Bandhan Bank share pops 5% as CLSA upgrades to 'High Conviction Outperform'

Bandhan Bank share price:  Private banking and financial services company Bandhan Bank shares were in demand on Friday, February 21, 2025, as the stock surged as much as 4.80 per cent to hit an intraday high of Rs 143 per share. 

 

The rally in Bandhan Bank’s share price followed an upgrade from Hong Kong-based brokerage firm CLSA, which raised its rating to ‘High Conviction Outperform’ from the previous ‘Outperform’ rating. However, CLSA maintained its target price at Rs 220, reflecting a potential upside of 61 per cent.

 

CLSA referenced the veteran fund manager Anthony Bolton, who once stated, “The most money in equity markets is made when things go from bad to less bad.”

 

 

CLSA analysts, Piran Engineer and Roshny Munshi, predict that the Indian microfinance sector will improve from ‘bad’ to ‘less bad’ in 1-2 quarters, and from ‘less bad’ to ‘normal’ by Q2FY26. They also noted early signs of improvement in collection efficiency, which, if sustained, could lead to a reduction in slippages with a one-quarter lag.

 

Therefore, Bandhan Bank, analysts believe, is strategically positioned to capitalise on this recovery. 

 

Top factors behind the CLSA upgrade:

 

New management team: No legacy concerns

 

Analysts at CLSA noted that the majority of Bandhan's top management has been revamped, with nearly all key members joining within the last 2 years. 

 

The new managing director and CEO came on board in November 2024, while two executive directors were appointed in 2023 and 2024. Other senior members, such as the CFO and heads of the MFI and corporate banking divisions, also joined recently. The team, analysts believe, is focused on enhancing technology and refining underwriting processes. 

 

Additionally, Bandhan Bank has cleared the audit for its CGFMU scheme, with Ernst & Young certifying loans worth approximately Rs 20,000 crore. Considering this, analysts do not foresee any major risk of ‘kitchen-sinking’ from the new management.

 

Bandhan Bank’s outperformance in the MFI cycle

 

CLSA believes this microfinance (MFI) cycle will be shorter than previous downturns like the COVID-19 crisis, as borrower incomes are not majorly impacted in this cycle. Collection efficiency notably improved in December 2024, and if this trend continues, slippages should improve in the following quarter. 

 

Bandhan Bank’s MFI slippage ratio of 8 per cent in Q3FY24 was notably better than that of its peers. Furthermore, analysts highlighted that less than 1 per cent of Bandhan Bank’s MFI book is tied to Karnataka, where concerns exist.

 

Shift toward secured lending, no capital requirement, and undervalued

 

According to CLSA, the new management plans to increase the share of secured loans from around 50 per cent to 55-60 per cent over the next two years. Additionally, Bandhan Bank is expanding its product offerings, including transaction banking, agricultural loans, and credit cards. 

 

While this shift to secured lending may slightly reduce its steady-state return on assets (ROA), analysts at CLSA believe it will also reduce business cyclicality and better align with regulatory expectations. 

 

Thus, CLSA forecasts Bandhan Bank’s ROA at 1.5 per cent-1.6 per cent in the medium-term, similar to that of Axis Bank, with no need for further capital infusion. 

 

With a target price of Rs 220, which implies a 1.2x FY27 PB ratio, analysts also pointed out that Bandhan Bank is currently undervalued. Thus, CLSA analysts expect the stock to rerate as the macro environment improves in the coming quarters.