March 23, 2018 / 2:17 AM / a month ago

BREAKINGVIEWS-Tiny loans price big future for newbie India bank

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

MUMBAI, March 23 (Reuters Breakingviews) - India’s newbie bank is attracting big money. An initial public offering will give Bandhan Bank a market capitalisation of almost 448 billion rupees ($6.9 billion), or nearly five times book value, according to a Breakingviews calculation. That sounds punchy for a microfinance lender that only became a bank three years ago, but the rich figures can be justified by fat returns, and a more than decade-long record as a niche lender.

A public listing is a condition of the bank licence Kolkata-based Bandhan won three years ago. Most of its business still comes from small loans, mostly to groups of women in India’s east and northeast, where the population is poorly served by traditional banks. But Bandhan has also rapidly grown a deposit base.

The financials are something to behold. Net interest income grew 27 percent in the nine months to end December. Gross non-performing assets, though rising, amount to just 1.7 percent of loans. Low costs and high interest rates produce a net interest margin of 9.9 percent, more than double that of its largest private-sector banking rival, the $73 billion HDFC Bank . Return on equity is an impressive 26 percent.

Bandhan represents the convergence of two hotly valued areas: microfinance and consumer-focused private lenders. Both are in demand from investors who want to benefit from India’s rapid growth, but avoid the wobbly balance sheets and fraud plaguing state banks.

That helps to justify the valuation. Given rapid growth, bankers say, the price equates to more like 4 times book value a year from now. That puts Bandhan on the same forward valuation given to Bharat Financial Inclusion, a roughly comparable outfit, when it agreed to merge with IndusInd Bank last year, and is similar to where HDFC Bank trades. Other consumer lenders, like Bajaj Finance, command higher multiples.

Investors are pricing in sustained high growth. One challenge Bandhan will have to overcome is that it concentrates on less-industrialised parts of the country, where demand for credit is lower and so it may need to venture deeper into other states. Another is maintaining high lending standards amid rapid expansion. Still, the outlook for the new banking kid on the block is bright.

On Twitter twitter.com/ugalani

CONTEXT NEWS

- India’s Bandhan Bank on March 22 priced shares in its initial public offer at the top of the range, valuing the lender at almost $7 billion.

- Investor subscriptions for the initial public offering of Bandhan amounted to almost 15 times the shares on offer, as of March 19, data from India’s National Stock Exchange showed.

- The bank offered a mix of new and existing stock valued at up to $686 million in a narrow price range between 370 rupees and 375 rupees. The issue period closed on March 19. Anchor investors include the Abu Dhabi Investment Authority.

- Axis Capital, Goldman Sachs, JM Financial, JPMorgan and Kotak Mahindra are managing the IPO.

- The shares are due to begin trading on or around March 27.

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Editing by Quentin Webb and Sharon Lam

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