Bandhan Bank strikes deal to raise Rs1,500 crore

Kolkata: Bandhan Financial Services Ltd has concluded an agreement to sell shares in the bank it is about to launch at 2.9 times the book value of its ₹ 10,000 crore microfinance business amid concern that its transformation into a bank will significantly pare profitability.

Bandhan is in the process of raising ₹ 1,500 crore from three investors—International Finance Corp. (IFC) of the World Bank Group, the Singapore government’s GIC Pvt. Ltd and Small Industries Development Bank of India (Sidbi).

The pricing of Bandhan Bank’s share sale is comparable with that of leading private banks. HDFC Bank Ltd, for instance, is trading at 4.3 times its book value, Axis Bank Ltd at 3.04 times and ICICI Bank Ltd at 2.23 times.

However, when compared with state-owned lenders such as State Bank of India (SBI), the valuation of Bandhan Bank’s share sale is impressive. Among public sector banks, SBI commands the highest valuation and is trading at 1.6 times its book value.

The bank’s management refused to disclose the price at which shares are to be sold, citing a confidentiality agreement. Under Reserve Bank of India (RBI) guidelines, it is required to go public by 2018.

When it only gave small loans, Bandhan’s return on equity (RoE)—a measure of profitability—was 28-30%, but this is set to decline sharply over the next few years even though as a bank it will be able to raise deposits directly from savers.

Bandhan Bank’s managing director and chief executive officer Chandra Shekhar Ghosh said the management is bracing for a substantial cost escalation. Its impact on profitability can only be mitigated by the bank’s ability to collect cheap public deposits, he said.

For analysts, it isn’t surprising that Bandhan’s RoE is going to decline after it becomes a bank. In 2014-15, HDFC Bank, for instance, registered an RoE of 19.37% and SBI, India’s biggest lender, 10.62%.

Bandhan’s loans so far are of small amounts and its deposits are also likely to be small. Hence its transaction costs are going to be higher than other private banks such as HDFC Bank. So for the first few years, its profitability will be under pressure. Whether or not it succeeds as a bank depends entirely on its ability to scale up, said an analyst, asking not to be named.

In 2013-14, Bandhan’s net profit jumped 36% over the previous year to ₹ 283.46 crore on a revenue of ₹ 1,212.83 crore.

Bandhan, which currently has a loan book of ₹ 10,000 crore, could have chased more growth in microfinance, but Ghosh chose to expand into banking when in 2014, RBI issued new banking permits for the first time in 10 years.

Bandhan Bank will start operations on 23 August with 630 branches across 27 states, Ghosh announced in Kolkata on Thursday. By then, it expects to receive regulatory clearances for investments by IFC and GIC, and the bank will start operations with a capital base of ₹ 3,200 crore and a capital adequacy ratio of 34%, he said.

IFC and GIC will own 5% each directly in the bank if their proposed share purchase is cleared by the Foreign Investment Promotion Board. They have also bought shares in the bank’s holding company, so their effective control will be higher.

IFC and Sidbi have provided risk capital to Bandhan for many years. At the end of March 2014, IFC and Sidbi owned 10.93% and 9.63%, respectively, in the microfinance business—the holding company of the bank. GIC is a new investor.

Unveiling the bank’s 10-member board on Thursday, Ghosh said former chief economic advisor Ashok Kumar Lahiri will be the lender’s non-executive chairman. Ghosh, for now, will be the only executive director. On completion of the share purchase, IFC and GIC will appoint representatives to the bank’s board.

Among other members of the board are B. Sambamurthy, former chairman and managing director of Corporation Bank; Bhaskar Sen, former chairman and managing director of United Bank of India; Krishnamurthy Subramanian, associate professor of finance at the Indian School of Business; C.M. Dixit, senior partner at audit firm G.D. Apte and Co.; and Sisir Kumar Chakrabarti, former deputy managing director of Axis Bank.

Bandhan has hired around 8,000 people in the past few months, of which around 5,000 are to be deployed in its business of rural lending, according to Ghosh. At the same time, around 3,000 of the 13,500 employees of its microfinance business have been trained to work at the bank’s branches. Over the next couple of years, the bank will hire 3,000-4,000 more, he added.