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21-10-2024 05:57 PM | Source: Centrum Broking Ltd
Buy RBL Bank Ltd For Target Rs. 291 By Centrum Broking Ltd

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RBL Bank faced challenges this quarter as asset quality issues impacted key profitability segments. As a result, we are revising our credit growth estimates to a 16% CAGR for FY24- 27, lower than the bank’s guidance of over 18%. We are also adjusting our projected RoA to an average of 1.1% for FY26/27, below management’s target of +1.3%. In light of delays in achieving the expected return profile and the broader sector’s valuation pressures, we are lowering our target P/ABV multiple from 1.25x to 1.0x. Despite RBL’s stock declining over 17% FYTD25 (compared to a ~11% rise in NIFTY and a 20% increase in NIFTY Midcap), we believe concerns around growth, asset quality, and profitability are largely priced in. While both internal and external challenges have caused disruptions, the management’s long-term strategy for achieving diversified and sustainable growth is gradually materializing. Looking ahead, we expect a steady improvement toward a 1.1% RoA, aided by a possible interest rate-cut cycle and recovery in the MFI and credit card segments. With the stock trading at an attractive 1HFY27E P/ABV multiple of 0.7x, we view it as an attractive BUY opportunity. We have revised our estimates to account for progress so far and the impact of strategic initiatives, resulting in earnings adjustments of -18% and -18% for FY25E and FY26E, respectively

Operational performance below our and street estimates

NII came in at Rs16.2bn (+9.5% YoY/-1.0% QoQ) below our estimated NII of Rs16.6bn. NII was impacted by interest reversals from slippages (Rs1,200mn) and lower disbursals in high yielding segments. PPoP came at Rs9.3bn, (up 20.6% YoY/up 19.6% QoQ) owing to sharp uptick in non-interest income during the quarter along with 1% sequential decline in opex. However, PAT came in lower sequentially at Rs2.3bn (-30.0% YoY/-34.0% QoQ)

Retailisation of Gross Advances pending uptick in financials

Gross advances depicted muted growth (poor show for unsecured piece), increasing by mere 1.4% QoQ, reaching Rs879bn. However, retailisation of advances – RA (+24%/+2% YoY/QoQ) continues and as per management the return profile is improving. Similarly, in wholesale book too granularity prevailed with CB growing with decline in corporate banking. We expect this transition to aid NIMs expansion in times to come

Deposits growth impressive; CASA rises (+100bps QoQ)

On the liability front, total deposits grew by +20.3%/+6.5% YoY/QoQ; granular RDs maintained the growth +32%/4% YoY/QoQ respectively. RBL’s CASA ratio also witnessed a rise of 100bps to 33.6% from 32.6% as of 1QFY25. This rise was primarily due to steps taken from bank to strengthen liability franchise. Further, the LDR/LCR ratio remains at comfortable levels of 81%/129%

Valuations provide margin of safety; Key is improvement in asset quality

It is noteworthy that RBL's recent quarterly results have been below management guidance and street expectations impacting valuation multiples. We have revised our estimates to account for progress so far and the impact of strategic initiatives, resulting in earnings adjustments of -18% and -18% for FY25E and FY26E, respectively. Looking ahead, we expect a steady improvement toward a 1.1% RoA, aided by a possible interest rate-cut cycle and recovery in the MFI and credit card segments. With the stock trading at an attractive 1HFY27E P/ABV multiple of 0.7x, we view it as an attractive BUY opportunity. Key monitorable: credit growth pick up, asset quality improvement and improvement in return profile as it approaches the completion of its "Mission 2026" strategy

 

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