Foreign brokerage CLSA on Friday said nearly the entire top management of Bandhan Bank Ltd is new and that it does not see a risk of kitchen sinking. It said Bandhan Bank is performing better than peers this MFI cycles, is gravitating towards secured lending, and has no need for capital.
"We keep our estimates and target price unchanged but upgrade our recommendation from O-PF to HC-OPF following a 20 per cent correction over the past three months. Even at an undemanding target multiple of 1.2 times, the stock offers 65 per cent upside. We believe the stock will rebound when things get better," CLSA said.
The foreign brokerage said the Indian microfinance space will go from bad to less bad in 1-2 quarters and from less bad to normal by Q2FY26. There are early signs of improvement in collection efficiency, and if this is sustained it should result in improvement in slippage with a quarter lag, it said.
Following the development, the stock rose 4.8 per cent to hit a high of Rs 143 on BSE. CLSA suggested a target price of Rs 220.
Bandhan Bank, it said, is well-placed to benefit from this recovery. "Its asset quality performance this cycle has been better than peers. Almost the entire management team is new, and we do not see risk of ‘kitchen-sinking," the brokerage said.
Bandhan Bank's MD and CEO joined the bank in November 2024, while the two Executive Directors joined in 2023 and 2024. The CFO, MFI business head, corporate banking head, among others, all joined in the past 12-24 months. Bandhan Bank has also received a clean chit for its CGFMU scheme claims, after Rs 20,000 crore of its loans were audited by Ernst & Young. While the market is concerned about kitchen-sinking, CLSA said it does not believe this will happen.
Bandhan Bank is working on improving technology and tightening underwriting processes, it said.
The ongoing MFI asset quality cycle will be shorter than prior crises like Covid, as borrower incomes are not impacted, CLSA said adding that various MFI players have highlighted meaningful improvement in collection efficiency in December 2024 versus prior months.
"If this sustains, slippage will improve in a quarter. Bandhan’s MFI slippage ratio of 8 per cent in 3QFY24 was much better than peers. It also has among the lowest share of borrowers with four or more lenders. Lastly, while there is concern over the state of Karnataka, we highlight it is less than 1% of Bandhan’s MFI book," CLSA said.