Bandhan Bank Q1 Results Review: Rising Stress In MFI Poses Risk, New CEO Appointment Awaited

Bandhan Bank Ltd.'s first-quarter profit for fiscal 2025 increased, but challenges, such as rising stress in the microfinance book and clarity on the appointment of a new CEO, persist, according to analysts.

"... believe a clear long-term strategy on the growth front will only emerge once the bank sees the appointment of the new Managing Director and Chief Executive Officer, possibly after September 2024," Emkay Global said in a July 27 note.

It added, "... the recent floods in East India, rising customer overleveraging, and potential farm-loan waiver in Maharashtra (12% of the overall portfolio) pose persistent risks in the MFI space."

The lender's standalone net profit rose 47.4% year-on-year to Rs 1,063.4 crore. Net interest income, or core income, rose 20.6% year-on-year to Rs 3,005.1 crore.

The lender's asset quality worsened, with the gross non-performing asset ratio rising 39 basis points per quarter to 4.23%. The net NPA ratio, too, worsened 4 bps to 1.15%, as compared to 1.11% in the previous quarter.

• Bank reported first-quarter earnings beat on profit after tax, driven by lower-than-normalised seasonality

• Took a hit of 362 basis points on capital adequacy ratio as it increased risk weights on Emerging Entrepreneurs Business loans from 75% to 125% on its conservative reading of RBI's circular from November

• Saw lowest credit cost since first-quarter of fiscal 2023

• Expect credit cost for full year to settle at 1.8-2% due to sharp rise in 1–90 Days Past Due 

• Maintain 'hold' with a target price of Rs 200 apiece.

• The profit after tax was higher than expected, primarily due to lower provisions.

• The sequential decline of the housing book remains a concern as the bank has a strategic direction to increase its share of secured loans.

• The growth of the bank's deposits at 23% YoY, coupled with better loan yields, led to a nearly-stable net-interest-margin at 7.6%.

• Recovery of CGFMU—a scheme that provides collateral-free loans to small and micro units in India—remains elusive, but the management remains hopeful of it happening sooner than anticipated. 

• Expect the bank to clock a return-on-asset of 1.9–2.1% over fiscal 2025–2027, which would be well below its historical trajectory due to continued asset quality issues.

• Key risks to the lender include an unfavourable CGFMU portfolio audit outcome and the possible appointment of a PSU banker, which could lead to back-tacking a calibrated growth approach.

• Maintain its 'reduce' call, with a target price of Rs 175 apiece.

• Expect return-on-asset of 2.2% in fiscal 2026

• Expect return-on-equity of 18.9% in fiscal 2026

• Other income grew 37% YoY, which led to a growth in total revenue by 22.8% YoY

• Capital to Risk (Weighted) Assets Ratio, or CRAR declined sharply due to impact of an increase in risk weights in Emerging Entrepreneurs Business book, from 75% to 125%

• Maintain 'neutral' with a target price of Rs 220 apiece

• First quarter results were better than expected due to lower-than-estimated provisions.

• Loans and advances grew 21.8% YoY on the back of growth across all verticals.

• The Capital to Risk (Weighted) Assets Ratio, or CRAR growth, was impacted sequentially due to a reduction from the short-term current account balance in the previous quarter.

• Estimate earnings compound annual growth rate of 49.8% over fiscal 2024–206, on the back of 18.3% CAGR in the loan book and lower credit costs.

• Key overhangs include the end result of the detailed audit on the directions of NCGTC, succession at the top management level, frequent IBPC transactions in the housing portfolio in the long term, and a higher C-D ratio of 94.3%, which can constrain growth.

• Maintain 'accumulate' with a target price of Rs 217 apiece.