Buy RBL Bank for the Target Rs 425 by Motilal Oswal Financial Services Ltd
Weak NII offset by lower opex; asset quality improves NIMs contract 28bp QoQ to 4.13%
* RBL Bank (RBK) reported 1QFY27 PAT of INR2.5b (39% beat, up 10% QoQ/ 27% YoY), aided by lower opex intensity and slightly lower-than-expected provisioning.
* NII was down 1% QoQ/up 12% YoY at INR16.5b (6% miss). NIMs declined 28bp QoQ due to a 43bp QoQ decline in yields on advances and a 14bp QoQ rise in cost of funds. The bank expects NIMs to expand by 30-40bp from 2QFY27 onward with full benefits from capital infusion.
* Opex fell by 8% YoY/5% QoQ (12% beat), while other income at INR9.6b was a miss. C/I ratio, thus, came in at 64.7% (vs. 65.1% in 4QFY27).
* Advances grew 23% YoY/2% QoQ, while deposits were down 10% QoQ/up 11% YoY as the bank chose not to renew certain wholesale deposits. CASA mix declined to 30.0% vs. 33.6.% in 4QFY26.
* Fresh slippages increased slightly to INR9.4b. GNPA/NNPA ratios, however, improved by 15bp/2bp QoQ to 1.30%/0.37%. Credit costs came in lower at 2.2% (annualized), while PCR declined marginally to 72.0%.
* We tweak our FY27/28 earnings estimates, factoring in operating leverage, offset by relatively softer gains in NIMs. We estimate RoA to reflate to ~1.5% by FY28E. Reiterate BUY with a TP of INR425 (1.4x Mar’28E ABV).
Guides for 1%+ FY27-exit RoA; credit cost to improve from 2HFY27 onward
* RBK reported 1Q PAT of INR2.5b (up 10% QoQ/27% YoY), aided by lower opex and lower-than-expected provisioning.
* NII was down 1% QoQ/up 12% YoY at INR16.5b. NIMs declined 28bp QoQ in 1Q to 4.13% due to a 43bp QoQ decline in yields on advances and a 14bp QoQ rise in cost of funds. The bank expects NIMs to expand by 30-40bp in 2Q, with full gains from capital infusion reflecting in earnings.
* Other income was down 1% QoQ/up 12% YoY at INR9.6b, with softer core fee income growth of 16% YoY (down 13% QoQ) to INR9.2b. Treasury income was modest too. Total revenue thus was down 5% QoQ/up 2% YoY at INR26.1b. Opex was down 8% YoY/5% QoQ at INR16.9b. C/I ratio was largely flat at 64.7%.
* PPoP grew 31% YoY/fell 3% QoQ to INR9.2b (6% beat), led by lower opex.
* Provisions declined but remained high at INR6b, largely led by credit card, MFI and PL. Credit cost is expected to improve meaningfully starting 2HFY27, with moderation in credit card slippages.
* Advances grew 23% YoY/2% QoQ to INR1.16t. Retail advances grew 13% YoY/fell 4% QoQ, while wholesale advances rose 38% YoY/10% QoQ.
* Deposits grew 11% YoY/fell 11% QoQ to INR1.25t, with the bank shedding bulk deposits. CASA mix declined by 361bp QoQ to 30.0%. C/D ratio inched up to 93.1%.
* Fresh slippages increased slightly to INR9.4b. GNPA/NNPA ratios improved by 15bp/2bp QoQ to 1.30%/0.37%. PCR declined marginally to 72.0%.
* CRAR rose to 33.3% with CET1 at 32.2% after the Emirates NBD capital infusion in 1Q, with net worth increasing to INR429b.
Valuation and view
RBK reported a mixed quarter as NII miss was largely offset by lower-than-expected opex intensity driving an earnings beat. NIMs declined sharply by 28bp QoQ, impacted by yield compression and a higher cost of funds. However, NIMs are expected to improve 30-40bp in the near term and structurally over the medium term, aided by lower funding costs on the back of credit rating upgrades and replacement of highcost borrowings. Credit growth remained strong, with the bank expected to maintain its 20%+ growth momentum, led by wholesale growth of 20-25% and MFI/unsecured growth of 15-20%. On asset quality, slippages are expected to moderate after 1HFY27, with a reduction in slippages in credit card book and higher secured asset mix, which shall gradually support a reduction in credit costs toward ~1.5% in the medium term. We tweak our FY27/28 earnings estimates, factoring in operating leverage, offset by relatively softer gains in NIMs. We estimate RoA to reflate to ~1.5% by FY28E. Reiterate BUY with a TP of INR425 (1.4x Mar’28E ABV).
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