RBL Bank, Bandhan Bank, AU SFB, IndusInd Bank shares gain up to 8%; here's why

Shares of RBL Bank Ltd, Bandhan Bank Ltd, AU Small Finance Bank Ltd (AU SFB), IDFC First Bank Ltd and IndusInd Bank climbed up to 7 per cent in Thursday's trade as the reversal in risk weights on MFI loans will help reduce risk-weighted assets for these banks, supporting capital adequacy levels. 

Universal banks like Bandhan Bank, IndusInd Bank, IDFC First Bank, RBL Bank, and some SFBs with significant exposure to the microfinance sector will be the key beneficiaries, MOFSL said adding that the improved capital position will enable some of these banks to operate with optimal leverage, thus supporting their RoE and alleviating the need to raise capital in the short term.

Shares of Bandhan Bank soared 8.27 per cent to Rs 146.50. RBL Bank climbed 6.62 per cent to Rs 168.90. AU SFB advanced 4.80 per cent to Rs 549.30. IndusInd Bank and IDFC First Bank were trading 1.5-1.6 per cent higher.

The MFI relaxation may benefit MFI-heavy banks, other than SFBs. It will benefit Bandhan Bank and RBL Bank the most, said Nuvama Institutional Equities. 

The RBI has eased risk weights on MFI business loans of banks to 75 per cent from 125 per cent. It had in November 2023 increased the risk weights, which had led to a rise in RWA for banks, putting pressure on CET-1 ratios. This had strained the capital adequacy, creating challenges for banks, particularly those with already thin capital buffers. 

"The roll back in risk weights for MFIs shall benefit all MFI-heavy banks, but not SFBs because other than AU SFB, no SFB had raised risk weights on MFI loans to 125 per cent. AU had done it only on 20 per cent of MFI loans that were consumption loans, and not on other loans. Other SFBs had not hiked risk weights. Banks that had hiked risk weights include Bandhan, RBL, IDFC First and IIB," Nuvama said.

MOFSL said the restoration of risk weights to pre-November 2023 levels will help alleviate this pressure, especially as the profitability of many mid-sized banks is already under pressure due to asset quality concerns in unsecured segments.

"The reduction in risk weights will lower capital consumption for banks, which are likely to pass on partial benefits to NBFCs in the form of lower lending rates, in addition to the transmission from the recent repo rate revision. This could potentially reduce borrowing costs for NBFCs and support margin and growth recovery. Key beneficiaries: Bandhan, IndusInd, and RBL Bank," MOFSL said.

JM Financial said Bandhan Bank, Ujjivan SFB and Equitas SFB would be most benefited and should see their Tier-I capital increase by 1.7 per cent, 5.5 per cent and 1 per cent, respectively, as a result of these notifications.