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RBL stock price has witnessed significant decline (-11% in last 5days) primarily led by broader market correction in mid-cap space (-5% in last 5days). Pertinently, this decline is after posting above our/street expectations 2QFY24 results which we feel offers an attractive investment opportunity. We would like to highlight that the Bank has made a significant turnaround, emerging from a risk-off phase that led to muted growth over FY20-23 to high growth phase. The bank has posted impressive advances growth of in +21% YoY in 1HFY24, marking a positive change driven by a retail focus (+35% YoY). The change in management in June 2022 was a turning point for RBL Bank. We like the new management strategy with focus on retail secured loans, leveraging existing infrastructure, retaining talent through internal promotions, and improved regulatory compliance. These efforts resulted in the highest-ever annual and quarterly profits in FY23 and 2QFY24, along with a robust CRAR of 17.1%. We believe the bank's strong retail loan growth is expected to continue without compromising asset quality, making RBL Bank a compelling investment with the potential for substantial upside. Considering these factors, RBL Bank remains a strong BUY, with a target price of Rs339, representing a potential upside of 57%.

Diversifying loan book via increased product offerings

On the asset side, RBL has diversified its offerings by introducing new retail products, resulting in the retail portfolio accounting for 58% of advances (vs. 54% in 1QFY24) and achieving remarkable growth of 35% in 1HFY24. Even in the wholesale lending segment, the bank is focusing on granular growth, with commercial banking (+17% YoY) outperforming corporate banking growth (+3.3% YoY). Therefore, we believe RBL would witness a NIMs expansion in FY24 unlike its peers.

Leveraging touchpoints to drive granular liabilities

Similarly, on the liability side, RBL Bank's retailisation efforts have paid off, with retail deposits now constituting a 44% of total deposits and experiencing a strong 19% YoY growth in 1HFY24 vs. 13% YoY growth on total deposits front. RBL, similar to its peers, continues to experience pressure on CASA (35.8% from 37.3% as of 1QFY24). The CDR ratio improved sequentially to 85.1% from 85.4%, it remains at comfortable levels.

Focus on asset quality yielding results

Furthermore, the bank has made notable improvements in asset quality, with GNPA and NNPA ratios reducing to 3.12% and 0.78%, respectively, as of 2QFY24. Additionally, the bank maintains adequate liquidity with a CRAR of 17.1%. Further, we appreciate the management efforts of strengthening the balance sheet by building the buffer in recent quarter (100bps created on Credit Card & Microfinance Advances).

Valuations provide margin of safety; BUY for 57% upside

RBL is poised for strong earnings, and a shift in its loan portfolio which could potentially drive even higher performance. With a substantial increase in the share of retail loans (currently 58% compared to 54% in 1QFY24) and improving NIMs resulting from the reduction in the wholesale loan book, we anticipate RBL to achieve a RoA of 1.2% by FY26E, a significant jump from 0.8% in FY23. The bank's robust retail loan growth, notably outperforming the industry (35% in 2QFY24), is expected to continue without compromising asset quality. In terms of valuation, RBL Bank offers a margin of safety with a PB ratio of 0.8x and a PE ratio of 7x for 1HFY26

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