Kotak Institutional Equities has maintained its BUY rating on Bandhan Bank, assigning a fair value target of Rs 225 per share. The report underscores a challenging recent performance, marked by a steep decline in earnings and heightened provisioning, but remains optimistic about the bank’s future trajectory. Central to their recommendation are improving asset quality metrics, easing credit costs, and the management’s focused strategy to transition toward a more resilient and diversified banking franchise.

Bandhan Bank—Navigating Through Volatility Toward Revival

Bandhan Bank’s financials for the period signal a tough operating quarter, with a 65% year-on-year decline in earnings and rising provisions, yet the bank’s underlying asset quality appears to be stabilizing. Gross NPLs have risen only marginally, while slippage and credit costs show signs of peaking. With a current market price of Rs187 and a target of Rs225, Kotak Institutional Equities maintains a BUY, citing valuation comfort and prospects of stronger earnings growth in the coming years. The bank’s focus is shifting from crisis navigation to franchise strengthening and profitable growth.

Research House’s Stance and Investment Levels

Kotak Institutional Equities reiterates a BUY, with a fair value target of Rs225, implying a potential upside of over 20% from current levels around Rs187.

Valuation metrics: At its target price, Bandhan Bank would trade at just 1.2 times FY27E book value and 9 times FY27E expected earnings, an attractive proposition considering the forecasted return on equity approaching 14%.

Stock levels for investors:

Profitability Impacted But Foundations Strengthening

Operating profit contracted 15% YoY, provisions jumped 120% YoY: Despite marginal topline growth, bottom-line earnings tumbled as credit costs spiked due to legacy MFI stress and a conservative provisioning approach.

Slippages and gross NPLs: Slippages improved to 4.5% (down about 80bps QoQ), and the gross NPL ratio rose only modestly to 5.0%. Net NPLs, at 1.4%, remain controlled, supported by a sturdy provision coverage ratio near 74%.

NIM under pressure but stabilizing: Net interest margin fell by 30bps quarter-on-quarter, landing at 6.4% as the business mix shifted toward lower-yielding, less volatile loans, and swift repricing on floating-rate portfolios impacted spreads.

Shift in Asset Quality and Credit Costs

Credit costs subsiding: Credit cost for the latest quarter declined to 3.4%, down from 3.7% previously, and management is confident of meeting or beating its 2.5% guidance for FY26.

MFI exposure and risk management: Microfinance (MFI) portfolio slippages retreated sharply to well below 8%, demonstrating Bandhan’s prudent underwriting and post-pandemic portfolio cleansing, particularly in West Bengal.

Attention pivots to growth and RoE: With the worst asset quality pressures easing, expectations now turn to the bank’s return on equity trajectory and underlying growth drivers.

Growth Outlook: Transition Drives Next-Stage Performance

Deceleration in MFI, acceleration elsewhere: The MFI business is projected to grow less than 10%, but strong expansion in retail, mortgages, and SME segments (>20% growth) should drive overall loan growth toward 15%.

Opex to remain elevated short term: The bank is investing heavily in people, technology, and strengthening its product platform, which should keep cost-to-income ratios elevated over FY26-27 before operational efficiencies emerge.

Fee income improvement lagging: Although the management is targeting higher non-interest income through expanded fee businesses, tangible results are still to be fully realized.

Strategic Franchise Renewal and Structural Changes

Pivoting from high-volatility microfinance: Bandhan is intent on reducing the historical dependence on group MFIs, shifting toward less cyclical, more granular segments—mortgages now account for roughly 20-25% of loans, with SME and retail gaining share.

Deposit growth robust, CASA ratio falls: Term deposits rose by 27% YoY (retail term deposits up 34%), even as CASA fell by 600bps to 27%. Fund-raising agility offsets declining low-cost deposits.

Regional market dynamics: Bandhan’s loan market share in West Bengal has dropped post-Covid, but its deposit market share continues to rise, reflecting growing customer stickiness and diversification.

Risks and Management Initiatives

Transition setbacks possible: With policy changes—such as billing micro-borrowers on holidays and MFIN guardrails—Bandhan faces operational risks, but management is actively strengthening digital collections and encouraging pre-payments.

Retail segment watch: Delinquencies in mortgage and personal loan books are manageable; course corrections are under way.

Capital Adequacy strong: With a CAR of 18.6%, Bandhan is well-capitalized to support near-term growth and withstand residual risks.

Forecast and Valuation Synopsis

Financial performance projections: FY25-27 estimates point to EPS of Rs17.1, Rs16.7, and Rs23.8 respectively. Book value per share is expected to climb from Rs160.6 to Rs179.1 across the forecast horizon. Return on equity is likely to rebound toward 13.4% by FY27.

Dividend outlook: Yield is forecast at 1.4–2% over the next three years, offering steady returns in addition to capital appreciation potential.

Conclusion: Gradual Re-rating, But Execution Is Key

Kotak Institutional Equities firmly maintains a BUY recommendation on Bandhan Bank, contending that downside is limited at current levels, but the pace of re-rating will be dictated by consistent execution and tangible signs of improved operating leverage. With asset quality stabilizing and growth drivers resetting, investors willing to ride out volatility could be well-positioned to capture both valuation re-rating and fundamental recovery. The new management’s ability to deliver on cost efficiency, expand non-interest revenue, and keep credit costs in check will determine the bank’s trajectory toward its targeted 14% RoE and beyond.