Bandhan Bank stock has been one of the worst-performing Indian banking stocks over the past year, losing 17% in value. In comparison, the Nifty Bank index has rallied over 16% during the same time frame.
Notably, the stock's downward trajectory has persisted since CY19, with a decline of 7.60%. This trend continued through CY20, CY21, and CY22, leading to a fall of 21%, 37.18%, and 7.30%, respectively. In the current year so far, it is down by 2.31%.
However, going by the projections made by the global brokerage firm BofA Securities, the stock may see a potential turnaround and positive shift in its trajectory.
Bandhan Bank is a private-sector bank that focuses on serving individuals who are overlooked by the banking system, especially in rural India. Bandhan Bank specialises in micro-advances and has been expanding the general banking business to complement the micro loan business. It has more than 1,000 branches across India.
The brokerage cites several key factors for its rating upgrade, highlighting the transformational strides taken by the bank in recent quarters.
The brokerage downgraded the stock to ‘neutral’ in November 2022 on worries about earnings uncertainty and turnaround risks. However, the brokerage now sees clarity emerging on most fronts and sees the scope for positive surprises going forward.
The bank has been a high-growth, high RoE business, with MFI being the key segment. But increasing asset quality issues in its restructured book post COVID have created volatility in earnings growth and uncertainty around the business plan.
“The bank is now close to completion of its loan book diversification, and its MFI book has stabilised. We see visibility for a recovery in MFI growth,” said BofA Securities.
Further, the bank made meaningful headway in its diversification strategy over the past 4–6 quarters. Visibility around growth momentum and the RoA contribution of various segments is now improving. From a medium-term perspective, this should improve the stability of the bank’s growth and RoA profile, as the brokerage highlighted.
The brokerage said the bank's asset quality performance has been a source of disappointment through the COVID cycle and said it has probably been the last bank to see credit cost normalisation.
However, the brokerage believes there is now light at the end of the tunnel due to collection efficiencies now at 98%, close to normal, incremental slippages and credit costs normalising fast, and surplus buffers being meaningful and adequate.
The bank’s NIM profile deteriorated from 9% levels pre-COVID to 7% in FY23, attributed to elevated slippages and a shift away from the high-yielding MFI portfolio. As these drivers approach a potential stabilisation, the NIM trajectory is poised for improvement, guided by management at 7–7.5%.
An anticipated turn in the rate cycle could further amplify the bank's position, capitalising on a favourable balance sheet mix, it said.
Amid these developments, the brokerage raised its EPS by 2-7% and reduced the cost of equity to 14.6% (14.8% previously) on a lower beta giving better visibility on earnings growth and business stability, resulting in a price target of ₹300 (from ₹260). This revised target signals an upside potential of 31% for the stock from its previous closing price.
At 1.4x Forward P/B, the stock is pricing in around 13–15% ROEs and <15% growth for the stock, offering a meaningful margin of safety, according to the brokerage.
26 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
