CLSA has identified Bandhan Bank as its top pick in the Indian Financial sector and upgraded rating to high conviction Outperform as it expects it as the best play on the MFI recovery cycle. It has a target price of Rs 220 per share, which implies 55% to the share price from current levels. The brokerage house said that if a reduction of 25 percentage points is assumed in risk-weight on 43% of its microfinance institutions (MFI) loan book, it implies a tier 1 ratio of 15.3%, i.e. a tier 1 accretion of 160 basis points. The lender’s tier 1 ratio as of Q3 FY25 stands at 13.7%.
RBI’s liquidity infusion a big help
The lender of last resort, RBI, was cracking hard on the banking sector with regulatory norms and liquidity tightening. The RBI started sucking out liquidity from the system starting 2023 to 2024. Now, the stance has changed.
“Clearly, good things are happening for the banking sector in a meaningful way,” said CLSA in a research note. RBI’s move to reduce risk-weights should further instil investor confidence for a quick MFI recovery.
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Risk-weights for Microfinance Institutions loans have been reduced from 125% to 100% in most cases, while 75% in some eligible cases as well. This implies a risk-weight decrease of at least 25 percentage points for Bandhan’s and IIB’s MFI loans.
The banking regulator started infusing liquidity in a big chunk, first by slashing repo rate, then bringing down the risk weights on microfinance as well as bank loans on NBFCs.
The good times for the sector got a helping hand from the indefinitely postponed proposed regulatory tightening (LCR norms and provisions on project financing).
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The lender reported a 42% year-on-year decline in its net profit at Rs 426 crore for Q3 FY25 as against Rs 733 crore in the same period a year ago. The fall in net profit was due to higher provisions towards bad loans and higher expenses. Plus, the bank’s microfinance segment continued putting stress on its earnings, with Rs 1196 crore fresh slippages reported during the quarter.
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