Bandhan Bank Q3 FY26: Asset Quality Improves But Profitability Remains Under Pressure

The stock closed at ₹142.65 on January 22, 2026, gaining 3.37% on the day, though it remains significantly below its 52-week high of ₹192.45. Trading 25.88% below that peak, the bank's shares reflect investor caution despite the recent quarterly improvement. With a price-to-book value of 0.93x and a trailing P/E ratio of 19x, Bandhan Bank trades at a discount to most private sector peers, suggesting the market has already priced in considerable uncertainty around its earnings trajectory.

Financial Performance: Sequential Recovery Masks Deeper Challenges

Bandhan Bank's Q3 FY26 results present a tale of two narratives. On a sequential basis, the 83.78% surge in net profit from Q2 FY26's ₹111.87 crores to ₹205.59 crores appears encouraging. However, this recovery merely represents a partial bounce-back from an exceptionally weak prior quarter, and when viewed against the year-ago period, the 51.79% decline underscores persistent profitability headwinds.

Interest earned in Q3 FY26 stood at ₹5,431.24 crores, showing marginal sequential growth of 1.45% but remaining essentially flat year-on-year with a 0.87% decline. More concerning is the net interest income trajectory, which reached ₹2,688.30 crores in the quarter—up 3.85% sequentially but down 4.48% year-on-year. This compression reflects the twin challenges of rising funding costs and moderating loan yields as competition intensifies in the microfinance and small business lending segments.

The bank's net interest margin (NIM) improved slightly to 5.9% in Q3 FY26 from 5.8% in Q2 FY26, offering a glimmer of hope. However, this remains substantially below the 6.9% recorded in Q3 FY25, representing a 100-basis-point erosion over the year. The continued NIM pressure stems from elevated deposit costs in a competitive environment and the need to maintain higher liquidity buffers, which constrains the deployment of funds into higher-yielding assets.

Provisions and contingencies remained elevated at ₹1,154.63 crores in Q3 FY26, virtually unchanged from Q2 FY26's ₹1,152.56 crores but down 16.05% from the year-ago quarter's ₹1,376.01 crores. While the year-on-year reduction signals improving asset quality trends, the absolute level of provisioning continues to consume a significant portion of pre-provision operating profit, limiting the bank's ability to deliver robust bottom-line growth.

Asset Quality: The Silver Lining in an Otherwise Cloudy Picture

The most encouraging aspect of Bandhan Bank's Q3 FY26 performance lies in asset quality improvement. Gross non-performing assets (NPAs) declined sharply to 3.33% from 5.02% in Q2 FY26, marking the lowest level in multiple quarters. Net NPAs similarly improved to 0.99% from 1.37% sequentially, demonstrating effective resolution efforts and tighter underwriting standards.

This asset quality improvement represents a critical inflection point for Bandhan Bank. The microfinance sector, which forms the core of the bank's lending portfolio, has witnessed stress cycles in recent years, particularly in certain geographies. The bank's ability to bring down gross NPAs from 5.02% to 3.33% in a single quarter suggests that the worst of the asset quality cycle may be behind it, though vigilance remains essential given the inherent volatility in microfinance lending.

The provision coverage ratio of 70.8% in Q3 FY26, though marginally lower than 73.7% in the previous quarter, remains adequate to absorb potential shocks. More importantly, the bank's capital adequacy ratio stands at 17.33% (with Tier-1 at 16.5%), providing a comfortable buffer above regulatory requirements and enabling continued loan book expansion without immediate capital infusion needs.

Profitability Challenges: Low ROE Signals Efficiency Concerns

Despite the asset quality improvements, Bandhan Bank's profitability metrics reveal deeper structural challenges. The bank's return on equity (ROE) stands at just 5.00%, significantly below the private sector banking average and well short of the double-digit returns that characterise well-managed banks. This low ROE reflects suboptimal capital efficiency and suggests that the bank is struggling to generate adequate returns on shareholder funds.

Return on assets (ROA) of 0.63% similarly trails industry benchmarks, highlighting that the bank's asset base is not being deployed as productively as peers. The combination of compressed margins, elevated provisioning, and moderate loan growth has created a challenging profitability environment that requires strategic intervention.

Operating profit before provisions and contingencies stood at ₹1,445.01 crores in Q3 FY26, down 28.51% from ₹2,021.36 crores in Q3 FY25. This sharp contraction in pre-provision operating profit constrains the bank's ability to absorb credit costs and limits earnings resilience. The cost-to-income ratio, averaging 41.50% over recent periods, remains elevated for a bank of Bandhan's scale and business model, suggesting scope for operational efficiency improvements.

Deposit Franchise Under Pressure: CASA Ratio Concerns

Bandhan Bank's deposit franchise has shown signs of strain, with the CASA ratio declining to 27.3% in Q3 FY26 from 28.0% in Q2 FY26 and 31.7% in Q3 FY25. This 440-basis-point year-on-year erosion in low-cost deposits forces the bank to rely more heavily on expensive term deposits, directly impacting NIMs and profitability.

Total deposits stood at ₹1,51,212.50 crores as of March 2025, reflecting healthy 11.84% year-on-year growth from ₹1,35,201.99 crores in March 2024. However, the composition shift towards higher-cost deposits poses a structural challenge. In a competitive banking environment where customers have multiple options, maintaining and growing the CASA franchise requires significant branch network investments, digital capabilities, and customer relationship management—areas where Bandhan Bank continues to build scale.

The bank's advance-to-deposit ratio of 89.27% indicates efficient fund deployment, though it leaves limited room for rapid loan book expansion without corresponding deposit mobilisation. Advances stood at ₹1,31,987.32 crores as of March 2025, up 8.96% from ₹1,21,136.78 crores a year earlier—a respectable growth rate but one that needs to be balanced against asset quality considerations.

Peer Comparison: Valuation Discount Reflects Performance Gap

Bandhan Bank's valuation metrics position it at the lower end of the private sector banking spectrum, reflecting market concerns about its profitability trajectory and growth prospects. With a P/E ratio of 18.71x and price-to-book value of 0.93x, the bank trades at a significant discount to most peers, suggesting that investors have priced in considerable execution risk.

The peer comparison reveals Bandhan Bank's fundamental challenge: while its P/E multiple appears reasonable at 18.71x, the sub-par ROE of 5.00% justifies the below-book valuation. Federal Bank and Karur Vysya Bank, with ROEs of 11.09% and 16.45% respectively, command price-to-book multiples of nearly 2x, demonstrating the market's willingness to pay premium valuations for superior capital efficiency.

Bandhan Bank's dividend yield of 1.05%, based on the latest dividend of ₹1.50 per share, offers modest income support but is unlikely to be a primary driver of investor interest. The bank's market capitalisation of ₹22,546 crores positions it as a small-cap player in the banking sector, limiting institutional participation and contributing to higher stock price volatility.

Valuation Analysis: Attractive Entry Point or Value Trap?

At the current price of ₹142.65, Bandhan Bank trades at 0.93x its book value of ₹151.21 per share, representing a 5.66% discount to book. This below-book valuation typically signals one of two scenarios: either the market is overly pessimistic about the bank's prospects, creating a value opportunity, or fundamental challenges justify the discount, making it a potential value trap.

The bank's valuation grade of "EXPENSIVE" despite trading below book value appears paradoxical but reflects the platform's assessment that current earnings quality and growth trajectory don't justify even the discounted valuation. The stock has declined 54.60% over five years whilst the Sensex gained 68.39%, representing a staggering 122.99 percentage points of underperformance—a clear indication of sustained fundamental challenges.

Historical valuation trends show the stock transitioned from "Very Attractive" in July 2025 to "Expensive" by November 2025, reflecting deteriorating fundamentals and earnings disappointments. The 52-week high of ₹192.45 now appears distant, with the stock trading 25.88% below that level and showing limited technical momentum for a sustained recovery.

Shareholding Pattern: Institutional Confidence Wavering

Bandhan Bank's shareholding pattern reveals shifting institutional sentiment, with notable movements across key investor categories in recent quarters. Promoter holding declined to 40.29% in September 2025 from 40.92% in June 2025, though this remains above the regulatory minimum threshold for private banks.

Foreign institutional investor (FII) holding declined to 23.43% from 24.34% sequentially, continuing a pattern of foreign investor exodus that saw FII stakes drop from 26.73% in September 2024. This 3.30 percentage point reduction over four quarters signals waning confidence amongst global investors, likely driven by concerns about profitability and the bank's ability to navigate the evolving microfinance landscape.

Mutual fund holding showed a positive trend, increasing to 8.99% from 7.82% quarter-on-quarter, suggesting some domestic institutional managers see value at current levels. However, with only 29 mutual fund schemes holding the stock, institutional participation remains limited compared to larger private sector banks. Insurance company holdings also edged higher to 7.60%, indicating selective buying by long-term domestic investors.

The absence of promoter pledging provides comfort regarding governance and financial stability. Bandhan Financial Holdings Limited, the primary promoter entity, holds 39.41% with no encumbrance, whilst Bandhan Mutual Fund holds an additional 0.88%, bringing total promoter holding to 40.29%.

Stock Performance: Persistent Underperformance Across Timeframes

Bandhan Bank's stock performance across multiple timeframes paints a concerning picture of sustained underperformance against both the broader market and its sectoral peers. The stock has declined 5.75% over the past year whilst the Sensex gained 7.73%, resulting in negative alpha of 13.48 percentage points. This underperformance becomes more pronounced over longer periods.

The three-year performance reveals a 39.82% decline whilst the Sensex surged 35.77%, representing a staggering 75.59 percentage point underperformance. Over five years, the divergence becomes even more dramatic: the stock has lost 54.60% of its value whilst the Sensex gained 68.39%, resulting in 122.99 percentage points of underperformance. Such persistent and substantial underperformance indicates deep-rooted fundamental challenges rather than temporary cyclical headwinds.

Compared to the private sector banking index, which delivered 15.81% returns over the past year, Bandhan Bank's 5.75% decline represents 21.56 percentage points of sectoral underperformance. This suggests the bank's challenges are company-specific rather than industry-wide, with peers successfully navigating the same operating environment.

The stock's beta of 1.35 indicates higher volatility than the broader market, with a standard deviation of 31.49% compared to the Sensex's 11.25%. This high-beta, high-volatility profile combined with negative returns places the stock in the "HIGH RISK LOW RETURN" category—an unattractive risk-reward proposition for most investors. The negative Sharpe ratio confirms that investors have not been compensated for the elevated risk undertaken.

Technical Analysis: Bearish Trend Dominates

From a technical perspective, Bandhan Bank remains entrenched in a bearish trend that commenced on January 8, 2026, at ₹144.75. The stock trades below all key moving averages—5-day (₹142.06), 20-day (₹144.75), 50-day (₹147.24), 100-day (₹155.34), and 200-day (₹162.98)—indicating sustained selling pressure and lack of buying interest across multiple timeframes.

Technical indicators across weekly and monthly charts flash predominantly bearish signals. The MACD shows bearish divergence on the weekly chart, whilst RSI remains in neutral territory without providing directional conviction. Bollinger Bands indicate bearish momentum on both timeframes, whilst the On-Balance Volume (OBV) trends mildly bearish, suggesting distribution by informed investors.

Key technical levels to monitor include immediate support at ₹128.15 (the 52-week low), which represents a crucial floor. A breach below this level could trigger further downside momentum. On the upside, immediate resistance lies at ₹144.75 (20-day moving average area), followed by major resistance at ₹155.34 (100-day moving average) and strong resistance at ₹162.98 (200-day moving average). The 52-week high of ₹192.45 remains a distant target, requiring a significant fundamental catalyst to achieve.

Delivery volumes showed a sharp spike on January 21, 2026, with 64.89 lakh shares changing hands at 46.94% delivery percentage—135.09% higher than the five-day average. This unusual activity warrants monitoring, as it could signal either institutional accumulation at lower levels or distribution disguised as delivery-based trades.

Investment Thesis: Quality Concerns Outweigh Valuation Appeal

Bandhan Bank's investment thesis presents a complex picture where improving asset quality metrics clash with persistent profitability challenges and structural concerns. The bank's Mojo score of 36/100 places it firmly in SELL territory, reflecting the platform's assessment that risks outweigh potential rewards at current levels.

The quality assessment reveals a bank that has slipped from "Excellent" to "Good" in recent quarters, with the caveat that "valuation parameters have become very low compared to its past." This downgrade reflects concerns about earnings consistency, profitability metrics, and the ability to sustain competitive advantages in an increasingly challenging microfinance environment.

The financial trend classification of "NEGATIVE" captures the essence of the bank's current predicament. Whilst gross NPA at 3.33% represents the lowest level in recent quarters—a genuine positive—this is offset by multiple concerning factors: net profit has fallen 33.0% versus the previous four-quarter average, operating profit before other income has declined, and cash and cash equivalents have reached multi-quarter lows.

Key Strengths: Building Blocks for Potential Recovery

Outlook: What to Watch in Coming Quarters

The path forward for Bandhan Bank requires simultaneous execution on multiple fronts: sustaining the asset quality improvement trajectory, stabilising and eventually expanding net interest margins, rebuilding the CASA franchise, and most critically, demonstrating a credible path to double-digit ROE. The bank's microfinance-centric model, whilst providing access to underserved markets, inherently carries higher volatility and requires exceptional execution to deliver consistent returns.

Management's ability to navigate regulatory changes in the microfinance sector, maintain underwriting discipline during growth phases, and build a diversified liability franchise will determine whether the current valuation discount represents opportunity or value trap. The coming quarters will be crucial in establishing whether Q3 FY26's asset quality improvement marks a genuine inflection point or merely a temporary respite in an ongoing struggle.