Bandhan Bank: CLSA’s Top Pick in India’s Financial Sector Amid MFI Recovery

In a recent analysis, CLSA, a prominent brokerage house, has identified Bandhan Bank as its top pick within the Indian financial sector. The firm has upgraded Bandhan Bank’s rating to "high conviction Outperform," indicating strong expectations for the bank as it capitalizes on the ongoing recovery cycle of microfinance institutions (MFIs). This upgrade comes with a target price set at ₹220 per share, projecting a potential upside of 55% from the current share levels.

Positive Outlook on Microfinance Recovery

The optimism surrounding Bandhan Bank is significantly influenced by a shift in the Reserve Bank of India’s (RBI) monetary policy. In the past year, the RBI tightened liquidity across the banking sector. However, recent shifts have indicated a move towards easing, which is expected to benefit institutions heavily involved in microfinance.

“Clearly, good things are happening for the banking sector in a meaningful way,” stated CLSA in its research report. The brokerage noted that a reduction in risk weights for MFIs could reinstate investor confidence and provide a quicker recovery trajectory for the sector. For Bandhan Bank, this could lead to an improved tier 1 capital ratio, potentially increasing to 15.3%, reflecting an accretion of 160 basis points if risk weights on 43% of its microfinance loan book are adjusted.

The RBI has lowered the risk weights for microfinance loans from 125% to 100% in many cases, and even down to 75% for certain eligible scenarios. This change translates to a risk-weight reduction of at least 25 percentage points for Bandhan Bank and its peer, Indian Overseas Bank (IIB).

Recent Performance and Current Challenges

Despite this positive outlook, Bandhan Bank recently reported a challenging financial performance for the third quarter of FY25. The bank posted a net profit of ₹426 crore, representing a significant decline of 42% year-on-year, which is down from ₹733 crore in the same quarter of the previous financial year. This drop can be attributed to higher provisioning for bad loans and increased operational expenses. Notably, the microfinance segment remains a significant source of pressure, with fresh slippages amounting to ₹1,196 crore during this period, up from ₹752 crore in the corresponding quarter a year ago.

Additionally, Bandhan Bank’s share price has faced downward pressure, falling 3.5% over the past few days and more than 9% over the last month. Year-to-date, the stock has experienced a striking decline of over 30%.

Conclusion

As Bandhan Bank navigates the complexities of its current financial situation while positioning itself for a future recovery linked to changing regulatory environments, CLSA’s upgrade reflects confidence in the bank’s resilience and ability to thrive in an evolving landscape. Investors will be closely monitoring the bank’s response to these challenges and the broader economic impacts affecting the microfinance sector.

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