Green shoots seem to emerge in troubled microfinance portfolio of Bandhan Bank; brokerages are signaling confidence in recovery
After a bruising period marked by asset quality deterioration and margin compression, Bandhan Bank appears to be scripting a credible recovery story—one that has caught the attention of leading brokerages who are now turning upbeat on the stock.
In a shift, both ICICI Securities and Axis Securities have upgraded the stock to BUY, betting on improving fundamentals that suggest the worst may be behind India’s largest microfinance-focused lender.
The Microfinance Albatross Shows Signs of Healing
At the heart of Bandhan’s troubles—and now its recovery—lies its massive Economically and Educationally Backward (EEB) or microfinance portfolio. This segment, which has been the bank’s Achilles heel for several quarters, is finally showing “green shoots” of improvement.
“Bandhan’s operational indicators in the EEB segment are showing gradual signs of improvement, with X-bucket CE improving to 99.6% since Nov’25 and better early-stage delinquency indicators pointing to lower forward flows,” says Axis Securities in its latest note. The brokerage highlights that EEB slippages have declined for the third consecutive quarter, falling to Rs 942 crore in Q3 versus Rs 1,118 crore in Q2.
ICICI Securities echoes this optimism, noting that “MFI slippages improved QoQ but remain elevated at ~7.5% annualised. Importantly, SMA pool, after two quarters of rise, eased QoQ. The fresh stress formation has also come down substantially, as reflected in X-bucket collection of 99.6% for Nov-Dec’25.”
The Street is particularly encouraged by management’s commentary around vintage-level analysis suggesting low stress formation over the last year, instilling confidence that Portfolio at Risk (PAR) accretion will continue to moderate.
A Complete Overhaul of Risk Framework
Beyond the cyclical improvement in asset quality metrics, Bandhan appears to be undertaking fundamental structural changes that could redefine its risk profile going forward.
“Bandhan is considering structural changes to revamp EEB underwriting and move toward a rules-driven, independently governed credit framework to strengthen risk mechanisms and ensure better risk management,” says Axis Securities.
The overhaul extends beyond microfinance. In the mortgage segment, which has witnessed a continuous rise in NPAs over recent quarters, Axis Securities notes that “the bank has undertaken structural improvements in underwriting and operating processes. Earlier, customer onboarding, credit appraisal, and operations were handled by the same personnel; this has now been fully segregated, with independent teams managing onboarding and underwriting.”
This separation of duties—a basic tenet of sound risk management—was surprisingly absent earlier and its implementation signals management’s seriousness about building institutional safeguards.
The Margin Recovery Story
While asset quality has dominated the narrative, Bandhan’s net interest margin (NIM) story is equally compelling and often overlooked.
“NIMs improved marginally by 6 bps QoQ, driven by a declining CoF, which was adequate to offset the impact of portfolio mix shift on yields,” says Axis Securities. ICICI Securities reports an even sharper improvement: “Despite stable spreads, NIM improved ~10bps to 5.9% QoQ, aided by better LDR and CRR benefits.”
More importantly, the margin trajectory appears set for sustained improvement. “Management remains confident of maintaining NIMs around ~6% in the near term, with a further 35-50 bps improvement over subsequent quarters, supported by MFI growth revival, continued deposit repricing, an improving CASA mix, and lower interest reversals,” says Axis Securities.
The mechanics are straightforward: Bandhan is expected to benefit from deposit repricing over the next 2-3 quarters. While approximately 45% of advances are repo-linked and will see an adverse impact from the December 2025 rate cut, this headwind is expected to be more than offset by lower cost of funds.
The Valuation Argument
Perhaps the most compelling part of the bull case is valuation. Both brokerages argue that current prices adequately reflect the uncertainties while offering significant upside as the recovery materializes.
ICICI Securities values the stock at 0.9x FY28E Adjusted Book Value with a target price of Rs 175, representing 23% upside from the current market price of Rs 142. “Current valuations at below trailing book seem to be adequately factoring in the uncertainties surrounding the impending state assembly elections in its key states (West Bengal, Assam),” the brokerage notes.
Axis Securities has set a target of Rs 160, valuing the stock at 0.9x September 2027E ABV, down slightly from its earlier target of Rs 165 but with an upgrade to BUY from HOLD, signaling increased conviction despite a modest target price reduction.
The Earnings Recovery Path
Both brokerages paint a picture of substantial earnings recovery ahead, albeit from a low base.
“We expect Bandhan’s RoA/RoE to improve to 1.2-1.5%/10-13% over FY27-28E vs. an unimpressive 0.5/4% in FY26E,” says Axis Securities.
ICICI Securities is similarly optimistic: “We see the bank delivering sizeable delta on RoA from 0.6% in FY26E to ~1.2% for FY27E, driven by easing credit costs.”
The path to this recovery is well-articulated: declining slippages, improving early delinquency indicators, strengthening risk frameworks across segments, and easing credit costs supporting earnings as the NIM cycle bottoms out.
Axis Securities expects management to achieve its credit cost guidance of 1.6-1.7% by exit-FY27, with EEB credit costs settling at around 2.5%—a substantial improvement from current elevated levels.
The Mix Shift Advantage
An underappreciated aspect of Bandhan’s transformation is the fundamental shift in its business mix. ICICI Securities highlights that “the bank has made substantial progress in mix change with the secured book’s share now at ~57% (vs. 49% YoY).”
This shift toward secured lending—housing loans and retail assets—is critical for multiple reasons. It diversifies the bank away from its concentrated microfinance exposure, improves the overall risk profile of the book, and positions it for more stable growth.
“Retail assets continued their strong growth momentum and jumped 11% QoQ/ 57% YoY,” notes ICICI Securities, though housing growth was softer at 2% QoQ.
What Could Go Wrong?
No turnaround story is without risks, and Bandhan’s recovery path faces several potential hurdles.
ICICI Securities identifies a key risk: “Higher-than-expected stress impacting RoA.” Given that credit costs remain elevated at 3.35% (though moderating from 3.5% QoQ), any reversal in the improving trend could derail the earnings recovery.
Political risk also looms large. With impending state assembly elections in key markets like West Bengal and Assam, there’s potential for loan waiver announcements or other populist measures that could impact repayment behavior in the microfinance segment.
The broader macroeconomic environment for microfinance also remains uncertain. While Bandhan’s early indicators are improving, the sector as a whole continues to grapple with overleveraging concerns and regulatory scrutiny.
