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Recovery Slated for H2FY26, HOLD Stays!

Est. Vs. Actual for Q1FY26: NII – INLINE; PPOP – BE

Changes in Estimates post Q1FY26

FY26E/FY27E (in %): NII: -5.3/-4.6; PPOP: -1.3/-2.2; PAT: -11.7/-8.3

Recommendation Rationale

• Slippages Moderate; Improving Trend Likely to Continue: In Q1FY26, Bandhan witnessed an improvement in slippages, in line with management guidance and the trend is expected to continue in FY26. The management has indicated that slippages will continue to remain elevated in Q2FY26, post which gradual normalisation is likely. The NPA (% of disbursements) in the EEB portfolio has been elevated at 4-5% over the past few quarters, largely attributed to the customer over-leveraging and is expected to subside over the coming quarters, eventually settling at <3%. The SMA0 pool witnessed a slight deterioration owing to (a) procedural changes (change in billing policy), (b) implementation of tighter MFIN norms alongside (c) a marginal drop in the CE in the key states of WB and Assam. A similar trend is expected to be seen in Q2; however, the management believes that this is not worrisome as these dues would be collected subsequently and roll forward is likely to be avoided. Bandhan’s credit costs are expected to remain on a declining trend, with gradual normalisation in credit costs expected from H2FY26. The management has continued to guide for 2.5% credit costs for FY26.

• Near-term NIM Pressures Inevitable: The (a) shift towards lower-yielding secured portfolios, (b) higher slippages driving interest reversals, and (c) slower repo rate cuts weighed on Bandhan’s margins. However, a 19bps improvement in CoF, aided by SA rate cuts, partially offset the impact. The banks’ endeavour to bring more stability to their portfolio by improving the share of secured portfolio will continue to weigh on margins in the near term. However, the impact of the SA and TD rate cuts is expected to reflect in the CoF from Q3FY26 onwards. Similarly, improving slippages trends should further lend some support to NIMs for the bank. Bandhan continues to make focused efforts towards improving the CASA deposit accretion, which could further support margins. Currently, ~45-48% of the book is floating, and the impact of the rate cut would reflect in the following quarter. The ~52% fixed rate book should provide some cushion to NIMs from Q3FY26 onwards. Thus, NIM pressures will continue in Q2FY26, before margins stabilise from Q3FY26.

• Cautious EEB Growth: The bank continues to remain cautious in pursuing growth in the EEB segment and has guided for a modest 5-7% advances growth in FY26, with a pick-up visible only in the latter half of the year. Bandhan has been facing challenges in growing in the newer states of TN, KA, GJ, and UP, owing to elevated stress and challenges owing to the ordinances. Currently, the majority of the EEB disbursements are towards ETB customers.

Sector Outlook: Positive

Sector Outlook: Positive Company Outlook: Navigating headwinds in the EEB segment while adopting a cautious approach, Bandhan expects advances growth to be 15-17% in FY26, primarily driven by faster growth in the non-EEB segments (26-27% growth in FY26). Margin pressures will continue over the next quarter before stabilising from H2FY26, supported by lower slippages and the downward trajectory of CoF as the rate cuts on TDs and SA get reflected. Asset quality challenges seem to be gradually fading, with the slippage trend expected to improve from H2 onwards, driving nearnormalisation of credit costs. Resultantly, assuming the guided recovery progresses well, we expect a gradual recovery in RoA for Bandhan from 1.5% in FY25 to 1.7-1.8% over FY26-27E.

Current Valuation: 1.1x FY27E ABV; Earlier Valuation: 1.0x FY27E ABV

Current TP: Rs 195/share; Earlier TP: Rs 180/share

Recommendation: We maintain our HOLD recommendation, given limited upside potential.

Financial Performance:

? Operating Performance: Bandhan's disbursements (ex-commercial) de-grew sharply by 17/28% YoY/QoQ, led by weaker trends in the EEB and Mortgage segment, while Retail disbursements grew 17% YoY (QoQ de-growth). Advances growth was weak at 6% YoY/ -3% QoQ, majorly led by a sharp de-growth in MFI book (-15/-7% YoY/QoQ). The non-MFI book showed strong growth of 27% YoY but remained flat QoQ. Deposits growth outpaced credit growth and was healthy at 16/2% YoY/QoQ, led by TDs (+27/9% YoY/QoQ). CASA growth was weak and de-grew by 6/12% YoY/ QoQ, with CASA Ratio declining to 27.1% vs 31.4% QoQ.

? Financial Performance: NII de-grew by 8% YoY and remained flat QoQ. NIMs contracted by 30 bps QoQ due to a decline in yields with the shift in the portfolio mix and slower growth in EEB segments despite a marginal fall in the CoF. Non-interest income growth was strong, supported by strong treasury gains. Opex growth was controlled, growing at 14% YoY and de-grew by 4% QoQ. C-I Ratio stood at 52.1% vs 54.5% QoQ. Credit Costs continued to remain elevated at 3.52% though moderated marginally QoQ from 3.89% QoQ. Earnings growth was weak.

? Asset quality: The collection efficiency for EEB loans was marginally lower at 97.6% vs 97.8% in Q4FY25. Slippages moderated sequentially, with the slippages ratio at 4.6% vs 5.2% QoQ. GNPA/NNPA inched up to 4.96/1.36% vs 4.7/1.28% QoQ. The bank wrote off loans worth Rs 1,047 Cr.

Key Takeaways

• Building a granular deposit franchise: Bandhan’s focus continues to remain on improving the granularity of the deposit franchise. The bank has introduced the “One-Bandhan” campaign to ensure strong mobilisation of deposits and has been able to garner retail deposits to the tune of Rs 4200 Cr in the last 40 days. CASA ratio declined in Q1FY26 owing to seasonality and the rate cut taken by the bank, resulting in a shift towards retail TDs. The bank will continue to focus on CASA deposits to strengthen the deposit mix alongside containing CoF.

Outlook

De-risking the portfolio with the shifting mix towards secured assets should ensure lower volatility in asset quality outcomes. However, it will keep margins under pressure with a meaningful yield differential between EEB and secured products. Continued investments in tech, franchise and scaling of new products will pressure Opex ratios. This transformation is currently weighing on the bank’s profitability and is expected to keep RoA subdued. As asset quality challenges wane and credit costs gradually gravitate towards normalised levels, we expect RoA to improve to 1.7% by FY28E from 1.5% in FY25. We cut our NII estimates by 4-5% over FY26-27E, factoring in sharper margin pressures, and also cut our earnings estimates by 8-12% owing to higher opex growth and slightly higher credit costs. We expect Bandhan to deliver RoA/RoE of 1.6-1.7%/13-14% over FY27-28E, an improvement from RoA/RoE of 1.3/10.3% in FY26E.

Valuation & Recommendation

We value the stock at 1.1x FY27E ABV vs. current valuations of 1.1x FY27E ABV to arrive at a target price of Rs 195/share, implying a limited upside of 4% from CMP. A meaningful re-rating would be driven by sustained growth, delivery and decisive trends indicating improving profitability.

Key Risks to Our Estimates and TP

• The key risk to our estimates remains a slowdown in overall credit momentum, which could potentially derail earnings momentum for the bank.

• Any additional asset quality stress arising from the EEB book could potentially impact our earnings estimates

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