In the recent days, one of the biggest IPOs which has entered to our Capital Market is of Bandhan Bank. Before going through a analysis, let’s take a look on the financial condition and important details for the bank.
Bandhan Bank’s Profile
Bandhan Bank was incorporated on 23 December and began operations on 25 August, 2015. Bharat Financial company limited (BFCL) is the parent company of the Bandhan Bank. However, promoter of bank is Bandhan Financial Holding which holds more than 85 percent of total equity shares. Micro Finance is the major source of revenue and profit for the bank. As of 31st December 2017, the bank had around 9.8 million micro loans and 2,633 Dorestep service centers. East and Northeast India accounts for strong presence of the bank.
To build a strong banking business, Bank had opened around 501 bank branches and 50 ATMs under its greenfield network. And now this number has grown to 887 bank branches and 430 ATMs as of 31st December 2017, which is now serving more than 2 million general customers.
In the IPO, IFC is offering around 1.4 crore shares for sale, and remaining shares consist of a fresh issue of 9.7 crore shares. Total offer for sale and fresh issue makes around 10 percent of the total equity of the Bank. From the IPO, bank is aiming to raise around Rs 4473 crore out of which Rs 810 crore would go to selling shareholders. Also, this IPO values company around Rs 44,730 crore which is higher than most of the Great quality banks.
In the financial front, bandhan bank has been able to maintain its asset quality which indicates by its 1.6 percent Gross NPA out of total portfolio of advances. PE ratio of bandhan bank lies around 36.5 which is higher than most of the Great asset quality Banks like HDFC bank, ICICI bank whose PE ratio is 33.5 and 20.4 respectively.
The price band of the recently started Bandhan Bank is 315-320. The issue of the bank will close today and as per latest media reports, the IPO has been fully subscribed now which is little good for its retail subscribers. The bank will use this IPO raised Capital for its future expansion plans and expenditure.
Overview on valuations and expansion
Looking upon the Asset quality and financial condition, Bandhan bank looks a good option for a bet on retail banking space. However, the biggest problem with the bank is of lower time period of Incorporation of the bank. It is true that Bank has rapidly grown its business in the retail segment. But for consistent growth over next many years, the bank will need to enter in Corporate lending, SME, MSEM loans which carries higher risk. If we look at the present condition of different banks in India, Bandhan Bank may look attractive because of better asset quality. But with the passage of time, this asset quality will probably decline because of higher risk in Non-retail lending and significant risk in retail lending also.
If we assume and believe that Bandhan Bank may also try to remain concentrated in Retail business only for lower risk, than it could not be possible. Because this will increase their risk of loan portfolio which consist mostly of East and northeast area. And any type of Financial distress in these areas may completely wipe out the Lending condition of Bandhan Bank.
So, overall i think believe risk is much higher in Bandhan Bank as compare to others. Whereas, most of the banks have already faces most distressed NPAs, Bandhan Bank is awaited to go from NPA problem if it enters in Corporate lending. So, volatility in stock price could also remain very high for next 1-2 years. And on the valuation front, it is again not a attractive choice. Valuations are high and current weakness in overall markets also make Bandhan Bank IPO listing with full of risk. Therefore, I would suggest to avoid subscribing this IPO for both listing gains and long-term holding perspective. However, those who have already subscribed may try to take a exit during initial listing days. Next one year for the bandhan bank stock in market could be very risky and volatile.
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