Bandhan Bank’s stock price touched Rs 700 per share in 2018, when the bank was delivering a 4.2% return on assets (ROA). Then came a cascade of shocks: IL&FS crisis, Cyclone Fani, and Covid.Between FY20 and FY21, gross non-performing assets (GNPA) ballooned from 1.5% to nearly 7%.By 2023, the RBI had grown uncomfortable with founder-CEO Chandra Shekhar Ghosh. It cut his reappointment from the board-recommended five years to three, and imposed restrictions on remuneration and branch expansion. Subsequently, Ghosh stepped down in April 2024.What’s even more striking is that since the IPO, the bank has provisioned over Rs 36,000 crore for bad loans, one of the largest provisioning numbers for a bank of its size.It’s no surprise, then, that shareholders are frustrated and the stock has severely underperformed.Against this backdrop, something interesting happened in Q3 FY26. Instead of trying to window-dress the numbers, the new management took a bold call: make things worse before they get better.What did Bandhan do?The bank packaged Rs 6,872 crore of bad loans and sold them to asset reconstruction companies (ARCs), specialist firms that buy distressed assets at steep discounts and attempt recoveries.Source: Bandhan Bank Q3 FY26 Results Update and Conference CallThe MD told analysts that he could have reported a much higher profit by keeping GNPA at 5%. Instead, GNPA dropped from 5.0% to 3.3% in a single quarter, at the cost of Rs 528 crore in additional provisions and a one-time gratuity hit of Rs 120 crore.This reduced profits in the quarter but provides a fresh start for the lender going ahead.The profit pictureSource: Bandhan Bank data sheet, investor presentationsPAT swung from Rs 372 crore in Q1 to Rs 112 crore in Q2, before recovering to Rs 206 crore in Q3. Management had said that Q2 would mark the bottom, and so far, that view appears to be playing out.Story continues below this adThe Return on Equity (ROE) recovered from 1.8% to 3.2%, but at this level, it would take over 20 years to double the bank’s book value. At these levels, ROE is below the cost of capital.The path to double-digit ROE runs through reduced credit costs. This is the hit on the income statement a bank takes for the loans that turn bad. Since the March 2025 quarter, credit cost (in %) has been trending downwards and currently stands at 3.3% of total loans.This is encouraging.In the December 2025 conference call, management guided for credit costs of 1.6-1.7% by FY27 exit. If that materialises and net interest margin (NIM) holds around 6%, an ROA of ~1.5% and ROE of 10%+ becomes achievable. Still below the best private banks, but a world apart from today’s 3.2%. Source: Bandhan Bank Investor Presentation Q4FY25The bigger picture: No longer just a microfinance bankDuring its IPO in 2018, over 80% of Bandhan’s loan book was microfinance. That concentration made it a one-trick pony and exposed the bank to severe cyclicality. Today, microfinance’s share has fallen to 34.5% (EEB + SBAL) of total loans.Story continues below this adWholesale banking now accounts for 31% of advances, with 94% of its large corporate book rated A- or above. Source: Bandhan Bank Investor Presentation – Q3FY26The trade-off, however, is that the NIM has declined from 6.7% to 5.9% as lower-yielding secured loans replace high-yielding microfinance. However, the cost of funds is also falling, down 50 bps to 6.7%. The CFO expects another 35-50 bps benefit as expensive deposits reprice.In this context, the legacy microfinance book, which has been the Achilles heel for Bandhan Bank, has proved to be a boon.Under the surface: The green shootsThe legacy book (microfinance) is still bleeding, but the new book is pristine. Collection efficiency (CE) on current loans stands at 99.6% as of December 2025. Housing finance remains a watch item due to legacy GRUH Finance underwriting issues, though fixes are underway.Source: Bandhan Bank conference calls, data sheet, Q4 FY25 to Q3 FY26Another leading indicator of reducing stress in the microfinance (Emerging Entrepreneurs Book) segment is that the percentage of loans becoming overdue by more than 30 days is decreasing. This is called the SMA-0 bucket. If this trend continues, GNPA should reduce significantly. Source: Bandhan Bank Investor Presentation – Q3FY26This is likely behind management’s guidance for an overall credit cost of 1.6-1.7% (currently 3.3%) by FY27 exit.The management questionAfter Ghosh’s exit, Partha Pratim Sengupta took charge in November 2024 with a three-year mandate. Every strategic shift described above carries his imprint. Given the tough clean-up decisions, including large write-offs, the market appears cautiously hopeful that this turnaround is real.Story continues below this adThe RBI’s nominee director, appointed ahead of the CEO transition, has been extended until June 2026. Whether the regulator gives another extension will be a key governance signal; however, so far, there is no indication that this could get extended further.Valuation and outlookThe stock trades at roughly 1.2x book value, reflecting low confidence in recovery. However, seen in the context of current price movement, it suggests that the market is quickly re-adjusting to new expectations. Source: http://www.screener.inIf credit costs normalise to 1.6-1.7% and NIM stabilises around 6%, ROE of 12%+ by FY27 exit is achievable. As these numbers inch closer to reality, the stock could potentially re-rate.The risks include CASA erosion, housing finance book quality, and a regime change in West Bengal (which accounts for 42% of the MFI book). At a capital adequacy of 17.8%, Bandhan Bank ranks amongst the lowest microfinance-exposed entities, which could mean it will have to raise growth capital soon.Story continues below this adThis is a potential turnaround in a sector that is itself showing signs of reversal. The next two quarters should reveal whether the management can deliver on the promise.Note: We have relied on data from http://www.Screener.in and http://www.tijorifinance.com throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.Rahul Rao has helped conduct financial literacy programmes for over 1,50,000 investors. He also worked at an AIF, focusing on small and mid-cap opportunities.Disclosure: The writer or his dependents do not hold shares in the securities/stocks/bonds discussed in the article.Story continues below this adThe website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.