Bandhan Bank: CLSA’s Top Pick in the Financial Sector
March 3, 2025
In a recent announcement, CLSA has identified Bandhan Bank as its top pick within the Indian financial sector, elevating its rating to a high conviction "Outperform." The recommendation comes as the brokerage firm anticipates a favorable recovery cycle for microfinance institutions (MFIs), which Bandhan Bank primarily serves. This analysis highlights the bank’s potential for significant market upside and strategic positioning amid regulatory changes in the financial landscape.
Target Price and Share Expectations
CLSA has set a target price of ₹220 per share for Bandhan Bank, which suggests an impressive 55% increase from the current trading levels. This projection is rooted in the expectation that a reduction in risk-weighted assets could enhance the bank’s financial stability and performance metrics. CLSA posits that adjusting risk-weight on 43% of Bandhan’s MFI loan book could lead to a tier 1 capital ratio of 15.3%, reflecting a 160 basis point increase from the existing 13.7% reported at the end of the third quarter of FY25. ### RBI’s Role in Banking Recovery
The Reserve Bank of India (RBI) has shifted its stance towards the banking sector, easing previous regulatory pressures and injecting liquidity into the financial system. Following a period of stringent liquidity management, the RBI’s recent actions, including lowering risk-weights for MFI loans, are expected to bolster investor confidence and facilitate a quicker recovery in the microfinance sector.
In this context, CLSA remarked, “Clearly, good things are happening for the banking sector in a meaningful way,” emphasizing the positive implications of the RBI’s policies. The reduction of risk-weights from 125% to 100% for many MFI loans—and 75% in selective scenarios—offers substantial relief, reducing risk weights by at least 25 percentage points for Bandhan Bank and similar lenders.
Recent Financial Performance
Despite the optimistic outlook, Bandhan Bank has faced challenges in its recent financial performance. In the third quarter of FY25, the bank reported a 42% year-on-year decrease in net profit, amounting to ₹426 crore, compared to ₹733 crore in the previous year. This decline is attributed to increased provisions for bad loans and heightened operational expenses, coupled with significant slippages in its microfinance segment, which totaled ₹1,621 crore during the quarter.
The bank’s struggles are evident, as it reported fresh slippages of ₹1,196 crore compared to ₹752 crore from the same quarter the previous year, reflecting ongoing pressures in its lending portfolio.
Stock Performance Overview
The share price of Bandhan Bank has encountered volatility, having declined by 3.5% in the past few days alone. Over the course of the last month, the stock has fallen over 9% and a staggering 32% in the past six months. Year-on-year, the share price has suffered a drop of more than 30%, indicating a challenging market environment for the bank amid broader economic trends.
Conclusion
While CLSA’s bullish stance on Bandhan Bank suggests a potential turnaround stemming from regulatory relief and recovery in the MFI sector, the bank’s recent financial struggles highlight ongoing risks. Investors should remain vigilant as the landscape evolves, considering both the opportunities presented by CLSA’s optimistic rating and the challenges reflected in the bank’s financial metrics.
For those seeking insights into market trends and investment strategies, tracking updates on key financial movements and expert analyses will be essential in navigating the current economic climate.
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