiatives by the Governments, the demand for affordable housing
 has been increasing and creating demand for the Housing loans. The demand for low cost
housing is increasing in both urban and rural markets alike.
THREATS
 Competition from both Banks and NBFCs: The banks have been expanding at a
greater growth rates which limits the scope of deposits available and loans that can be
advanced by other form of banking channels. Bandhan by its nature of business and the
segments it operates, is competing with commercial banks, co-operative banks and
NBFCs like micro-finance institutions.
 The FinTech companies: The FinTech companies are offering innovative and varied
types of financial products. Thus, leaving the customers with a plethora of options to
choose from. For instance, the P2P-NBFC type of models that are picking up could be
threat to the company.
 Contagion effect: The FIs have been lending beyond their capacity to absorb bad loans
and thus creating problems of liquidity and financial instability in the market. This is
creating a financial contagion effect on other financial institutions in the economy
thereby destabilizing the financial ecosystem in India.
 High exposure to PSL: Bandhan has around 90% exposure to priority sector lending
which includes agriculture and allied activities, eligible industries and service sector
businesses, and other personal loans. Any event of natural disasters can lead to huge non-
performing assets of the current loan portfolios.
 Other risks: The Banking industry by its very nature is exposed to various risks like the
Credit Risk, Market Risk, Liquidity Risk, Operational Risk and various other Risks.

Competitive Analysis
The RBL and South Indian Banks are selected as close comparable of Bandhan bank for the
purpose of peer evaluation considering the total income level, deposits and advances size of the
companies. A brief summary of the financial aspects of these companies are presented as under:
South Indian
Particulars Bandhan Bank RBL Bank
Bank
Total Income (Rs. in cr) 7707.09 7602.73 7743.07
Net Profit (Rs. in cr) 1951.5 247.53 866.95
Deposits (Rs. in cr) 43,231.62 80,420.12 58,394.00
Gross Advances (Rs. in cr) 39,643.39 63,635.92 54,308.24
Net Worth (Rs. in cr) 11202 not available 7336
Net Interest Margin (%) 10.43% not available 4.14%

Book Value per share 93.89 29.48 171.93

EPS (Diluted) (per share) 16.34 1.37 20.47
Profit per employee (Rs. in cr) 0.06 0.03 0.15
Business (deposits less inter-bank deposits
2.58 17.25 18.23
plus advances) per employee (Rs. in cr)
 CASA Ratio (%) 40.75% 24% 25%
Branches (no's) 986.00 870 452
Employees (no's) 32,342 8440 5972

CAR (%) 29.20% 12.61% 13.46%

GNPA (%) 2.04% 4.92% 1.38%
NNPA (%) 0.58% 3.45% 0.69%

P/E (x times) 9.92 3.21 10.53

Industry P/E (x times) 25.52 25.52 25.52
P/B (x times) 2.70 0.20 0.64
Return on assets - ROAA (%) 4.25% 0.29% 1.30%

Bandhan’s high CASA ratio of 40.75% helped it maintain a high net-interest margin of 10.43%
which is significantly higher than that of RBL Bank. It also ensured that the ROAA of Bandhan
is highest at 4.25% while that of the other banks remained at 0.29% and 1.30%.
On the operations front, the CAR of Bandhan is high and thus it has a higher ability to absorb
any shocks of NPAs in its loan portfolio which mainly comprised of PSL. The NPAs of Bandhan
is significantly lower compared to the other banks which indicates the operating efficiency of the
Bank despite it being focused of PSLs and rural lending. The profit and business per employee
are not well for Bandhan compared to other banks. This is mainly on account of the modus
operandi of Bandhan Bank which focuses on personalized customer service which requires huge
employee base to support and maintain its operations.
On the investment front, the P/E ratios of all the banks considered are below the Industry P/E of
25.52. It signifies huge investment opportunity in these banking companies. The P/B ratio which
is the key ratio used for relative valuation among the financial services companies is the highest
for Bandhan bank.

Conclusion and Way-forward

Bandhan is a bank that has been built on strong fundamentals and a laid-out vision of focusing
on financial inclusiveness. The Bandhan have been successful in making profits while serving
the Bottom of the Pyramid in India. The healthier assets with lower NPA and the high growth
potential of Bandhan makes it attractive to the investors. However, Bandhan should equally
focus on diversifying its loan portfolio while still continuing its purpose of financial inclusion.

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