This is part 2 of my observations from the Bandhan DHRP. For part 1, click here.
Some points worth spending some time over before making your decision to invest in Bandhan IPO:
- 87% of lending book consists of microloans (unsecured); in case of mass defaults (low to medium probability) NPAs may rise at alarming rate
- Diversification of product portfolio to other retail products is expected to bring down profit margins, RoE and RoA as they are low-margin products as compared to microloans
- 5x post IPO book value, is at premium to peer banks. Management justifies it by saying it is a unique business model and can’t be compared with other banks.
- Post raising capital, the bank would need to grow at 70-75% CAGR (rough estimate) in 3-4 years to use the capital raised.
Hope it helps!
Some interesting points from Bandhan DHRP:
- No other commercial bank has extensive focus on under-banked and under-penetrated markets. Also, Bandhan strongly placed as compared with other NBFCs and small finance banks.
- All microloans are group-based individual loans which increases credit discipline through mutual support. Also, collection of microloans occurs on weekly basis. All microloan customers are insured. Gross NPA to gross advances stood at 1.43% (impressive)
- Credit appraisal for microloans is primarily based on qualitative inputs (not sure if it is strength or weakness)
- Low cost distribution network through 2,546 doorstop service centers (DSCs); Hub and spoke model
- Strengthening liability franchise: In just two years, total CASA stood at INR 71bn with CASA ratio of 28% and retail to total deposit ratio of 76%. Planning to open targeted branches in urban areas to get access to low-cost deposits.
- Focus on increasing share of non-interest income: As ~97% of gross advances are in PSL category, Bandhan can earn non-interest income by selling PSL certificates to other non-compliant banks. Recently, entered into arrangement to offer third-party insurance products and MFs and earn commissions.
- Looking to expand into SME and other retail lending: Selective in approach; Intend to open branches and DSCs to grow customers base for micro loans, retail and SME lending into rural affluent and mass affluent populations
- Highly concentrated operations in terms of both region (majority of operations in Eastern and North-eastern India; as these regions have lowest presence of bank branches per capita as compared to other regions) and product portfolio (microloans consists of ~90% of gross advances)
- Capital base: SLR: 36.81%, CRR: 4.02% and CAR (26.24%) well above RBI requirements of 20%, 4% and 13% respectively.
Watch this space as will keep adding more in coming days.