Bandhan Bank Initiating Coverage

The Evolving Story

December 15, 2020

Shreepal Doshi ([email protected], +91 99786 71550), Rohan Mandora ([email protected], +91 97370 65666) India Equity Research | BFSI December 15, 2020 Initiating Coverage Bandhan Bank

CMP Target Price Rs 412 Rs 490 Evolving biz model, profitable franchise Mar 2022 Rating Upside LONG 19% ()

➢ Bandhan Bank (Bandhan) has seen a remarkable transition to an universal bank with Stock Information

new non-MFI product additions. Its distinctive business model is backed by industry Market Cap (Rs Mn) 663,715 leading track record in MFI and Housing (erstwhile Gruh Finance) coupled with one of 52 Wk H/L (Rs) 527/152 the fastest growth in deposits (54% CAGR over FY16-1HFY21). Avg Daily Volume (1yr) 18,239,190 ➢ While underpenetrated/rural geographies remain focus areas, Bank plans to re- Avg Daily Value (Rs Mn) 80.0 classify/expand the product bouquet under its Vision 2025 with a target loan mix of Equity Cap (Rs Mn) 387 30%/30%/30%/10% for EEB/Mortgages /CB/Retail segments. Face Value (Rs) 10 ➢ In Oct’20, ~95% of Bandhan's MFI customers have started paying, leading to ~91% Share Outstanding (Mn) 1,610.4 collection efficiency. COVID provisions stand at Rs 21bn (2.7% of gross loans). Bloomberg Code BANDHAN IN ➢ Expect 2H disbursements to be healthy. We build in 24%/25% CAGR for gross Ind Benchmark BANKEX loans/deposits over FY20-FY23 with RoEs of ~23% for FY22/FY23 each. Initiate with LONG with Mar’22 TP of Rs 490, valuing the company at 3.3x on FY23E ABV. Ownership (%) Recent 3M 12M Promoters 40.0 (21.0) (61.0) Remarkable transitioning from MFI to universal bank: Bandhan secured RBI’s ‘in-principle’ approval in Apr’14 and began banking operations in Aug’15. The bank delivered gross DII 12.7 4.6 (8.1)

loan/deposit CAGR of 43%/54% over FY16-1HFY21 to Rs 774.6bn/Rs 661.3bn, with a FII 32.2 17.8 (14.4) customer base CAGR of 22% over this period. Robust deposit franchise is on the back of (1) Public 15.1 (1.5) (16.6) healthy SA/CA of 33%/5%, (2) retail TD contributing ~41% of deposits and (3) liability customer base of 5.1mn. We however believe the bank’s deposit market share in its key states in East/NE states is still low at 1.5% and can increase further.

Revamping product bouquet: Bandhan has revamped its business strategy in 2QFY21 with a FY25E asset target mix of (1) Emerging Entrepreneurship Business (MFI) at 30% (vs 62% currently), (2) Commercial banking (SME, Samruddhi & SEL) at 30% (vs 28%), (3) Retail products (gold, PL, 2W) at 10% (vs 1% currently) and (4) Mortgages (micro, affordable, prime) at 30% (vs 25%). We expect NIMs (on avg. assets)/RoA to contract to 7.1%/3.4% in FY23E (FY20: 8.5%/4.1%) amid a shift to relatively low-yield products. However, RoEs are likely to remain best-in-class at ~23% in FY23E.

Healthy PPoP CAGR, contained credit cost: Bandhan delivered a NII/PPoP/PAT CAGR of

61%/85%/82% over FY16-FY20. While it maintained NIMs of 8-10% in this period, operational leverage led to strong PPoP growth. The bank has emerged stronger post the AP Relative price chart crisis, demonetization, Assam agitation and impact of floods and cyclones with resilient asset BANDHAN IN Nifty Index

quality and growth. Even post current pandemic, collection efficiency trends has been steadily 555 improving with Oct’20 CE at 91% with 95% paying customers. The bank is carrying a 2.7% 440 provision buffer (Rs ~21bn on gross loans) and guided for 3.5% COVID-related credit cost. 325 We expect credit cost of 2.8%/1.6%/1.5% in FY21/FY22/FY23. 210

View: We appreciate the bank’s track-record to absorb event risks and believe it is well 95

equipped (professional expertise, network and customer franchise) to change its loan mix and

Jul-20

Jan-20 Oct-19 capitalise on the cross-sell opportunities. Initiate coverage with LONG. Key risks: Uptick in Apr-20 Source: Bloomberg rural NPAs, delayed economic revival and imposition of lockdown. Financial Summary Analysts

YE Credit EPS ABVPS P/E P/ABV ROE Shreepal Doshi Mar NII PPOP PAT RoA (%) cost (Rs) (Rs) (x) (x) (%) Rs mn (bps) [email protected] FY20A 63,239 54,466 30,237 18.8 91.9 21.9 4.5 22.9 4.1 262.2 +91-079 6190 9541

Rohan Mandora FY21E 76,014 60,467 29,840 18.5 102.1 22.2 4.0 18.2 2.9 280.0 [email protected] FY22E 90,945 73,115 44,156 27.4 125.7 15.0 3.3 22.8 3.5 157.0 +91-079 6190 9529 FY23E 109,294 87,468 52,929 32.9 149.0 12.5 2.8 22.8 3.4 150.0 Source: Company, Equirus Research

Refer to important disclosures at the end of this report December 15, 2020| 1 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Bandhan – the evolving story Transformation from NBFC-MFI to a universal bank Bandhan had secured the RBI’s in-principle approval in Apr’14 and the final nod in Jun’15. Bandhan Secured universal banking license in Bank was incorporated in Dec’14 as a wholly-owned subsidiary of Bandhan Financial Holdings and Jun’15 and began operations in Aug’15 began its operations in Aug’15. Bandhan Financial Holdings Limited is owned by Bandhan Financial Services (BFSL) – the largest NBFC-MFI until all its business was transferred to Bandhan Bank.

Bandhan began its journey in 2001 as Bandhan Konnagar, a NGO, providing microfinance services to women in rural West Bengal. BFSL started its microfinance business in 2006 and the NGO transferred its microfinance business to BFSL in 2009; thereby, the entire microfinance business was Gross/net advances CAGR 43%/48% taken over by BFSL. At the time of this transfer, BFSL was India’s largest microfinance company by during FY16-1HFY21 to Rs 774.6bn/ number of customers and loan portfolio size. Under the universal banking license norms, the bank was Rs 733.1bn required to form a NOFHC to be the bank’s promoter and therefore Bandhan Financial Holdings Limited was incorporated. The bank was also required to bring down promoter holding to 40% within five years of commencement of business. The Gruh merger and the recent block deal (Aug’20) enabled the bank to meet this regulatory requirement.

The bank’s gross/net advances in FY16 stood at Rs 155.8bn/Rs 124.4bn; since then, it has grown its gross/net advances book at a 43%/48% CAGR during FY16-1HFY21 to Rs 774.6bn/Rs 733.1bn. Further, Bandhan has a customer base of ~20.8mn borrowers, which have grown at a 22% CAGR over FY16-1HFY21. About 90% of Bandhan’s loan book is PSL compliant.

Deposit CAGR of 54% over FY16- The deposit franchise registered a 54% CAGR over FY16-1HFY21 to Rs 661.3bn. CASA ratio improved 1HFY21 with CASA ratio at 38.2% from 21.6% in FY16 to 38.2% in 1HFY21. Exhibit 1: Net Advances CAGR of 48% over FY16-1HFY21

Net Advances (Rs Mn) Growth - YoY (%)

800,000 733,067 90% 666,299 80% 700,000 76.5% 600,000 68.1% 70% 60% 500,000 396,434 50% 400,000 35.4% 297,130 40% 300,000 33.4% 30% 200,000 168,391 124,375 20.0% 20% 100,000 10% 0 0% FY16 FY17 FY18 FY19 FY20 1HFY21

Source: Company Data, Equirus

December 15, 2020| 2 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Merger with Gruh Finance

Board of Directors of Bandhan Bank & On Jan’19, Bandhan approved its merger with Gruh in an all-stock deal (share exchange ratio at Gruh Finance approved the merger in 568:1,000 for Bandhan: Gruh). As on Sep’18, Gruh had an advances book of Rs 166.6bn and Jan’19 Bandhan Rs 333.7bn, leading to a total advances book of Rs ~500.4bn. This merger benefitted Bandhan in two ways:

1. Diversification of product line from an MFI player (86% of book in Sep’18 to 58% post- merger) and delivering healthy gross advances growth of 38% yoy in FY19.

Post-merger MFI book shrunk to ~60% 2. Bringing down BFHL’s (non-operating promoter entity) stake from 82.3% to 61% as required vs. 86% earlier; promoter shareholding by Sep’18 RBI guidelines. declined to 61% from 82.3% earlier However, the merger pushed up the bank’s CoF (FY20 CoF at 7.8% vs. 5.5% in FY19) with Gruh’s borrowings also coming on Bandhan’s balance sheet. That said, most borrowings have been replaced by deposits in the last six months. With this merger, blended yields are also expected to moderate as Gruh’s housing product rates range between 9-14% vs. Bandhan’s MFI product yield of ~18%.

Exhibit 2: Standalone loan book split in 2QFY19 Exhibit 3: Loan book split post-merger in 2QFY19

Micro Banking Others Micro Banking Retail Home Loans Others

14% 14%

28% 58%

86%

Source: Company Data, Equirus Source: Company Data, Equirus

Exhibit 4: Bandhan Bank – Brief timeline

Year (FY) Events/Brief overview

2001 Began journey as Bandhan Konnagar, an NGO, providing microfinance services to economically weaker women in rural WB

2006 Bandhan acquired an NBFC and established it as Bandhan Financial Services (BFSL). Focus on the micro finance segment continued

2009 The NGO transferred its microfinance business to BFSL; thereby, the entire microfinance business was undertaken by the latter

2014 BFSL received an in-principal approval from RBI in Apr'14 to set up a universal bank. Bandhan Bank was incorporated in Dec'14

Bandhan Bank began its operations in Aug'15. The entire microfinance business was transferred from BFSL to the bank. The bank started operations 2015 with a network of 501 branches and 50 ATMs.

2018 Bandhan Bank launched its IPO worth Rs 44.7bn in Mar’18 at the issue price of Rs 375

2019 Announced and completed merger with Gruh Finance in an all-stock transaction

Source: Company Data, Equirus

December 15, 2020| 3 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Bandhan’s Vision 2025 During Sept’20, Bandhan launched its FY25E Vision which revolves around becoming a one-stop solution for all customer needs. The bank aims to:

(1) Increase its product bouquet (2) Geographically diversify and enhance branch presence (3) Leverage cross-selling opportunity to its customer base Exhibit 5: Bandhan Bank’s Vision 2025

Product-wise Loan Split Sep'20 FY25 E

EEB Group EEB Individual* Mortgages CB* Retail EEB Group Mortgages CB* Retail

9% 1% 10%

30%

25% 30% 62% 3%

30%

Geography-wise Loan Split

Central Eastern North Eastern Northern Southern Western Central Eastern North Eastern Northern Southern Western

9% 13% 17% 6% 23%

7%

19% 12% 23% 53% 14% 4%

Branch Network Strategy

~3x

Source: Equirus, Company

*EEB Individual is part of CB for FY25 projections

December 15, 2020| 4 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Investment Rationale Largest MFI lender with a proven track record MFI remains an attractive segment

The microfinance industry has grown at a ~29% CAGR to Rs ~2.3trn (without SHG) over FY16-FY20. Banks enjoy the largest share in this segment at ~40% followed by NBFC-MFIs and SFBs at ~31% and ~19% respectively. With the conversion of Bandhan from a NBFC-MFI (FY16), and also the merger of Bharat Financial with IndusInd bank (in FY19), the share of banks within the ecosystem has increased to ~40%. In terms of geography, the eastern region continues to be largest contributor at Banks dominate the microfinance ~33% followed by South/West/North/Central/North East at ~27%/15%/11%/8%/6%. While the segment with a ~40% share largest ten states form ~83% of the overall GLP, the three largest states in terms of MFI exposure are Tamil Nadu (~14%), West Bengal (~14%) and Bihar (~11%).

The industry is regulated in terms of spreads (10% over and above CoF), even as players enjoy RoAs ranging from 3-5%. However, with focus on the lower income group category, the industry is exposed to multiple risks arising from (1) natural calamities (cyclone and floods), 2) political uncertainty/ interference (loan waiver announcements) and (3) socio-economic events (protests). While such events tend to hit MFI lenders/industry for that select year, past trends indicate that the recovery to growth and profitability has also been the fastest for them.

Exhibit 6: Gross Loan portfolio stands at Rs ~2.3trn

Gross Loan Portfolio (Rs bn)

2,500 2,318

2,000 1,874

1,500 1,358 1,072 1,000 847

401 500 249 168 174

0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company Data, Equirus

Exhibit 7: Banks have emerged as the largest lender in the sector Exhibit 8: Eastern and Southern states form ~60% of GLP

Bank NBFC-MFI SFB NBFCs MFIs Eastern South West North Central North East

100%

80%

60%

40%

20%

0% FY16 FY17 FY18 FY19 FY20

Source: Company Data, Equirus Source: Company Data, Equirus

December 15, 2020| 5 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

We have sized the market in sync with the traditional method of estimating the number of households to assess the loan opportunity. With smaller households and nuclear families, we expand the potential universe to the entire female population in the country, in the lendable age group of 19-59. We ascribe demographics on income patterns and assume that 60% of them could be eligible for micro finance. MFI market size to be Rs ~9tn (~4x from the current size) Exhibit 9: Potential universe for micro credit lending Total population Units Overall India Assumptions

Female Population between 19-59 mn 390

Female Population between 19-59 mn 234 Assuming 60% of women can be financed Assuming ATS of Rs 35,000 which is ~32,000, Average ticket size Rs 35,000 expect increase in ticket size

Potential demand is nearly 4 times today's Demand for micro credit Rs bn 8,190 outstanding (excl. SHG).

Source: Equirus, Company Data

Globally, close to 20% of borrowers are men; also, Latin America men are more than 35% of borrowers even as this number in South Asia is far lower at 11%. However, we have excluded financing to men under MFI norms in this exercise; not doing so would have increased the potential market opportunity. Bandhan’s market share at 19-20% in overall MFI ecosystem

With gross loan outstanding for the MFI sector at ~Rs 2.3trn, Bandhan’s market share in the ecosystem is 19-20%. While the industry has grown at a 29% CAGR over FY16-FY20, the bank has delivered a ~32% MFI book CAGR during this period.

MFI loans don’t have the joint liability Most NBFC-MFIs follow Bangladesh’s Joint Liability Group (JLG) model wherein group members have framework, with each member the responsibility/liability to make good for any defaults of a group member. However, Bandhan follows separately evaluated a unique structure; while MFI loans are given in a group structure, individual members are not a part of any joint liability structure. Each group member is separately evaluated by loan officers based on bureau checks and other qualitative aspects; thus, members in the same group can have different ticket sizes/ tenure/EMIs for their loans. These loans remain unsecured in nature.

Exhibit 10: Microloan product types

Micro loan products Brief Ticket size Tenure Rate of Interest Processing fees

For creating additional source of income by Linked to MCLR. Suchana Rs 1,000 to Rs 25,000 Up to 1 year No using the money for co-run businesses currently, it is 17.95% Linked to MCLR. Srishti For scaling up current business Rs 26,000 to Rs 1,50,000 Up to 2 years 1% + GST currently, it is 17.95% Linked to MCLR. Suraksha For medical emergencies to existing customers Rs 1,000 to Rs 15,000 Up to 1 year No currently, it is 9.95% For education fees of existing Linked to MCLR. Susikhsha Rs 1,000 to Rs 10,000 Up to 1 year No customer's children currently, it is 9.95%

Source: Company Data, Equirus

Exhibit 11: Bandhan has the lowest interest rate for MFI loans MFI – Interest rate (%) Bandhan Bank ~18% Ujjivan SFB 22% - 23% Equitas SFB 22-24% CreditAccess Grameen 19% - 21% Spandana Sphoorty 20-22% Bharat Finance - IndusInd Bank ~20%

Source: Company Data, Equirus

December 15, 2020| 6 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Robust growth driven by healthy new customers acquisition, strong customer retention

Bandhan delivered a ticket size/borrower addition CAGR of 17%/14% over FY16-1HFY21. As on Sep’20, the bank had a base of ~11.2mn MFI customers, of which ~55% have 4+ years of vintage. The bank is comfortable lending up to Rs 150,000 to high-vintage MFI customers; the ticket size to first/second cycle customers is capped at Rs 50,000. Further, about 55% of MFI borrowers are only Bandhan borrowers (unique to the bank) and ~82% to Bandhan along with one MFI. In terms of customer profile, ~75% are associated with agri & allied (~44%) and food processing & retail stores (~30%).

Some practices followed by Bandhan: As on Sep’20, Bandhan had a base of • Weekly collection model ~11.2mn MFI customers, of which ~55% have 4+ years of vintage • Individual credit evaluation of members within a group

• No joint liability of members within a group

• Loans given for business purpose only, and therefore not given to customers with fixed income as their primary source of income

• Only one loan/household or one loan/member is given (exception: emergency/education loans)

• No loan renewal until the customer is 40/80 weeks into the cycle for 1/2yr tenure loans

Bandhan has not signed the ‘Code for responsible lender’ by MFIN.

Exhibit 12: Peer comparison on ticket size, AUM and active MFI customers FY17- FY17 FY18 FY19 FY20 1HFY21 1HFY21 CAGR (%) MFI ticket size (MFI book/Active

customers) Bandhan Bank 29,667 35,858 40,690 41,462 44,446 12.2% Bharat Financial 17,186 20,585 23,533 23,363 NA 10.8%* CreditAccess 21,205 26,871 28,987 29,583 28,812 9.2% Satin Creditcare 15,598 20,866 17,380 20,714 19,223 6.2% Spandana 12,283 19,964 17,772 26,572 28,504 27.2% Asirvad 14,663 16,248 21,338 23,218 21,613 11.7% MFI AUM (Rs Mn) Bandhan Bank 205,295 276,110 386,149 461,898 497,800 28.8% Bharat Financial 91,500 125,940 174,170 224,280 223,830 29.1% CreditAccess 30,754 49,747 71,593 119,960 111,820 44.6% Satin Creditcare 35,845 50,100 54,730 63,800 59,590 15.6% Spandana 12,971 31,664 43,720 68,290 73,540 64.2% Asirvad 17,595 24,372 38,408 55,026 49,710 34.5% Active MFI customers (Mn) Bandhan Bank 6.9 7.7 9.5 11.1 11.2 14.7% Bharat Financial 5.3 6.1 7.4 9.6 21.7%* CreditAccess 1.5 1.9 2.5 4.1 3.9 32.5% Satin Creditcare 2.3 2.4 3.1 3.1 3.1 8.9% Spandana 1.1 1.6 2.5 2.6 2.6 29.1% Asirvad 1.2 1.5 1.8 2.4 2.3 20.4%

Source: Company Data, Equirus *CAGR for FY16-FY20

December 15, 2020| 7 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 13: Bandhan’s MFI book CAGR ~30% over FY16-1HFY21 Exhibit 14: Borrowers up by ~13% CAGR over FY16 - 1HFY21…

Bandhan - MFI book (Rs Bn) Growth - YoY (%) Existing Borrowers (Mn) Net borrowers added (Mn) Growth - YoY (%) 600 45.0% 12 25% 497.8 40.0% 500 461.9 10 35.0% 20% 386.1 400 30.0% 8 15% 276.1 25.0% 300 6 20.0% 205.3 10% 200 153.8 15.0% 4

10.0% 5% 100 2 5.0% 0 0.0% 0 0% FY16 FY17 FY18 FY19 FY20 1HFY21 FY17 FY18 FY19 FY20 1HFY21

Source: Company Data, Equirus Source: Company Data, Equirus

Exhibit 15: …whereas O/s per borrower grew at 15% CAGR Exhibit 16: Disbursement CAGR at ~39% over FY16-FY20

O/s per borrower (Rs) Disbursement (Rs Mn) Growth - YoY (%)

50,000 44,446 700 120% 40,690 41,463 600 100% 40,000 35,858 500 29,667 80% 30,000 23,478 400 60% 20,000 300 40% 200 10,000 100 20%

0 0 0% FY16 FY17 FY18 FY19 FY20 1HFY21 FY16 FY17 FY18 FY19 FY20

Source: Company Data, Equirus Source: Company Data, Equirus

Exhibit 17: Customers in essential segment form ~-75% of loans Exhibit 18: Above Rs >50k exposure constitutes ~50% of the book

Agriculture & Allied Food processing & Retail Rs <50k Rs 50k - Rs 100k Rs >100k Non-Essential Mfg Others 11% 14%

14%

45% 50%

36%

30%

Source: Company Data, Equirus Source: Company Data, Equirus

December 15, 2020| 8 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Although Bandhan has 1,045 branches and 3,300 doorstep service centres across India, the East and North-eastern states (together ~80% of MFI book) remain key business geographies, especially for the MFI product. Within MFI, the focus is to serve the rural and semi-urban customers (~78% of the book).

Exhibit 19: East & NE remain the concentrated geography for MFI… Exhibit 20: …exposure to urban/metro limited at ~22% of AUM

East & North East Rest of India Rural & Semi-urban Urban & Metro

19% 22%

81% 78%

Source: Company Data, Equirus Source: Company Data, Equirus

Proactive transitioning strategy for vintage MFI customers

Having been in the ecosystem for almost two decades, Bandhan has ~55% of its MFI customers in the Unveiled Samruddhi to transition 4+ cycle vintage group. To retain and be a part of customer growth story, the bank has strategized existing 4+ old cycle customers to the transitioning of these customers to fulfil their increased capital requirements. Under the new strategy individual loan products with increased (launched in 2QFY21), Bandhan has unveiled the Samruddhi product to transition existing 4+ old ticket sizes cycle customers to individual loan products with increased ticket sizes. The practice of customer transitioning from the group structure/JLG model is not something new (already seen for Ujjivan SFB and CreditAccess Grameen).

Key features of the transitioning strategy:

1. Make the customer exclusive to Bandhan

2. Underwriting practice involves household income; FOIR ranges between 50-60%

3. Interest rate is same as MFI loans (~18% currently) and the ticket size is capped at Rs 300,000 for the product

4. Payment cycle change to monthly from weekly. Individual payment method from door- step collection.

December 15, 2020| 9 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Developing a complete housing product bouquet Bandhan’s merger with Gruh, a housing finance company, has facilitated the addition of a secured product line (along with substantial book size) and brought on board a vastly experienced management team. Prior to the merger, Gruh’s loan book stood at Rs ~166.3bn, of which 93% was contributed by retail home loans.

Exhibit 21: Gruh Finance loan book before the acquisition (2QFY20) Exhibit 22: Loan book split before the merger

Loan Book (Rs Bn) Housing Mortgages Construction NRP

200 182 1.9% 174 4.6% 180 156 10.0% 160 132 140 120 111 100 80 60 40 20 0 83.6% FY16 FY17 FY18 FY19 2QFY20

Source: Company Data, Equirus Source: Company Data, Equirus

At the time of merger, Gruh’s management team was retained. Even post-merger, this segment of the product line is managed by the old Gruh Finance team headed by Mr. Sudhin Choksey.

Gruh has long history of operating in the low-ticket (Rs 0.8-1.0mn) home loan financing for self- employed customers. In this segment, it enjoyed a spread of 3.2-3.5% and contained its credit cost to 25-30bps during FY11-FY18; the company delivered a ~22% loan book CAGR in this period. Gruh’s expertise in this segment is further reflected in it RoA/RoE profile which ranged at 2.4-3%/ 28%-34% during FY11-FY18.

Leveraging Gruh’s business to establish presence across housing finance segments

Bandhan intends to leverage Gruh’s business and technical knowhow and roll out products in branches Intends to tweak Gruh’s products as (esp. in North/East) of Bandhan wherein Gruh centres are not present. At the time of merger, Gruh well as launch micro and prime had 194 branches of which 76% were in western (~51%) and central (~ 25%) states. Bandhan also housing products plans to tweak the Gruh product by (1) increasing avg. ticket size to Rs 1.4mn-Rs 1.5mn (vs. Rs 0.8mn- Rs 1mn) and (2) increasing LTVs to ~75% from 60-65% currently. The sourcing model and underwriting practices for the product will remain intact. We believe rollout of Gruh’s housing product at all bank branches will not come at significant cost, with no major branch expansion/set-up costs.

Bandhan aims to launch micro and prime housing products to cater to all customer segments. Micro housing will be operated from EEB branches and will have an Avg ticket size of ~Rs 0.5mn with a similar pricing profile as that of MFI loans. However, customer property will be mortgaged. While the prime housing product will be in-line with large private banks in terms of pricing, ticket size and LTVs.

We believe the strategy to have presence across ticket sizes within the housing finance segment is a right move as the bank’s organic customer franchise is also from different income segments. Further, this move will aid in attracting new customers.

December 15, 2020| 10 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 23: Extensive presence in East and North-Eastern states with opportunity to expand in southern and western states Grand Total

1,018 3,346 195

1 No. of No. of No. of Home Bank Branches Banking Units Loan Centres Jammu & Kashmir

2 1

2 Himachal Pradesh Chandigarh 14 24 12 25 Punjab 22 20 Uttarakhand 1 15 34 National CapitalTerritory (NCT) ofDelhi Haryana Arunachal Pradesh 1 6 20 132 14 67 333 5 Sikkim 76 351 Rajasthan 2 3 UttarPradesh 1 7 86 448 1 Assam Nagaland Meghalaya Bihar 2 6 27 39 Manipur 25 92 1 37 84 47 2 5 39 185 33 Jharkhand 384 928 2 Tripura Gujarat MadhyaPradesh 22 80 11 WestBengal Mizoram

Chhattisgarh 36 146

54 155 51 Odisha 1 1 1 Maharashtra Dadra& Nagar Haveli 9 36 Telangana

2 4

Goa 23 65 17 4 27

Karnataka Andhra Pradesh 1 4

Puducherry 1 18 50 12 9 Andaman & TamilNadu NicobarIslands Kerala

Source: Company Data (as on Mar’20), Equirus

December 15, 2020| 11 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Revamping overall asset book strategy Over the last five years, Bandhan has forayed into various products (apart from MFI) in order to retain the existing micro-banking customer base and provide a broader bouquet of products to liability customers.

The bank has revamped its strategy and classified asset products in four segments: 1. Emerging Entrepreneurship Business 2. Commercial Banking 3. Retail Banking 4. Housing Business

Bandhan plans to have a separate team for each product segment at every branch. The MFI, Limited business experience in housing Samruddhi and micro housing businesses will be done from EEB branches (currently MFI branch) by loans to be a key challenge and having an additional room at the same branch. However, there will be a separate team for each monitorable over the next 2-3 years product. Besides, we believe Bandhan’s strategy of transitioning vintage customers to non-group, individual lending framework, will enable it to become an exclusive lender to vintaged customers (consolidation of borrowings at customer level). Further, customer stickiness will increase due to lower pricing (lower MFI loan yields owing to CoF benefits). The retail, SEL, SME and prime housing (incl. HL by Gruh) business will be carried out from banking branches, with the rollout of each product at all branches done in a calibrated manner. The SEL loan is unsecured in nature and the ticket size is up to Rs 1mn with the pricing ranging between 15-17%. The underwriting process for this product depends on (1) past two years financials, (2) GST return filling and (3) credit bureau check of customers/entities. SME (includes WC & term loans) is a secured product with a much higher ticket size depending on the credit requirement, eligibility and mortgage valuation. The underwriting process for credit evaluation is the same as for SEL loans. Gruh’s HL product will be launched at banking branches wherever its centres are not present. While Gruh’s sourcing (exclusive agent driven) and underwriting model will not be disturbed, transitioning to a higher ticket size and placing it in different ticket size brackets will increase competition for the product. While the broader strategy is well focused in terms of customer needs, we believe Bandhan has limited business experience in these categories and implementation will be a key challenge and monitorable over the next 2-3 years. Further, the rollout of Gruh’s affordable housing product is yet to be done at all Bandhan branches (currently only at 160 bank branches).

December 15, 2020| 12 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 24: Segment-wise product details and strategy Sr. Products Products Customers strategy Brief No. categories Emerging • It will have only group MFI loan customers • Open market and existing MFI 1 Entrepreneurship • MFI - Group Loans • Will continue to add 15-20% new customers customers Business (EEB) • Bank has proven underwriting model for this segment

• Transitioning the vintage MFI customer towards the next product segment to fulfill higher credit requirement. Strategy is to consolidate the borrowings of customers. Joint loan with Husband. • Individual loans • Samruddhi – transitioning of existing /Samruddhi customers • Business visibility/income evaluation is done for these vintage customers while giving higher ticket sizes under the Samruddhi Commercial • Small Enterprise • SEL – Acquisition from open market 2 product Banking Loans (SEL) • SME - Acquisition from open market • For SEL/SME product category – GST fillings/return are evaluated • SME loans • NBFC – Based on track-record and along with past two years of financials. While SEL is unsecured • Loans to NBFC financial situation product, SME loans are secured and against properties (Home/commercial) mortgages. SEL • Within the NBFC book, the bank lends to Small/Mid-sized NBFCs

• Bank will add Micro housing product with avg ticket size of Rs • Micro HF – Existing MFI customers & • Micro Housing <0.5mn new acquisition of customers from Finance Gruh's product will be towards affordable housing segment with ticket open market 3 Housing Business • Affordable size of Rs 1.5mn. No change in sourcing & underwriting process for • Affordable & Prime – Existing deposit Housing the Gruh product customers & new acquisition of • Prime Housing • Bank will also add Prime Housing product which would be in-line customers from open market with banking peer's

• 2-Wheeler • Broadly provide these lending • Idea is to cater to broader needs of the general banking customers • Personal Loans products to existing customers by having a diversified bouquet of products. 2W, PL and GL will be 4 Retail Business • Gold Loan (particularly deposit customers) and focused products within this segment. also to new customers • Vehicle Loans • Retail products will be competitive with the other banking peers.

Source: Company Data, Equirus

December 15, 2020| 13 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 25: Product details Product Product Interest rate (% - Processing Branch Sub-Product Brief Tenor Ticket size Category type P.A.) fees Network Create Income-generating Assets & Based on 1% plus enhance liquidity Repayable on Bank WC Loans Secured Documents processing All existing profit-making entities are Demand Branches submitted fees eligible 10% - 16% 7 years For individuals/ proprietorship/ Based on 1% plus including Bank Term Loans partnership with min 2 years of Secured Documents processing moratorium of Branches experience in same line of business submitted fees max 3 months For borrowers who have completed Linked to MCLR. 1% plus Micro Enterprise min of 4 cycles of Suchana/Srishti Rs 150,000 - MSME Unsecured currently, it is Up to 2 years processing EEB Branches Loans products under the MFI framework of Rs 300,000 Loans 17.95% fees bank For small entrepreneurs with fixed delivering service and have supersaver Linked to MCLR. 1% plus Micro Bazaar Rs 26,000 - Rs account with Bank. This is for non- Unsecured currently, it is Up to 2 years processing EEB Branches Loans 150,000 existing Suchana, Srishti & Micro 17.95% fees enterprise loans. 12 Months, 18 For borrowers who have completed Linked to MCLR. 1% plus Months & 24 Rs 75,000 - Rs Samriddhi Loans min 2 cycles under the MFI framework Unsecured currently, it is processing EEB Branches Months (3 300,000 of bank 17.95% fees options) Collateral free income generating activities loan in the form of working TL - Max 3 Yrs Small capital or asset creation for business Linked to MCLR. 2% plus WC - Rs 100,000 - Bank Enterprise Available for Self-employed Unsecured Varies between 17% processing Repayable on Rs 1000,000 Branches Loans professional/Non-professional with min - 19.5% fees Demand 2 years of vintage in the same line of business Depends upon Linked to MCLR. 2% plus Two-Wheeler For MB and liability customers - it’s a the vehicle & Bank Secured Varies between Max 3 years processing Loan cross-selling product credit Branches 15.5% - 19.07% fees evaluation Rate varied between Loan against Depends upon Bank For liability customers Secured TD rate + Max 3 years Zero Deposit the TD Branches 1.5%/2.0% Retail For existing Bank customers. Amoung Loan eligibility would depend upon credit Linked to MCLR. From Rs 12 Months to Bank Personal Loans evaluation. Unsecured Varies between 50,000 to Rs 36 Months Branches Loan in customer accounts in 2 15.0%-16.18% 500,000 working days To meet immediate financial needs. 1% plus Among can be disbursed in 45 Ranges between 6 Months to 36 Bank Gold Loans Secured Min. Rs 10,000 processing minutes. 10.99% - 18.00% Months Branches fees Customer gets free locker facility To meet fund requirement for short- term cultivation requirement, post- Agri 12 Months to Rs 25,000 - Rs harvest expenses, consumption needs, Unsecured EEB Branches Loans 60 Months 10,000,000 maintenance needs & investment plan for farming. Focused on affordable housing The ticket size will be increased to Rs Ranges between Bank Housing Loan Secured Up to 30 years 1.4-1.5mn (from Rs 0.8mn - Rs 0.9mn 8.75% - 12.00% Branches Gruh currently) Home To fulfill financing requirement against Loans property Ranges between Bank LAP Secured NA 60% LTV in self-occupied houses and 10% - 13.5% Branches 50% in commercial properties Bank will be launching the product Prime which will be in line with peer banks Bank Housing The ticket size for the product would be Secured Same as peer banks Up to 30 years Branches Loans higher than the affordable housing product Bank will be launching the product which will be for low-income group Micro customers Housing Secured Same as MFI loans NA EEB Branches The ticket size (up to Rs 0.5mn) for the Loans product would be lower than affordable housing product.

Source: Company Data, Equirus

December 15, 2020| 14 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Remarkable growth of the Deposit franchise Bandhan has delivered a robust 54% deposit CAGR over FY16-1HFY21. All its MFI customers (asset customers) have savings accounts with the bank. However, micro-banking customers only contribute ~5% of total deposits. Apart from MFI customers, the bank has added liability customers at a very healthy rate over the last five years. Strong deposit growth has been on the back of healthy CASA ratio of ~37%/~38% for FY20/2QFY21 – much ahead of peers (who began the banking journey almost together) and just 5-7% lower than large private sector banks. A key reason for such healthy SA ratio of ~33% is its high concentration in the East and North-eastern states where savings account balances have been higher as compared to other states in west and south.

RBI data on deposits reflects that the SA ratio in the East and North-eastern states has been higher than Strong deposit growth has been on the other regions. The bank has deep penetration in these states due to its MFI business, facilitating a back of a healthy CASA ratio of strong brand connect. Considering that customer behaviour in these states is to maintain relatively ~37%/~38% for FY20/2QFY21 higher SA balances, we believe there is a big opportunity for Bandhan to continue attracting healthy SA. Further, we believe the deposit franchise will continue delivering healthy growth with the maturing of branches in the West, North and South.

Over the last couple of years, the bank’s strategy has focused towards leveraging its branch network, digital channels, partnerships and presence in various ecosystems to expand its customer base.

Exhibit 26: Robust deposit CAGR of 54% over FY16-1HFY21…

Deposits (Rs Mn) Growth - YoY (%) - LHS

700,000 145% 661,300 160%

600,000 570,815 140% 120% 500,000 432,316 100% 400,000 338,690 80% 300,000 232,287 46% 60% 200,000 32% 32% 28% 40% 94,831 100,000 20% 0 0% FY16 FY17 FY18 FY19 FY20 1HFY21

Source: Equirus, Company Data

Exhibit 27: …led by active new customers acquisition… Exhibit 28: …and steady increase in retail TD

Liability Customers (Mn) CA SA Retail term deposit Bulk term deposit

6.0 100% 5.1 5.0 4.4 75% 4.0 3.5

3.0 2.4 50%

2.0 25% 1.0

0.0 0% FY18 FY19 FY20 1HFY21 FY16 FY17 FY18 FY19 FY20

Source: Company Data, Equirus Source: Company Data, Equirus

December 15, 2020| 15 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 29: Healthy CASA of >35% Exhibit 30: Active focus on non-concentrated deposit franchise CASA Ratio (%) Concentration of top 20 Deposits Bandhan Bank Ujjivan SFB Equitas SFB AU SFB Bandhan Bank Ujjivan SFB Equitas SFB AU SFB 50% 98.3% 100% 40% 73.6% 75% 30% 57.0% 40.9% 50% 41.8% 32.0% 20% 37.1% 32.7% 29.0% 20.9% 25.0% 23.4% 10% 25% 18.8% 13.1% 15.7%

0% 0% FY18 FY19 FY20 1HFY21 FY17 FY18 FY19 FY20

Source: Company Data, Equirus Source: Company Data, Equirus

Exhibit 31: Retail deposits to total deposits have steadily ramped-up Exhibit 32: Share of East & NE contributes ~60% of deposits

Retail deposits to total deposits (%) East & NE Western Northern Central Southern

80% 100% 78.4% 5.0% 7.0% 9.0% 78% 77.0% 77.00% 9.0% 80% 10.0% 12.0% 76% 12.0% 13.0% 74% 60% 72.0% 72% 70.7% 40% 70% 64.0% 59.0% 20% 68%

66% 0% FY17 FY18 FY19 FY20 1HFY21 FY19 FY20

Source: Company Data, Equirus Source: Company Data, Equirus

December 15, 2020| 16 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 33: Still potential to ramp-up CASA/branch metric FY17 FY18 FY19 FY20 1HFY21 CASA/Branch (Rs Mn) HDFC Bank 655.7 716.7 766.6 894.8 941.9 ICICI Bank 508.9 595.7 664.6 653.3 689.4 RBL Bank 318.1 403.0 450.2 443.4 504.1 IndusInd Bank 272.7 331.3 400.8 439.9 480.9

Bandhan Bank 81.4 124.2 178.7 206.6 241.9

AU SFB NA 56.6 111.5 93.3 100.5 Equitas SFB 100.5 45.4 62.7 60.5 86.8 Ujjivan SFB 86.8 7.4 15.0 25.4 30.8 CASA ratio (%) ICICI Bank 50.4% 51.7% 49.6% 45.1% 43.8% HDFC Bank 48.0% 43.5% 42.4% 42.2% 41.6% IndusInd Bank 36.9% 44.0% 43.1% 40.4% 40.3%

Bandhan Bank 29.4% 34.3% 40.8% 36.8% 38.2%

RBL Bank 22.0% 24.3% 25.0% 29.6% 31.1% Equitas SFB 17.2% 29.2% 25.3% 20.5% 25.2% AU SFB NA 26.9% 18.5% 14.5% 19.8% Ujjivan SFB 1.6% 3.7% 10.6% 13.5% 16.5% SA/Branch (Rs Mn) HDFC Bank 410.6 467.5 487.4 573.1 641.7 ICICI Bank 354.3 412.9 467.1 461.3 486.1 RBL Bank 161.0 201.5 254.5 248.9 319.3 IndusInd Bank 225.3 325.9 327.2 278.0 298.8

Bandhan Bank 64.1 98.4 142.1 174.1 210.5

AU SFB NA 46.2 77.9 65.8 80.9 Equitas SFB NA 34.6 49.4 50.9 76.1 Ujjivan SFB NA 6.9 13.4 21.4 24.4 SA Ratio (%)

Bandhan Bank 23.2% 27.2% 32.4% 31.1% 33.3%

ICICI Bank 35.1% 35.8% 34.9% 31.9% 30.9% HDFC Bank 30.1% 28.4% 26.9% 27.0% 28.3% IndusInd Bank 21.4% 30.3% 28.0% 26.3% 25.0% Equitas SFB 13.8% 22.3% 19.9% 17.2% 22.1% RBL Bank 11.1% 12.2% 14.1% 16.6% 19.7% AU SFB NA 26.9% 18.5% 14.5% 15.9% Ujjivan SFB 1.6% 3.4% 9.5% 11.4% 13.0% Total Deposit/Branches (Rs Mn) HDFC Bank 1,365.1 1,647.7 1,809.0 2,118.7 2,263.9 RBL Bank 1,447.2 1,656.7 1,802.3 1,497.7 1,620.8 ICICI Bank 1,010.4 1,152.6 1,339.6 1,448.1 1,575.1 IndusInd Bank 1,054.8 1,077.0 1,170.4 1,057.2 1,193.1

Bandhan Bank 276.5 361.8 438.5 560.7 632.8

AU SFB NA 210.2 603.2 644.4 508.1 Equitas SFB NA 155.2 248.1 295.6 344.9 Ujjivan SFB NA 81.3 140.8 187.5 186.8

Source: Company Data, Equirus

December 15, 2020| 17 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 34: North, North-eastern and East based states have seen relatively higher CASA and SA ratio North North Eastern East Central West South CASA ratio (%)

2QFY21 39.5% 58.5% 47.4% 51.8% 36.6% 41.7%

4QFY20 39.9% 58.7% 46.9% 51.5% 36.6% 40.6% 2QFY20 38.5% 57.4% 46.7% 51.8% 34.7% 40.3% 4QFY19 39.4% 58.5% 47.5% 53.1% 36.0% 41.3% 4QFY18 39.1% 58.6% 47.2% 53.3% 35.7% 41.6% SA ratio (%)

2QFY21 31.4% 50.2% 41.2% 46.0% 24.4% 32.7%

4QFY20 31.4% 48.5% 40.5% 45.3% 23.4% 31.9% 2QFY20 30.5% 48.7% 40.3% 45.6% 22.7% 31.7% 4QFY19 30.8% 46.9% 40.6% 46.3% 22.7% 32.5% 4QFY18 30.3% 46.9% 39.9% 46.2% 23.3% 32.7%

Source: RBI, Equirus

Exhibit 35: While the deposit share from these geographies has been low as compared to West and South 4QFY18 4QFY19 4QFY20 2QFY21 Current Saving TD Total Current Saving TD Total Current Saving TD Total Current Saving TD Total

North 20.0% 19.8% 22.5% 21.4% 19.1% 19.8% 22.1% 21.0% 19.1% 19.8% 21.5% 20.7% 19.3% 19.7% 22.1% 21.0% North Eastern 2.4% 2.7% 1.4% 1.9% 2.4% 2.8% 1.4% 1.9% 2.1% 2.9% 1.4% 1.9% 1.8% 2.8% 1.4% 1.9% East 10.3% 16.2% 12.1% 13.3% 9.8% 16.5% 12.1% 13.3% 9.1% 16.1% 12.0% 13.1% 9.0% 15.9% 11.8% 12.9%

Central 10.2% 19.1% 10.9% 13.5% 9.6% 19.0% 10.9% 13.4% 9.1% 18.8% 11.4% 13.6% 9.0% 18.5% 11.3% 13.5% West 34.6% 18.6% 29.1% 26.2% 36.7% 18.3% 29.2% 26.3% 37.5% 18.7% 28.7% 26.2% 35.6% 18.7% 28.3% 25.8% South 22.5% 23.6% 24.0% 23.7% 22.3% 23.7% 24.3% 24.0% 23.1% 23.8% 25.1% 24.5% 25.3% 24.2% 25.1% 24.9%

Source: RBIs, Equirus

Exhibit 36: Bandhan’s total deposit share from WB, AS, BH, JH, OR and Exhibit 37: Bandhan’s total deposit share in WB stands at 2.9% and its TR stands at 1.5% share among Pvt banks stands at 12.2% Rs Bn FY16 FY17 FY18 FY19 FY20 Rs Bn FY16 FY17 FY18 FY19 FY20 HDFC Bk 3.0% 3.0% 3.1% 3.9% 4.4% HDFC Bk 4.0% 4.2% 4.5% 4.9% 5.5% Axis Bk 3.7% 3.3% 3.3% 3.9% 4.0% Axis Bk 5.1% 5.2% 4.8% 4.9% 5.0% ICICI Bk 2.3% 2.2% 2.6% 3.6% 3.7% ICICI Bk 3.0% 3.2% 3.7% 4.4% 4.4% KMB 0.3% 0.2% 0.2% 0.5% 0.6% KMB 0.2% 0.2% 0.2% 0.8% 0.9% SBIN 28.4% 26.0% 26.0% 29.7% 29.9% SBIN 24.4% 24.9% 24.6% 24.5% 24.1% United Bank of India 6.5% 5.5% 5.0% 5.6% 5.5% United Bank of India 10.5% 10.7% 9.6% 9.7% 9.5% Bandhan 0.3% 0.7% 1.0% 1.3% 1.5% Bandhan 0.6% 1.4% 1.9% 2.4% 2.9% PSU Bk 81.2% 69.5% 68.0% 75.7% 73.5% PSU Bk 80.1% 78.9% 76.4% 72.6% 69.6% Pvt Bk 10.7% 10.3% 11.3% 15.4% 18.1% Pvt Bk 14.1% 15.5% 17.5% 20.6% 23.4% Total (Rs Bn) 13,253 17,479 19,105 18,157 19,764 Total (Rs Bn) 5,884 6,559 7,105 7,628 8,398

Bandhan Share's 0.3% 0.7% 1.0% 1.3% 1.5% Bandhan Share's 0.6% 1.4% 1.9% 2.4% 2.9% Bandhan's share Bandhan's share 3.2% 6.7% 8.6% 8.8% 8.6% 4.0% 8.9% 10.8% 11.7% 12.2% among Pvt banks among Pvt banks Source: Company Data, Equirus Source: Company Data, Equirus

December 15, 2020| 18 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Healthy PPoP/PAT CAGR of 17%/20% during FY20-FY23 NIMs to remain healthy amongst the peers despite product diversification

Post getting the universal banking license, Bandhan reduced its MFI product yields from 21-22% to ~18% to pass on the CoF benefit to customers but maintained spreads within the segment. While MFI customers are not price-sensitive, this move will nudge peers to become price competitive in the future.

Post-merger with Gruh, CoF inched up – to 7.8%/6.5% in FY20/1HFY21 from 5.5% in FY19 – as overall borrowings in the merged entity increased. On the other hand, the deposit share in overall liabilities declined from 77% pre-merger to ~60% post-merger; however, with deposits having healthy 16% YTD growth in 1HFY21, much of the borrowings have been replaced by deposits. Further, CoF While CoF improvement will be lower has already started softening and we expect it to further improve as B/S liability also declines with than the decline in overall yields, NIMs increasing disbursements. will be much ahead of banking peers Since banking operations began, NIMs (on avg. total assets) have been ranging between 8-10% due a higher MFI share in the overall loan book. The liability side saw good deposit traction, well supported by a healthy CASA of 30-35%, leading to a decline in CoF from 7.6% in FY17 to 5.5% in FY19. However incrementally, we believe NIMs will decline due to a changing loan book mix; home loans and other retail loans are likely to be priced much lower than MFI loans and have lower spreads. Further, CoF improvement from here on will be lower than the decline in the bank’s overall yields. Despite this change, we believe NIMs will be much ahead of banking peers. We expect FY22E/FY23E NIMs (on avg. total assets) to be 7.3%/7.1%, and NII CAGR over FY20-FY23E to be ~20%.

Exhibit 38: CoF softening as Gruh borrowings are replaced by deposits Exhibit 39: NIMs have moderated with an evolving business model

Yield on IEA (%) CoF (%) Spreads (%) -RHS NIM on AIEA (%) NIM on ATA (%) NIM on AGL (%) 18% 9% 13%

16% 8% 12% 14% 7% 11% 12% 6% 10% 5% 10% 8% 4% 9% 6% 3% 8% 4% 2% 2% 1% 7% 0% 0% 6% FY17 FY18 FY19 FY20 1HFY21 FY17 FY18 FY19 FY20 1HFY21

Source: Company Data, Equirus Source: Company Data, Equirus

*AIEA – Avg interest earning assets, ATA – Avg total assets, AGL – Avg Gross Loans

December 15, 2020| 19 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 40: NIM (on avg. TA) expected to soften further due to introduction of low-yield products

NIM on ATA (%) 12%

9.6% 10% 9.2% 8.9% 8.5% 8.1% 8% 7.5% 7.3% 7.1%

6%

4%

2%

0% FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company Data, Equirus

Operational metrics to remain in control

Bandhan follows a weekly collection model for its MFI segment; in context of the current pandemic, Opex/AAUM to range between 4-4.5% the bank has resorted to door-to-door collections for which it has also hired new employees. With this model, the bank’s opex/Avg gross loans is likely to range between 4.5-5%, in line with MFI industry peers such as CREDAG. However, this ratio is commendable considering that Bandhan has developed a strong deposit franchise as well. During FY20, opex/AAUM declined to 4.2%, largely led by the Gruh merger. Our analysis indicates that Gruh had an opex/AAUM of ~70bps. With the changing loan mix on the back of 1) incremental focus on the housing segment (loan book share of 30% by FY25E) 2) transitioning of vintage MFI customer to monthly collection model and launch of retail products, we expect opex/Avg. gross loans to hover around ~4% for the bank.

Bandhan plans to add 15-20% of its network every year, which includes branch network and employee base. C/I for FY20/1HFY21 stood at ~31%/~29%, and we expect the ratio to inch-up to ~35% over FY21-FY23. While the bank plans to actively pursue third-party products and has also tied-up with Standard Chartered Credit in this regard, we expect fee side benefits to flow in only after some time but opex growth to remain high.

Exhibit 41: Operational leverage helps improve branch/employee Exhibit 42: …which along with better other income avenues led to C/I efficiencies… ratio improvement

Employee cost/Avg AUM (%) Other Opex/Avg AUM (%) C/I ratio Opex/Avg AUM (%) - RHS 40% 36.3% 35.0% 3.0% 6.0% 35% 32.6% 30.8% 28.7% 2.5% 5.0% 30% 25% 2.0% 4.0% 20% 1.5% 3.0% 15% 1.0% 2.0% 10% 0.5% 1.0% 5%

0.0% 0.0% 0% FY17 FY18 FY19 FY20 1HFY21 FY17 FY18 FY19 FY20 1HFY21

Source: Company Data, Equirus Source: Company Data, Equirus

December 15, 2020| 20 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 43: Leveraging the branch network to roll out products by Exhibit 44: …leading to improving branch/employee level overall adding segment-wise employees… business

Branches (#) Employee/Branch (#) - LHS Business/Branches (Rs Mn) Business/Employee (Rs Mn) - LHS 1,200 50 1,600 35 45 1,000 1,400 40 30 35 1,200 800 25 30 1,000 20 600 25 800 20 15 400 600 15 10 400 10 200 5 5 200 0 0 0 0 FY17 FY18 FY19 FY20 1HFY21 FY17 FY18 FY19 FY20 1HFY21

Source: Company Data, Equirus Source: Company Data, Equirus

Exhibit 45: Expect product diversification to benefit the Opex/AUM (%)

Opex/Avg AUM (%) - RHS

6% 5.2% 5% 4.7% 4.7% 4.2% 4.0% 3.9% 3.9% 3.8% 4%

3%

2%

1%

0% FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company Data, Equirus

Exhibit 46: PPoP/AAUM expected to moderate on the back of expansion strategy going ahead

PPoP (Rs Mn) PPoP/AAUM (%)

100,000 12%

10% 75,000 8%

50,000 6%

4% 25,000 2%

0 0% FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company Data, Equirus

December 15, 2020| 21 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Proactive provisioning measures to smoothen the pandemic impact

Bandhan’s weekly collection model has been instrumental in helping it maintain healthy asset quality. This allows loan officers to meet customers more often than in a monthly/fortnightly model, and aids in stronger bond/connect with customers and therefore early realization of any ground-level updates.

Industry sees a decline in wilful defaulters

Some developments adding to the resilience of the MFI industry are:

• Post demonetization, the extensive use of credit bureaus and active data updates has aided underwriting processes for the MFI industry in taking informed decisions. • Lenders are paying upmost importance to adherence to policies and processes. • Loan book is more geographically diversified • There is higher borrower awareness towards impact on credit in case of deferment/non- payment of the instalment • Regulator and MFI industry bodies (such as MFIN) have become proactive about the industry With these industry developments, lenders have seen a decline in wilful defaulters. Bandhan’s credit cost (on avg. AUM) in FY17/FY18/FY19/FY20 stood at 0.5%/1.3%/1.9%/2.4%. Credit cost in FY20 also included COVID-related provisions of Rs ~10bn (1.7% of gross loans). Bandhan has no individual product of higher ticket size for vintage customers. While it has higher concentration in north-east and eastern states, including West Bengal wherein the ticket sizes are relatively higher as compared to other states. As per the data published by Equifax and SIBDI, nine of top ten districts in terms of portfolio outstanding are from West Bengal. However, interestingly there was not a single district from West Bengal with the highest 90+ dpd book. A key reason for Bandhan’s healthy collections has been its customer relationships. Its strategy to support customers in difficult times has helped it maintain healthy asset quality and a loyal customer franchise.

Improving collection efficiency

Owing to the pandemic, Bandhan had given a blanket moratorium to its MFI customers for the months of April and May. The collection efforts only began in June and since then the bank has experienced a steady improvement in CE across product segments. During 2QFY21, the bank reported that 94% of the EEB (earlier MFI) are paying monthly dues in September, leading to CE of 89%. Further, the percentage of customers paying/CE improved to 91%/95% in October (vs. 67%/68% in Jun’20). CE for SME/HF improved to 96%/98% in September vs. 88%/77% in July. The bank’s NBFC exposure remained robust with a CE of 100% since Jul’20. Bandhan expects CE to continue improving MoM for the coming months as some geography/state-level issues with respect to movement of public transport (such as trains connecting to Calcutta) get resolved.

COVID impact to be contained given the rural/essential items associated customer profile

Bandhan has closely experienced the AP crisis, demonetization, Assam agitation and impact of floods and cyclones; however, it has not only managed the loan book quality effectively but also bounced back strongly. While COVID is a once-in-a-century event, we believe proactive measures by the regulator has helped the economy revive faster than expected. These measures include: (a) providing adequate liquidity, (2) giving moratorium to customers, and (3) remaining open about more measures if required.

We expect the impact of COVID for the bank to be contained on the back of its rural customer base (75% of total customers) involved in relatively resilient business categories (~80% of customers not impacted due to lockdowns). Over the last three quarters, the bank has created a provision buffer of Rs ~21bn (COVID buffer of ~Rs 17bn, standard asset provision buffer of Rs ~3.1bn). At the book level, the bank believes COVID related credit cost would be ~3.5%. Having roots from the MFI background, the bank proactively provides for slippages/GNPAs. As on Sep’20, the bank had GNPA/ NNPA of 1.2%/0.4%. Bandhan’s PCR stands at 70%. In the MFI segment, the bank has a policy of writing-off a 180dpd account.

Post-merger with Gruh, we believe implementation of the bank’s strategy to separately have individual loan products for vintage customers and actively pursue retail products (gold, personal loans, 2W- Wheeler and Vehicle loans) will be the key. While we appreciate the new professionals onboarded to drive new business segments, the underwriting practices and asset quality for these segments need to be monitored. We expect the bank’s credit cost in FY21E/FY22E/FY23E to be at 2.5%/1.4%/1.3%.

December 15, 2020| 22 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 47: Remarkable improvement in number of paying customers in Exhibit 48: Commercial banking segments (SME & NBFC) collections the EEB segment (MFI & individual MFI loans) continued to report MoM improvements

No. of EEB customers paying (%) SME (%) NBFC (%) CB total (%)

120% 104% 99% 99% 98% 95% 100% 100%

80% 75% 96% 60% 92% 40% 88% 20%

0% 84% 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 Jul'20 Aug'20 Sept'20

Source: Company Data, Equirus Source: Company Data, Equirus

Exhibit 49: Housing CE was least impacted and improved to 98% in the Sept’20

Housing Finance (CE - %)

100% 98%

95%

90% 85% 85%

80% 77%

75% Jul'20 Aug'20 Sept'20

Source: Company Data, Equirus

Exhibit 50: Healthy recoveries despite contained gross slippages Exhibit 51: PCR improves to ~70%

Gross Slippage (%) GNPA (%) NNPA (%) PCR (%) - RHS

Reductions (excl. write-off) opening GNPA (RHS) 2.5% 80% 2.5% 30% 70% 25.9% 2.0% 25.0% 2.0% 60% 2.0% 25% 1.5% 50% 20% 1.5% 15.9% 1.3% 1.2% 1.5% 40% 15% 10.7% 1.0% 1.0% 30% 10% 0.6% 0.6% 0.6% 0.5% 20% 0.4% 0.4% 0.5% 0.5% 5% 0.2% 10% 0.7% 1.5% 2.2% 2.0% 0.1% 0.0% 0% 0.0% 0% FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 1HFY21

Source: Company Data, Equirus Source: Company Data, Equirus

December 15, 2020| 23 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 52: Expect credit cost to soften going ahead

Provisions/Avg AUM (%)

3.0% 2.6% 2.4% 2.5% 1.9% 2.0% 1.4% 1.5% 1.3% 1.4%

1.0% 0.5% 0.5%

0.0% FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company Data, Equirus

Clear visibility on RoEs sustaining ~23% in FY22E/FY23E

Maintaining healthy profitability along with robust growth has been a key differentiator for the bank since its inception. Over the last five years, Bandhan has ramped up its deposit franchise, entered newer geographies, merged with Gruh and now faced the COVID impact. Despite all these developments, the bank has always maintained a healthy ROA/RoE profile. It delivered PPoP/PAT CAGR of 85%/82% over FY16-FY20.

With the new strategy of venturing into retail products and expanding the housing product (via separate Rising leverage levels to aid RoE products for different income groups), we expect ROAs to decline to 3.5%/3.4% in FY22E/FY23E. However, we expect RoEs to be ~23% for FY22E/FY23E on rising leverage levels for the bank.

Exhibit 53: Robust NII/PPoP/PAT CAGR of 61%/85%/82% over FY16-FY20

NII - YoY growth (%) PPoP - YoY growth (%) PAT - YoY growth (%)

70%

60%

50%

40%

30%

20%

10%

0%

-10% FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company Data, Equirus

December 15, 2020| 24 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Exhibit 54: Peer comparison indicates highest RoE for Bandhan Bank

FY19 HDFCB ICICIBC SBIN IIB RBK BANDHAN UJJIVAN SFB EQUITAS SFB CREDAG Interest Income 8.6% 6.9% 6.8% 8.9% 8.9% 13.2% 15.8% 14.5% 18.7% Interest Expense 4.4% 3.9% 4.3% 5.4% 5.3% 4.3% 6.2% 6.6% 6.7% NII 4.2% 2.9% 2.5% 3.5% 3.6% 8.9% 9.5% 7.9% 12.0% Other Income 1.5% 1.6% 1.0% 2.3% 2.0% 2.1% 1.8% 1.9% 1.9% Total Income 5.7% 4.5% 3.5% 5.8% 5.6% 11.0% 11.3% 9.9% 13.9% Opex 2.3% 2.0% 2.0% 2.6% 2.9% 3.6% 8.6% 6.9% 4.7% -of Which Employee 0.7% 0.7% 1.2% 0.7% 0.9% 2.0% 4.5% 3.8% 3.0% PPOP 3.5% 2.5% 1.6% 3.2% 2.7% 7.4% 2.7% 2.9% 9.2% Provisions 0.7% 2.1% 1.5% 1.2% 0.9% 1.5% 0.3% 0.7% 1.2%

PAT 1.8% 0.4% 0.0% 1.3% 1.2% 3.9% 1.7% 1.4% 5.2%

Leverage 9.0 8.6 16.2 9.9 10.0 4.9 6.7 6.8 3.3

RoE 16.6% 3.2% 0.4% 13.1% 12.2% 19.0% 11.5% 9.8% 16.9%

Source: Company Data, Equirus

Exhibit 55: Bandhan has one of the lowest leverage levels among banks, and should likely lead to RoE expansion ahead despite moderation in RoAs

FY20 HDFCB ICICIBC SBIN IIB RBK BANDHAN UJJIVAN SFB EQUITAS SFB CREDAG Interest Income 8.3% 7.3% 6.7% 9.8% 10.1% 14.7% 16.8% 15.1% 17.7% Interest Expense 4.2% 4.0% 4.2% 5.7% 5.8% 6.2% 6.7% 6.6% 6.4% NII 4.0% 3.2% 2.6% 4.1% 4.3% 8.5% 10.2% 8.5% 11.3% Other Income 1.7% 1.6% 1.2% 2.4% 2.3% 2.1% 2.0% 1.6% 1.0% Total Income 5.7% 4.8% 3.8% 6.5% 6.5% 10.6% 12.2% 10.1% 12.3% Opex 2.2% 2.1% 2.0% 2.8% 3.3% 3.3% 8.2% 6.7% 4.7% -of Which Employee 0.7% 0.8% 1.2% 1.0% 0.9% 1.8% 4.5% 4.0% 2.9% PPOP 3.5% 2.7% 1.8% 3.7% 3.2% 7.4% 4.0% 3.4% 7.7% Provisions 0.9% 1.4% 1.1% 1.6% 2.4% 1.9% 1.1% 1.4% 2.7%

PAT 1.9% 0.8% 0.4% 1.5% 0.6% 4.1% 2.2% 1.4% 3.6%

Leverage 8.7 9.2 16.9 9.5 9.3 5.6 6.4 7.0 3.6

RoE 16.4% 7.1% 6.4% 14.5% 5.6% 22.9% 14.0% 9.7% 13.0%

Source: Company Data, Equirus

Exhibit 56: RoAs expected to contract, but RoEs to remain healthy at ~23%

RoAA (%) RoAE (%) - RHS 5.0% 35% 4.4% 4.5% 4.1% 3.9% 30% 4.0% 3.6% 3.5% 3.4% 3.5% 28.6% 25% 2.9% 3.0% 22.9% 22.8% 22.8% 20% 2.5% 19.5% 19.0% 18.2% 2.0% 15% 1.5% 10% 1.0% 5% 0.5% 0.0% 0% FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company Data, Equirus

December 15, 2020| 25 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Valuation & view

Bandhan has emerged as one of the fastest growing franchise (Gross Loans/Deposit CAGR of ~43%/~54% over FY16-1HFY21) with a track-record of managing healthy asset quality despite operating in the most riskier customer profile segment. Having transitioned itself into an universal bank, it has not only diversified its product bouquet (MFI, SME and HL & LAP post Gruh merger) but has also garnered healthy deposit franchise with CASA ratio of ~38%.

In the recent past, the bank has gone through two major events – Demonetization and Covid-19 pandemic – post getting the banking license and so far both seem to have been managed well (credit cost for FY17/FY18/FY19/FY20 at 0.6%/1.6%/2.1%/2.6% respectively). Further, states such as Assam and Odisha have had their own issues and despite that Bandhan has displayed sturdy performance on asset quality.

The management of the bank has delivered on overall growth of the franchise, it has been well supported by healthy profitability with FY20 RoA/RoE of 4.1%/22.9% respectively.

With strategy to be a one stop solution for its customers, the bank has forayed into insurance products, investment/mutual fund product and credit card partnership (with Standard Chartered bank). From the income perspective, these avenues would boost up the fee income for the bank along with extending the product bouquet. With a customer base of ~20mn and having highest market share in the east and north east, we believe the cross-sell opportunity for the bank is huge.

We believe the bank’s ability to venture in new segment/geographies has been on the back of its proactiveness to onboard professionals to drive those segments. In the last two years, the bank has built a core team of experienced professionals and continuously onboards segment specialists while retaining the existing core team members.

While we acknowledge that the bank’s strategy to have non-MFI segments contributing 55-60% of the book by FY25E would require 1) steady approach on new product launches, 2) cautious growth in newer products 3) proactive efforts on underwriting practices for non-MFI products and 4) retention of the core team, we believe the bank is well equipped (with professional expertise, network and customer franchise) to change its loan mix and capitalise on the cross-sell opportunities.

We expect Gross/net advances CAGR of ~24/23% over FY20-FY23E with credit cost (on gross loans) of FY21/FY22 of 1.4%/1.4%. On the deposit franchise, we expect CAGR of 25% over FY20-FY23E. With the changing loan mix, we expect the RoA to contract to 3.5%/3.4% in FY22E/FY23E. However, the RoE would remain ~23% in FY22E/FY23E each. We believe the operational metrics and return ratios are best in the industry. We initiate coverage on BANDHAN with a LONG rating and Mar’22 TP of Rs 490, valuing the company at 3.3x on FY23 ABV of Rs 149.

Exhibit 57: Gross loans CAGR expected to be 24% over FY20-FY23 Exhibit 58: SD valuation chart

Gross AUM (Rs Bn) Net Advances (Rs Bn) P/ABV (x) Avg +1 SD Avg +2 SD Avg since IPO Avg -1 SD Avg -2 SD Gross AUM - YoY (%) - RHS 10 1,600 70% 8 1,400 60% 1,200 50% 6 1,000 40% 800 4 30% 600 2 400 20% 200 10% 0

0 0%

Jul-18 Jul-19 Jul-20

Jan-19 Jan-20

Jun-18 Jun-19 Jun-20

Oct-20 Oct-18 Oct-19

Apr-19

Feb-19 Sep-19 Feb-20 Sep-20

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Sep-18

Dec-19 Dec-20

Aug-18 Aug-20

Nov-18 Nov-19

Mar-18 Mar-19 Mar-20

May-19 May-20 May-18 Source: Company Data, Equirus Source: Company Data, Equirus

December 15, 2020| 26 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Management Profile Exhibit 59: Building an experienced core team brick by brick to drive the next growth phase Name Designation Brief

• Founder, Managing Director and CEO with a total experience of ~27 years in the field of Chandra Shekhar MD & CEO microfinance and development. He founded Bandhan in 2001. Ghosh • He holds a masters’ degree in science (statistics) from the Dhaka University

• Mr. Choksey has ~35 years of experience within the Financial industry. Executive Director • Prior to his current role, he was the Managing director at GRUH Finance Limited which got Sudhin Choksey (Designate) merged with Bandhan Bank in FY19. • He is a Chartered Accountant and also has B.Com degree from University of Mumbai

• Mr. Bose has ~36 years of experience in banking industry. Deepankar Bose Head, Corporate Centre • Prior to joining Bandhan, he served as the Chief General Manager and Head of Wealth management business at SBI

• Mr. Naryani has ~32 years of experience in banking industry Sanjeev Naryani Head—Business • Prior to joining Bandhan, he worked as Chief General Manager and Head of Real Estate and Housing Business units at SBI

• Mr. Samdani has ~17 years of experience in the financial industry. • Prior to joining Bandhan, he served as head of business analytics and strategy at Development Sunil Samdani Chief Financial Officer Credit Bank and as CFO at Karvy Financial Services Ltd. • He is a Chartered Accountant. • Mr. Ashish has 26+ years of extensive experience in the field of banking and finance Head – Emerging Entrepreneurs • Prior to joining Bandhan, he served as the North Zone Head of ICICI bank and as Group Kumar Ashish Business Director at Airtel Money • He is an alumnus of Welingkar Institute of Management, Mumbai. • Mr. Biswajit has ~28 years of experience in the banking industry Biswajit Das Chief Risk Officer • Prior to joining Bandhan, he was associate with ICICI Bank and PNB Bank. • He is an alumnus of IIM, Calcutta

• Mr. Sanyal has over 20 years of experience in the field of Macro Economics Chief Economist & • Prior to joining Bandhan, he was associated with Barclays Bank PLC, Edelweiss Capital and Siddhartha Sanyal Head Research RBI. • He is a CFA and holds MA in Economics from Jawaharlal Nehru University

• Mr. Nand Kumar has over 27 years of experience in banking industry. Head, Banking Operations & Nand Kumar Singh • Prior to joining Bandhan, he was associated with Axis Bank and SBI. Customer Services • He is an MBA from IMT, Ghaziabad

• Mr. Kanagasabai has over three decades of experience at PSU bank Arvind Kanagasabai Head, Treasury • Prior to joining Bandhan, he served as the CFO at SBI DHFL limited

Source: Company Data, Equirus

December 15, 2020| 27 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Company Snapshot How we differ from consensus Particular (Rs Mn) Equirus Consensus % Diff Comment FY21 91,329 96,602 -5.5% Total Income FY22 111,279 113,673 -2.1%

FY21 29,840 31,526 -5.3% We expect the consensus to PAT FY22 44,156 45,018 -1.9% get revised. FY21 109 112 -2.4% BVPS FY22 131 136 -3.5%

Key investment arguments:

• Largest MFI lender with proven track-record to absorb multiple sectoral events

• Product extension (retail and Home loans) to aid overall business growth and engagements

• Rural centric borrower base (75-80% of total borrowers) to aid in early revival of growth

• Delivered strong deposit CAGR of 54% over FY16-1HFY21. Opportunity to leverage the branch network to ramp-up deposit franchise.

• Expect credit cost to moderated in FY22E/FY23E

• ROAs expected to moderate to 3.5%/3.4% in FY22E/FY23E on the back of product diversification. RoEs to remain best-in the industry at ~23%.

Key Estimates Key Assumptions FY19 FY20 FY21E FY22E FY22E NII (Rs Mn) 44,954 63,239 76,014 90,945 109,294 PPoP (Rs Mn) 37,475 54,466 60,467 73,115 87,468 PAT (Rs Mn) 19,508 30,237 29,840 44,156 52,929 Advances (Rs Mn) 396,434 666,299 805,215 993,895 1,240,077 Deposit (Rs Mn) 432,316 570,815 742,060 905,313 1,104,481 NII growth (%) 48.3% 40.7% 20.2% 19.6% 20.2% PPoP growth (%) 54.2% 45.3% 11.0% 20.9% 19.6% PAT growth (%) 45.0% 55.0% -1.3% 48.0% 19.9% Advances growth 33.4% 68.1% 20.8% 23.4% 24.8% Deposit growth (%) 27.6% 32.0% 30.0% 22.0% 22.0% Credit Cost on Gross Loans(%) 1.9% 2.4% 2.6% 1.4% 1.4%

Key risks:

• Significant uptick in rural NPAs

• High loan book concentration in the East and North-Eastern states.

• Being in the microfinance industry, business model is exposed to political uncertainty, socio- economic events and natural calamities • Implementation of strategy/processes for venturing into newer segments would be key Company Description:

Bandhan Bank is a commercial bank focused towards serving the underbanked and underpenetrated markets in India. Having incorporated as a microfinance lender, Bandhan got the universal banking license in Aug’15. The bank currently offers a variety of asset and liability products and services designed for micro banking and general banking. The bank amalgamated with Gruh Finance in Dec’19. As on Sept’20, the bank has net advances/deposit base of Rs 773.1bn/Rs 661.3bn respectively. The bank has a network of 1,045 branches, 3656 banking units and 487 ATMs spread across 34 states/UTs. Bandhan Financial Holdings, promoter of the bank, holds 40% stake in the bank.

December 15, 2020| 28 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Equirus BFSI coverage universe Mkt Price Target P/E P/ABV RoE RoA Company Reco. CMP Cap Target Date Rs. Bn. FY20A FY21E FY22E FY20A FY21E FY22E FY20A FY21E FY22E FY20A FY21E FY22E Banks Axis Bank LONG 607 1,858 640 Sep/21 105.3 21.7 14.5 2.34 2.15 1.85 0.2% 0.9% 1.2% 2.1% 9.1% 11.7%

Bandhan Bank LONG 412 664 490 Mar/22 21.9 22.2 15.0 4.48 4.04 3.28 4.1% 2.9% 3.5% 22.9% 18.2% 22.8%

City Union Bank LONG 187 138 180 Sep/21 28.9 23.9 19.3 3.05 3.04 2.51 1.0% 1.1% 1.3% 9.4% 10.4% 11.6%

DCB Bank LONG 123 38 105 Sep/21 11.3 16.0 9.1 1.32 1.29 1.18 0.9% 0.6% 1.1% 10.3% 6.7% 10.9%

HDFC Bank ADD 1,391 7,629 1420 Mar/22 28.1 24.8 20.7 4.41 3.89 3.38 1.9% 1.8% 1.9% 16.4% 16.0% 16.6%

ICICI Bank LONG 518 3,571 600 Sep/21 33.5 22.2 14.9 2.83 2.33 1.98 0.8% 1.1% 1.5% 7.1% 9.8% 12.4%

IndusInd Bank REDUCE 927 701 600 Sep/21 14.4 20.4 12.3 1.98 1.77 1.57 1.5% 1.1% 1.6% 14.5% 9.0% 12.7%

Karur Vysya Bank LONG 47 38 64 Mar/22 16.0 8.9 4.4 0.78 0.76 0.68 0.3% 0.6% 1.1% 3.6% 6.2% 11.5%

RBL Bank LONG 237 142 250 Mar/22 23.8 20.6 12.0 1.28 1.26 1.16 0.6% 0.7% 1.1% 5.6% 5.9% 8.8%

SBI Bank LONG 271 2,415 305 Sep/21 16.7 14.3 9.2 1.58 1.41 1.27 0.4% 0.4% 0.6% 6.4% 7.1% 10.2% Small Finance

Banks AU Bank LONG 923 281 900 Sep/21 41.6 30.4 34.0 6.75 5.63 4.89 1.8% 2.1% 1.6% 17.9% 18.8% 14.2%

Ujjivan SFB ADD 39 67 40 Mar/21 19.3 49.0 12.8 2.13 2.32 1.87 2.2% 0.7% 2.3% 14.0% 4.4% 15.5% MFIs Credit Access LONG 781 121 800 Sep/21 34.3 44.7 17.5 4.27 3.25 2.68 3.6% 2.0% 4.3% 13.0% 8.1% 17.0% Gramin Spandana Spoorthy LONG 743 48 940 Sep/21 13.6 16.7 8.3 1.82 1.70 1.38 6.5% 4.2% 6.7% 15.6% 10.3% 18.0% HFCs Aavas Finance REDUCE 1,662 130 1290 Sep/21 52.1 53.4 44.6 6.26 5.65 5.01 3.8% 2.9% 2.9% 12.7% 11.0% 11.7%

Canfin Homes LONG 485 65 525 Sep/21 17.2 14.8 12.9 3.17 2.74 2.24 1.9% 2.0% 2.1% 19.1% 18.5% 17.8% Vehicle

Financiers Cholamandalam ADD 377 309 285 Sep/21 29.4 22.4 17.9 4.48 4.30 3.38 1.7% 2.0% 2.3% 14.7% 15.7% 17.0%

Magma LONG 42 11 60 Sep/21 NM 10.8 5.8 0.52 0.56 0.50 0.0% 0.7% 1.3% -0.3% 3.8% 6.8%

Shriram Transport ADD 1,092 277 720 Sep/21 9.9 16.9 9.5 2.06 1.87 1.60 2.3% 1.3% 2.2% 14.8% 7.6% 11.9% Diversified NBFCs LT Finance Hold LONG 94 189 95 Sep/21 12.2 19.3 8.9 1.49 1.58 1.31 1.4% 0.9% 1.9% 11.0% 6.5% 13.1%

PFC LONG 121 319 155 Mar/22 5.6 4.4 3.6 1.00 0.90 0.72 1.6% 1.9% 2.1% 12.8% 15.4% 16.7%

REC LONG 142 280 170 Mar/22 3.9 3.7 3.1 1.15 1.08 0.78 2.2% 2.1% 2.2% 20.9% 20.2% 20.8%

Price to earning chart Price to book chart 60 10.0 50 8.0 40 +1δ +1δ 6.0 30 Avg Avg 4.0 -1δ 20 -1δ

10 2.0

0 0.0 Mar-18 Mar-20 Mar-18 Mar-20

Source: Company, Equirus Research Source: Company, Equirus Research

December 15, 2020| 29 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Key Financials Quarterly performance Y/E Mar (Rs mn) 1QFY20A 2QFY20A 3QFY20A 4QFY20A 1QFY21A 2QFY21A 3QFY21E 4QFY21E Net interest income 15,746 15,290 15,403 16,800 18,115 19,231 19,270 19,398 Other income 3,310 3,603 3,577 5,002 3,868 3,818 3,739 3,890 Total income 19,056 18,893 18,980 21,802 21,983 23,049 23,009 23,288 Operating expenses 5,505 5,824 6,341 6,595 6,141 6,773 7,900 10,047 Employee Expenses 3,318 3,327 3,405 3,621 3,894 4,148 4,355 4,691 Other Operating Expenses 2,187 2,497 2,936 2,975 2,247 2,626 3,545 5,356 PPOP 13,551 13,069 12,639 15,207 15,842 16,275 15,110 13,240 Provisions 1,254 1,455 2,949 8,274 8,491 3,945 4,260 3,906 Tax 4,261 1,896 2,380 1,760 1,853 3,130 2,729 2,315 Net Profit 8,036 9,718 7,310 5,173 5,498 9,200 8,121 7,020 Balance sheet (Rs Mn) Deposits 491,952 549,080 570,815 606,100 661,277 700,954 742,060 Advances 597,859 606,010 666,300 697,490 733,067 769,721 805,215 Investment 139,644 139,820 153,518 161,820 222,849 227,306 228,510 Gross NPL (Rs mn) 10,197 10,642 11,820 9,928 10,067 8,740 15,366 23,181 Net NPL (Rs mn) 3,475 3,369 4,914 3,894 3,358 2,625 4,992 11,614 % Growth Net interest income (NII) 41.9 37.0 33.6 15.0 25.8 25.1 15.5 Other income 56.3 52.8 29.0 16.8 6.0 4.5 (22.2) Total income 44.5 39.8 32.5 15.4 22.0 21.2 6.8 Operating expenses 34.2 38.6 34.0 11.6 16.3 24.6 52.3 (Staff expenses) 42.1 33.1 34.1 17.4 24.7 27.9 29.6 (Other expenses) 25.0 45.5 33.9 2.7 5.2 20.7 80.1 Operating profit 49.5 40.4 31.9 16.9 24.5 19.6 (12.9) Total provisions 17.2 (21.9) 439.8 577.3 171.0 44.5 (52.8) Profit after tax 99.3 120.7 (20.5) (31.6) (5.3) 11.1 35.7 Advances 88.4 78.9 68.1 0.0 22.6 27.0 20.8 Deposits 49.3 58.5 32.0 0.0 34.4 27.7 30.0 Profitability ratios (%) Yield on Advances 42.4 29.2 14.7 14.5 14.4 14.1 14.2 13.9 Cost of Funds 6.6 7.2 7.2 6.7 6.4 6.2 6.5 6.5 NIM 8.6 8.2 7.9 8.1 8.2 8.0 7.9 7.6 RoaA 4.2 4.8 3.5 2.4 2.3 3.6 3.1 2.6 RoaE 24.3 28.3 20.0 13.7 14.1 22.5 19.0 16.0 Asset Quality (%) Gross NPL ratio 1.7 1.8 1.9 1.5 1.4 1.2 2.0 2.8 Net NPL ratio 0.6 0.6 0.9 0.6 0.6 0.4 0.6 1.4 Coverage ratio 65.9 68.3 58.4 60.8 66.6 70.0 67.5 49.9 Prov/Avg loans 2.5 1.9 2.0 5.2 5.0 2.2 2.3 2.0 Business & Other Ratios (%) CASA 36.1 33.0 34.3 36.8 37.1 38.2 38.1 38.0 Cost-income ratio 28.9 30.8 33.4 30.3 27.9 29.4 34.3 43.1 Non int.inc / total income 17.4 19.1 18.8 22.9 17.6 16.6 16.3 16.7 Credit deposit ratio 0.0 121.5 110.4 116.7 115.1 110.9 109.8 108.5 CAR 27.0 25.1 24.7 27.4 26.5 25.7 NA 25.9 Tier-I 25.7 23.0 23.1 25.2 23.2 22.2 NA 24.0

December 15, 2020| 30 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Income Statement Y/E Mar (Rs mn) FY17A FY18A FY19A FY20A FY21E FY22E FY23E Net interest income 24,035 30,322 44,954 63,239 76,014 90,945 109,294 Other income 4,114 7,062 10,630 15,492 15,314 20,334 25,038 Total income 28,149 37,384 55,585 78,731 91,329 111,279 134,332 Operating expenses 10,220 13,083 18,110 24,265 30,862 38,164 46,864 Employee Expenses 5,456 6,880 10,087 13,670 17,088 21,360 26,700 Other Operating Expenses 4,764 6,203 8,023 10,595 13,774 16,804 20,164 PPOP 17,929 24,301 37,475 54,466 60,467 73,115 87,468 Provisions 884 3,742 7,351 13,932 20,601 14,123 16,755 Tax 5,925 7,103 10,616 10,297 10,026 14,837 17,784 Net Profit 11,120 13,456 19,508 30,237 29,840 44,156 52,929

YoY Growth (%) FY17A FY18A FY19A FY20A FY21E FY22E FY23E NII 71.6 26.2 48.3 40.7 20.2 19.6 20.2 PPOP 100.1 35.5 54.2 45.3 11.0 20.9 19.6 PAT 102.7 21.0 45.0 55.0 (1.3) 48.0 19.9 Loans 35.4 76.5 33.4 68.1 20.8 23.4 24.8 Deposits 92.2 45.8 27.6 32.0 30.0 22.0 22.0 Total Assets 53.0 46.5 27.4 62.5 22.3 23.4 22.3

Key Ratios Profitability (%) FY17A FY18A FY19A FY20A FY21E FY22E FY23E Avg. YoA (%) 21.3 16.4 16.5 17.9 17.0 16.5 15.0 Avg. cost of deposits (%) 7.3 5.9 5.4 6.6 6.5 6.3 6.3 NIM (%) 9.8 8.3 9.1 8.7 7.6 7.4 7.3 Cost/ Income (%) 36.3 35.0 32.6 30.8 33.8 34.3 34.9 Tax Rate (%) 34.8 34.6 35.2 25.4 25.2 25.2 25.2 CASA (%) 29.4 34.3 40.8 36.8 38.0 38.0 38.0 Credit/ deposit (%) 72.5 87.7 91.7 116.7 108.5 109.8 112.3 RWA/ Total assets 59.0 68.7 67.9 64.3 64.0 62.0 60.0 Assets Quality GNPA (%) 0.5 1.3 2.1 1.5 2.9 1.8 1.8 NNPA (%) 0.4 0.4 0.4 0.4 1.4 0.9 1.0 PCR (%) 29.7 71.3 82.6 75.8 49.9 49.7 43.3 Slippages (%) 0.7 1.5 2.2 2.0 4.5 2.0 2.0 Total provision/ Avg. loans (%) 0.6 1.6 2.1 2.6 2.8 1.6 1.5 Capital Adequacy (%) CRAR (%) 26.4 31.5 29.2 27.4 25.9 25.8 25.8 Tier 1 (%) 24.8 30.3 27.9 25.2 24.0 24.2 24.5

CAGR (%) 1 year 2 years 3 years 5 years NII 40.7 44.4 38.1 50.8 PPOP 45.3 49.7 44.8 50.8 PAT 55.0 49.9 39.6 47.1 BPS ` 0.5 9.5 32.5 24.4

December 15, 2020| 31 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Balance Sheet Y/E Mar (Rs mn) FY17A FY18A FY19A FY20A FY21E FY22E FY23E Equity 10,951 11,928 11,931 16,102 16,102 16,102 16,102 Reserve and surplus 33,513 81,891 100,087 135,852 159,866 195,283 236,560 Deposits 232,287 338,690 432,316 570,815 742,060 905,313 1,104,481 Borrowings 10,289 2,850 5,214 163,792 171,981 232,175 297,184 Other liabilities 15,320 7,741 14,870 30,617 32,147 35,362 38,898 Total Liabilities 302,361 443,101 564,417 917,178 1,122,157 1,384,235 1,693,226 Cash and balance with RBI 60,121 28,371 38,792 63,449 41,132 45,500 98,117 Balance with banks/call money 13,529 26,735 19,235 20,080 24,800 28,588 38,031 Investments 55,165 83,719 100,375 153,518 228,510 284,372 280,333 Advances 168,391 297,130 396,434 666,300 805,215 993,895 1,240,077 Fixed & other assets 5,155 7,145 9,582 13,832 22,499 31,880 36,669 Total Assets 302,361 443,101 564,417 917,178 1,122,157 1,384,235 1,693,226

Per Share Data (Rs) FY17A FY18A FY19A FY20A FY21E FY22E FY23E EPS 10.2 11.3 16.4 18.8 18.5 27.4 32.9 BVPS 40.6 78.7 93.9 94.4 109.3 131.3 156.9 ABVPS 40.0 77.2 92.0 91.9 102.1 125.7 149.0 DPS 0.0 1.0 3.0 0.0 3.0 4.5 6.0

Valuation (x) FY17A FY18A FY19A FY20A FY21E FY22E FY23E P/E (x) 40.6 36.5 25.2 21.9 22.2 15.0 12.5 P/B (x) 10.2 5.2 4.4 4.4 3.8 3.1 2.6 P/ABV (x) 10.3 5.3 4.5 4.5 4.0 3.3 2.8 Dividend Yield (%) 0.0 0.2 0.7 0.0 0.7 1.1 1.5 RoA (%) 4.4 3.6 3.9 4.1 2.9 3.5 3.4 RoAE (%) 28.6 19.5 19.0 22.9 18.2 22.8 22.8 RoRWA (%) 7.4 5.6 5.7 6.2 4.6 5.6 5.6

RoA Decomposition FY17A FY18A FY19A FY20A FY21E FY22E FY23E Interest income 15.6 12.9 13.2 14.7 13.0 12.7 12.6 Interest expenses 6.0 4.7 4.3 6.2 5.5 5.5 5.5 Net interest income 9.6 8.1 8.9 8.5 7.5 7.3 7.1 Treasury income 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other income from operations 1.6 1.9 2.1 2.1 1.5 1.6 1.6 Total income 11.3 10.0 11.0 10.6 9.0 8.9 8.7 Employee expenses 2.2 1.8 2.0 1.8 1.7 1.7 1.7 Other operating expenses 1.9 1.7 1.6 1.4 1.4 1.3 1.3 Total Operating expenses 4.1 3.5 3.6 3.3 3.0 3.0 3.0 Operating Profit 7.2 6.5 7.4 7.4 5.9 5.8 5.7 Loan Loss Provisions 0.4 1.0 1.5 1.9 2.0 1.1 1.1 Tax 2.4 1.9 2.1 1.4 1.0 1.2 1.2 Net Profit 4.4 3.6 3.9 4.1 2.9 3.5 3.4 Leverage Multiplier 6.4 5.4 4.9 5.6 6.2 6.5 6.6 ROE 28.6 19.5 19.0 22.9 18.2 22.8 22.8 Source: Company, Equirus Research

December 15, 2020| 32 Bandhan Bank (BANDHAN IN) India Equity Research | Initiating Coverage

Rating & Coverage Definitions: Registered Office: Absolute Rating Equirus Securities Private Limited • LONG : Over the investment horizon, ATR >= Ke for companies with Free Float market cap >Rs 5 billion Unit No. 1201, 12th Floor, C Wing, Marathon Futurex, and ATR >= 20% for rest of the companies N M Joshi Marg, Lower Parel, • ADD: ATR >= 5% but less than Ke over investment horizon Mumbai-400013. • REDUCE: ATR >= negative 10% but <5% over investment horizon Tel. No: +91 – (0)22 – 4332 0600 • SHORT: ATR < negative 10% over investment horizon Fax No: +91- (0)22 – 4332 0601 Relative Rating • OVERWEIGHT: Likely to outperform the benchmark by at least 5% over investment horizon Corporate Office: • BENCHMARK: likely to perform in line with the benchmark 3rd floor, House No. 9, • UNDERWEIGHT: likely to under-perform the benchmark by at least 5% over investment horizon Magnet Corporate Park, Near Zydus Hospital, B/H Intas Sola Bridge, Investment Horizon S.G. Highway Ahmedabad-380054 Investment Horizon is set at a minimum 3 months to maximum 18 months with target date falling on last day of Gujarat a calendar quarter. Tel. No: +91 (0)79 - 6190 9550 Fax No: +91 (0)79 – 6190 9560

© 2020 Equirus Securities Private Limited. All rights reserved. For Private Circulation only. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Equirus Securities Private Limited Analyst Certification I, Shreepal Doshi/ Rohan Mandora, author to this report, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Disclosures Equirus Securities Private Limited (ESPL) having Corporate Identification Number U65993MH2007PTC176044 is registered in India with Securities and Exchange Board of India (SEBI) as a trading member on the Capital Market (Reg. No. INB231301731), Futures & Options Segment (Reg. No.INF231301731) of the National Stock Exchange of India Ltd. (NSE) and on Cash Segment (Reg. No.INB011301737) of Bombay Stock Exchange Limited (BSE).ESPL is also registered with SEBI as Research Analyst under SEBI (Research Analyst) Regulations, 2014 (Reg. No. INH000001154), as a Portfolio Manager under SEBI (Portfolio Managers Regulations, 1993 (Reg. No.INP000005216) and as a Depository Participant of the Central Depository Services (India) Limited (Reg. No.IN-DP-324-2017). There are no disciplinary actions taken by any regulatory authority against ESPL. ESPL is a subsidiary of Equirus Capital Pvt. Ltd. (ECPL) which is registered with SEBI as Category I Merchant Banker and provides investment banking services including but not limited to merchant banking services, private equity, mergers & acquisitions and structured finance. As ESPL and its associates are engaged in various financial services business, it might have: - (a) received compensation (except in connection with the preparation of this report) from the subject company for investment banking or merchant banking or brokerage services in the past twelve months;(b) managed or co-managed public offering of securities for the subject company in the past twelve months; or (c) have received a mandate from the subject company; or (d) might have other financial, business or other interests in entities including the subject company (ies) mentioned in this Report. ESPL & its associates, their directors and employees may from time to time have positions or options in the company and buy or sell the securities of the company (ies) mentioned herein. ESPL and its associates collectively do not own (in their proprietary position) 1% or more of the equity securities of the subject company mentioned in the report as the last day of the month preceding the publication of the research report. ESPL or its Analyst or Associates did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ESPL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ESPL has not been engaged in market making activity for the subject company. The Research Analyst engaged in preparation of this Report:- (a) has not received any compensation from the subject company in the past twelve months; (b) has not managed or co-managed public offering of securities for the subject company in the past twelve months; (c) has not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (d) has not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (e) has not received any compensation or other benefits from the subject company or third party in connection with the research report; (f) might have served as an officer, director or employee of the subject company; (g) is not engaged in market making activity for the subject company. This document is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ESPL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession of this document are required to inform themselves of, and to observe, such applicable restrictions. Please delete this document if you are not authorized to view the same. By reading this document you represent and warrant that you have full authority and all rights necessary to view and read this document without subjecting ESPL and affiliates to any registration or licensing requirement within such jurisdiction. This document has been prepared solely for information purpose and does not constitute a solicitation to any person to buy, sell or subscribe any security. ESPL or its affiliates are not soliciting any action based on this report. The information and opinions contained herein is from publicly available data or based on information obtained in good faith from sources believed to be reliable but ESPL provides no guarantee as to its accuracy or completeness. The information contained herein is as on date of this report, and is subject to change or modification and any such changes could impact our interpretation of relevant information contained herein. While we would endeavour to update the information herein on reasonable basis, ESPL and its affiliates, their directors and employees are under no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may prevent ESPL and its group companies from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document including the merits and risks involved. This document is intended for general circulation and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. ESPL and its group companies, employees, directors and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. ESPL/its affiliates do and seek to do business with companies covered in its research report. Thus, investors should be aware that the firm may have conflict of interest. A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and www.bseindia.com (Choose a company from the list on the browser and select the “three years” period in the price chart).

Disclosure of Interest statement for the subject Company Yes/No If Yes, nature of such interest

Research Analyst’ or Relatives’ financial interest No

Research Analyst’ or Relatives’ actual/beneficial ownership of 1% or more No

Research Analyst’ or Relatives’ material conflict of interest No

Disclaimer for U.S. Persons Equirus Securities Private Limited (ESPL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition ESPL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by ESPL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., ESPL has entered into a chaperoning agreement with a U.S. registered broker-dealer name called Xtellus Capital Partners, Inc, (''XTELLUS'). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

"U.S. Persons" are generally defined as a natural person, residing in the United States or any entity organized or incorporated under the laws of the United States. US Citizens living abroad may also be deemed "US Persons" under certain rules.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, XTELLUS, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

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