Bandhan Bank drops 14% as margin pressure hits profitability outlook
The Indian lender's shares plummeted after management slashed return-on-assets guidance for the year, signaling that funding costs and competitive deposit pressures will outweigh improvements in asset quality.
Bandhan Bank shares fell as much as 14.3% to ₹178.75 in early Mumbai trading on Wednesday after the lender slashed its annual profitability targets. The selloff came despite the bank posting a 34.8% year-on-year increase in first-quarter net profit to ₹501.6 crore.
Management lowered its exit return-on-assets guidance for FY27 to a range of 1.2% to 1.4%, down sharply from a previous estimate of 1.6% to 1.8%. The bank cited anticipated pressure on net interest margins and operating expenses from uncertain external factors and intensifying competition for deposits.
The quarterly results themselves painted a picture of steady progress on asset quality. The gross non-performing asset ratio improved sequentially to 3.15% from 3.27%, while the net NPA ratio fell to 0.93%. Provisions dropped significantly to ₹682.5 crore from ₹1,147 crore a year earlier, helping to drive the profit increase.
However, the margin warning reflects a growing imbalance in the bank's balance sheet that concerns investors. While loan growth was robust at 18% year-on-year, driven largely by non-microfinance portfolios, deposit growth lagged at just 7%. This pushed the credit-deposit ratio up to a tight 92%, forcing the bank to rely on more expensive funding.
Brokerages responded to the weaker guidance with a wave of earnings downgrades. Motilal Oswal Financial Services cut its FY27 and FY28 estimates by roughly 14% and 6% respectively, downgrading the stock to "Neutral" with a target of ₹225. It now expects return-on-assets to reach just 1.0% this year and 1.4% the next.
Nuvama Institutional Equities noted that while microfinance recovery is on track, higher funding costs tied to West-Asia conflicts and a shift toward secured retail lending will drag on margins. It reduced earnings estimates for FY27 through FY29 by 11% to 14%, downgrading its rating to "Hold" and cutting its price target to ₹230 from ₹250.
JM Financial took a less severe approach, trimming earnings per share estimates by 2% to 3% but retaining an "Add" rating. The firm raised its target price to ₹220 from ₹200, citing a valuation rollover to 1.2 times FY28 estimated price-to-book, even as it acknowledged that margin expansion benefits are being pushed out.
