Bandhan Bank stock price target raised to INR210 by UBS on improving MFI trends

UBS raised its price target on Bandhan Bank to INR210.00 from INR165.00, maintaining a Neutral rating, citing gradual improvements in microfinance industry Portfolio at Risk (PAR) 1-90, which decreased to 3.9% in May. Despite this, concerns persist regarding rising PAR 90+ and Bandhan Bank's own higher Q4FY25 PAR 1-90, suggesting only gradual declines in slippages. UBS anticipates Net Interest Margin pressure from a sustained shift toward lower-yield non-MFI loans, limiting further re-rating of the stock—which has rallied 24% recently—due to ongoing asset quality concerns and a potentially lower growth/Return on Assets profile.

Analysis

UBS has raised its price target for Bandhan Bank to INR 210.00 from INR 165.00 but maintained a Neutral rating, reflecting a mixed outlook. The upgrade is underpinned by a gradual improvement in the microfinance industry's short-term asset quality, with Portfolio at Risk (PAR) for 1-90 days declining by 100 basis points since December to 3.9% in May. However, this positive is largely offset by a deteriorating long-term trend, as PAR 90+ continues to rise, increasing by 330 basis points over the same period. For Bandhan Bank specifically, its Q4FY25 PAR 1-90 of 3.3% is an improvement from its Q3 peak but remains elevated compared to the 2.0% recorded in Q4FY24. UBS anticipates a slow reduction in slippages, citing a high Special Mention Account (SMA) book and a forward flow rate of 64% in Q4. While the bank may benefit from a potential rate cut cycle due to its liability structure, persistent pressure on Net Interest Margin (NIM) is expected from the strategic shift toward lower-yield non-MFI loans. Following a 24% stock price increase in the last three months, UBS suggests further re-rating is limited by these asset quality concerns and a moderating growth and Return on Assets profile.

Key Decisions for Investors

• Given the stock's recent 24% appreciation and the Neutral rating, investors holding the stock could consider the increased price target a favorable level to trim positions, as near-term upside appears capped by asset quality concerns.
• Prospective investors should closely monitor the trajectory of PAR 90+ delinquencies and the bank's forward flow rates, as these metrics represent the primary risks to the bank's earnings and valuation.
• Long-term investors must factor in the structural pressure on Net Interest Margin and Return on Assets resulting from the bank's strategic shift away from its core, higher-yield microfinance loan book.