Bandhan Bank margins face deposit-cost pressure despite improving credit-cost recovery

Investment View and Valuation

Motilal Oswal Financial Services’ July 21, 2026 results update described Bandhan Bank’s 1Q FY27 performance as steady, supported by improving credit costs, but highlighted softer business momentum and profitability pressure from funding costs. The broker downgraded the stock to Neutral while retaining its target price of Rs 225, based on a valuation of 1.3 times March 2028 estimated adjusted book value.

The downgrade followed lower return-on-assets guidance and cuts to earnings estimates, despite quarterly profit exceeding the broker’s expectations. The current market price was Rs 209 at the time of the report.

1Q FY27 Financial Performance

Bandhan Bank reported 1Q FY27 profit after tax of Rs 500 crore, up 35 per cent year-on-year but down 6 per cent quarter-on-quarter. Profit was 9 per cent above Motilal Oswal Financial Services’ estimate, primarily because provisions were lower than expected.

Net interest income increased 6 per cent year-on-year and 4.5 per cent sequentially to Rs 2,920 crore, broadly in line with estimates. Net interest margin was unchanged sequentially at 6.2 per cent, supported by a 10 basis point quarter-on-quarter decline in the cost of funds, while loan yields remained flat. However, management expects margins to face pressure as elevated deposit pricing raises funding costs.

Other income of Rs 600 crore was in line with expectations but declined because of softer treasury income and relatively lower business growth. Operating expenses rose 1.9 per cent sequentially to Rs 2,170 crore, including a one-time Rs 60 crore gratuity provision, higher information technology costs and annual employee increments. The cost-to-income ratio increased to 61.5 per cent.

Business Growth and Funding Mix

Gross advances grew 16 per cent year-on-year and 0.8 per cent sequentially to Rs 1,55,500 crore. The non-EEB portfolio expanded 27 per cent year-on-year and 2.6 per cent sequentially, reaching 66 per cent of advances. The EEB book declined 2.4 per cent sequentially as the bank maintained a calibrated stance amid an uncertain external environment.

Retail assets expanded 45 per cent year-on-year, led by commercial vehicle, construction equipment and auto loans. Deposits grew 7 per cent year-on-year but declined 0.9 per cent sequentially to Rs 1,64,900 crore, as management consciously reduced high-cost bulk deposits.

CASA improved 9 basis points sequentially to 29.4 per cent, while CASA plus retail term deposits represented 74 per cent of deposits. The credit-to-deposit ratio was 92 per cent and the liquidity coverage ratio was 140 per cent.

Asset Quality and Credit Costs

Asset quality improved despite seasonally higher first-quarter slippages. Gross NPA declined 12 basis points sequentially to 3.15 per cent, while net NPA fell 4 basis points to 0.93 per cent. The provision coverage ratio remained stable at 71.1 per cent.

Fresh slippages rose marginally to Rs 1,080 crore from Rs 1,030 crore in 4Q FY26, including Rs 600 crore from EEB. Management attributed the increase partly to April holidays and state elections. Credit cost moderated to 1.8 per cent from 2.0 per cent in 4Q FY26, while EEB credit cost declined to 3.3 per cent.

Management said collection efficiency excluding NPA remained healthy at 98.5 per cent. The bank also reported Rs 120 crore of ARC-related cash recovery and expects recoveries to remain robust.

Management Guidance and Earnings Estimates

Management reduced its exit 4Q FY27 return-on-assets guidance to 1.2-1.4 per cent from 1.6-1.8 per cent. The revision reflects an estimated 30 basis point impact on margins and a 10 basis point impact on operating expenses from global uncertainty and competitive deposit pricing.

Management maintained FY27 credit-cost guidance of 1.6-1.8 per cent and guided for 14 per cent loan growth. This includes EEB growth of 5-10 per cent and non-EEB growth above 20 per cent. It also expects a 10-20 basis point improvement in other income from scaling wholesale banking and products such as foreign exchange, letters of credit and trade finance.

Motilal Oswal Financial Services reduced its FY27 and FY28 profit estimates by about 14 per cent and 6 per cent, respectively. The broker forecasts return on assets of 1.0 per cent in FY27 and 1.4 per cent in FY28.

Key Risks to the Thesis

• Sustained deposit-cost inflation and margin compression.
• Higher technology and operating expenses.
• Uncertain macroeconomic conditions.
• Slower EEB growth.