Bandhan Bank: CLSA’s Top Pick in the Financial Sector Amid MFI Recovery
Summary
In a recent analysis, CLSA has identified Bandhan Bank as its top recommendation in the Indian financial sector, upgrading its rating to a “high conviction Outperform.” The brokerage expects the bank to significantly benefit from the ongoing recovery in the microfinance institution (MFI) sector, projecting a target price of Rs 220 per share—a 55% increase from current levels.
Market Context and Rating Upgrade
On March 3, 2025, CLSA announced its upgraded assessment of Bandhan Bank, citing its potential to leverage the redefined risk-weight regulations affecting MFIs. This upgrade comes as Bandhan Bank’s tier 1 ratio stands at 13.7%, and a reduction of 25 percentage points in risk-weighting for 43% of its MFI loan book could elevate this ratio to 15.3%.
The analysis pointed out that such adjustments imply a significant tier 1 capital accretion of 160 basis points, which would enhance Bandhan Bank’s financial stability. CLSA stated, “If a reduction of 25 percentage points is assumed in risk-weight on 43% of its microfinance institutions (MFI) loan book, it implies a tier 1 ratio of 15.3%, i.e., a tier 1 accretion of 160 basis points.”
RBI’s Supportive Measures
The RBI’s recent shifts in policy have provided a much-needed lifeline to the banking sector. Previously, the RBI adopted a stringent stance, tightening liquidity throughout 2023 and into 2024. However, recent changes to policy have sparked optimism. CLSA reported that the reduction in risk-weights for MFI loans—down to 100% from 125%, and in some instances to 75%—are key components of this supportive approach.
“Clearly, good things are happening for the banking sector in a meaningful way,” noted CLSA, highlighting how the RBI’s commitment to injecting liquidity and loosening risk requirements is likely to bolster investor confidence and expedite the recovery of the MFI segment.
Bandhan Bank’s Financial Performance
Despite the encouraging outlook, Bandhan Bank recently faced challenges, reporting a 42% year-on-year decline in net profit for Q3 FY25, landing at Rs 426 crore compared to Rs 733 crore a year earlier. This decline stemmed primarily from increased provisions against bad loans and rising operational expenses, compounded by stressors in its microfinance sector, which saw fresh slippages of Rs 1196 crore—up from Rs 752 crore in the same quarter last year.
Moreover, the total slippages amounted to Rs 1621 crore, reflecting a concerning trend that needs addressing for the bank to capitalize fully on the recovery opportunities ahead.
Current Stock Performance
In terms of stock trading, Bandhan Bank has faced headwinds, experiencing a 3.5% decline over the past few days. In the previous month, the stock dropped over 9%, with a staggering 32% decrease over the last six months. Comparatively, the stock price has plummeted by more than 30% over the past year, indicating a turbulent year for the institution.
Conclusion
As CLSA positions Bandhan Bank as a leading player to watch in the financial sector, the broader market remains cautious yet hopeful about the implications of regulatory changes and recovery in microfinance. Investors and stakeholders will be keenly observing Bandhan Bank’s strategic responses to current financial pressures and its ability to harness emerging opportunities in the evolving banking landscape.
For those looking to navigate the dynamics of the financial market, keeping an eye on Bandhan Bank’s developments and stock performance will be crucial.
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