Bandhan Bank shares slump 19% after mgt cuts FY27 RoA guidance

Shares of Bandhan Bank slumped nearly 19% on Wednesday, emerging as one of the biggest losers on the bourses after the private lender cut its profitability guidance for FY27, overshadowing an otherwise steady set of first-quarter earnings.

Reacting to the announcement, Bandhan Bank shares tumbled by as much as 18.67% to ₹169.65 on the BSE, after closing at ₹208.60 in the previous session. The stock witnessed heavy trading volumes, with nearly 50 lakh shares changing hands, compared with the two-week average of 5.56 lakh shares.

The sharp decline came despite the bank reporting a stable quarterly performance, as investor sentiment was dented by management's weaker profitability outlook and expectations of prolonged pressure on margins.

Cuts FY27 RoA guidance to 1.2-1.4% from 1.6-1.8%

Bandhan Bank posted a 34.8% year-on-year rise in net profit to ₹501.7 crore in the June quarter, compared with ₹372 crore in the corresponding period last year. Net interest income (NII), the difference between interest earned and interest expended, rose 5.9% to ₹2,921 crore from ₹2,757 crore a year earlier.

Net interest margin (NIM) remained stable at 6.2%, while asset quality continued to improve, supported by lower slippages in its Emerging Entrepreneurs Business (EEB), formerly the microfinance portfolio. The lender also maintained its FY27 credit growth guidance of around 14% and retained its credit cost guidance of 1.6-1.8%.

However, the key disappointment was the management's decision to lower its FY27 exit return on assets (RoA) guidance to 1.2-1.4% from the earlier target of 1.6-1.8%.

The bank attributed the revision to a challenging external environment, higher funding costs, intense competition for deposits, and elevated operating expenses. Management indicated that around 30 basis points of the reduction stemmed from pressure on net interest margins, while another 10 basis points reflected higher operating expenses arising from technology investments, franchise expansion, annual wage revisions, and employee-related costs.

The revised guidance suggests that the bank's profitability recovery will take longer than previously expected, prompting investors to reassess earnings expectations.

Brokerages cut earnings estimates

Brokerages echoed these concerns, with several cutting earnings estimates despite acknowledging improving asset quality trends.

ICICI Securities described the June-quarter performance as reasonable but said the guidance cut was noteworthy, especially at a time when stress in the microfinance segment has begun to ease.

"The 40 bps cut in the guided RoA is attributed to NIM (which now looks stable) and a 10 bps impact on opex. Importantly, there is no change in credit cost guidance as slippages are expected to be broadly stable or improve," it said.

The brokerage observed that while the bank continues to expect healthy loan growth and stable credit costs, margins are now likely to remain flat instead of improving as earlier anticipated. Improved fee income and benign credit costs are expected to support RoA, but only within the revised guidance range.

JM Financial termed the quarter weak, noting that pre-provision operating profit declined 19% year-on-year and missed its estimates due to elevated operating expenses and weaker non-interest income.

While asset quality remained stable and credit costs moderated, the brokerage said the earnings recovery would likely be slower than previously anticipated, as margin expansion and operating leverage benefits have been pushed out. It reduced its FY27 and FY28 earnings estimates by 2-3% while maintaining an 'ADD' rating with a revised target price of ₹220.

Motilal Oswal was more cautious, downgrading the stock to 'Neutral' after cutting its FY27 and FY28 earnings estimates by 14% and 6%, respectively. The brokerage expects the bank to deliver an RoA of around 1% in FY27 and 1.4% in FY28, substantially below its earlier expectations. It said rising funding costs and intense competition for deposits are likely to keep margins under pressure, while higher operating expenses will continue to weigh on profitability.

Emkay Global, however, retained its 'Buy' rating and raised its target price to ₹240 from ₹220. The brokerage said the bank's asset quality continues to improve and loan growth remains healthy, particularly in the non-microfinance portfolio.

While acknowledging that NIMs are likely to moderate due to rising deposit costs, Emkay believes Bandhan Bank remains on a gradual recovery path and expects RoA to improve steadily over the next few years.

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