Buy RBL Bank Ltd For Target Rs 375 By Emkay Global Financial Services Ltd
RBL Bank continued to pursue accelerated growth while cleaning up portfolio, as it heads toward the transformative deal with Emirates NBD (ENBD). However, lower margins and slightly higher provisions led to earnings miss, with PAT at Rs2.3bn and RoA at 0.5%. Going ahead, the management believes that a lower cost of funds, due to a higher share of equity funding from ENBD, improved debt ratings, and access to NRI fund flows, will enable the bank to strategically shift its loan portfolio toward mortgages and corporates, while also delivering improved RoA/RoRWA. We view the deal as a game changer that could catapult the bank into a different league vs peers, in terms of assetliability scale-up (organic/inorganic) and fee opportunities. It could also position the bank to explore attractive inorganic opportunities in the banking sector, if available. We retain BUY on the stock with an unchanged TP of Rs375, rolled forward to 1.2x FY28E ABV. We have not factored in the capital infusion awaiting clarity on the final stake acquisition by ENBD, which could lead to a further upside
Credit growth accelerates, but margins slip
Credit growth accelerated to 23%/11% QoQ, due to strong momentum in corporate and retail secured businesses, with MFI also contributing positively. Card books continue to drag, a trend seen across banks and reflecting RBL’s strategy of weeding out weak portfolios. Deposit growth accelerated, while the CASA ratio shot up to 34%, as the bank benefited from year-end CA surge. However, decline in loan yields led to a 20bps QoQ decline in margin. We believe credit growth could remain strong in FY27E as well, which, coupled with lower CoF benefiting from equity funding by ENBD, could lead to margin improvement, and thus support the bank’s core profitability.
JLG stress eases, while credit card stress keeps slippages elevated
Gross slippages remained high at Rs9.3 bn (3.2% of loans), driven by continued elevated stress in credit cards. MFI stress continues to ease, but the impact of recent elections, along with the potential El-Nino effects, warrants monitoring. The management also indicated that card stress may continue in 1HFY27, and portfolio consolidation may continue for some time. That said, the bank is largely done with the portfolio clean-up in FY26, which should lead to lower credit costs in FY27 and support RoAs.
We retain BUY on RBL, with TP of Rs375
We largely retain our earnings estimates and expect the bank to deliver a gradual improvement in RoA to 0.9-1.5% over FY27-29E, mainly led by strong growth, better margins, improving operating leverage, and lower credit costs. We retain BUY, with an unchanged TP of Rs375, based on 1.2x FY28E ABV. Key risks: Delays in asset quality recovery in MFI/cards, conclusion of the deal with ENBD, impact of the West Asia crisis on growth and asset quality, and KMP attrition.
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