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RBL delivered a strong performance in 2QFY24, aligning well with our expectations. Notably, NII saw robust growth, increasing by 26% YoY and 4% QoQ, even in a challenging quarter marked by rising cost of funds, primarily due to a shift toward a more retail-oriented advances growth. The CTI ratio was impressive at 65%, indicating a 270bps sequential improvement. As a result, PPoP exhibited remarkable growth (+54%/12% YoY/QoQ), outpacing our expectations by 8%. Additionally, asset quality improved, with lower fresh slippages, as GNPA decreased to 3.1% from 3.2% in 1QFY24. During the quarter, the bank received a tax write-back of Rs2.98bn, which was prudently utilized to create a 100bps contingent buffer on Credit Card and Microfinance Advances, enhancing reserves and fortifying the balance sheet. We believe that the positive impact of strategy changes, particularly the introduction of in-house and digitally driven retail products, is yet to be fully reflected in the current market valuation. Consequently, we view RBL Bank as a strong candidate for a re- rating. Our valuation places a TP of Rs339, based on 1.25 x the ABV for the 1HFY26E.

Earnings beat, thanks to higher yielding revenue mix and lower opex

RBL’s earnings performance in the 2QFY24 was better than our expectations. NII came in at Rs14.8bn, (+25.6% YoY/+3.7% QoQ) exceeded our estimated NII of Rs14.5bn even in a challenging quarter marked by rising cost of funds, primarily due to better product mix – RA (+35%/+8% YoY/QoQ) and CB (+17%/+11% YoY/QoQ). PPoP came at Rs7.7bn, (+53.6% YoY/11.8% QoQ) beat our estimates due to lower CTI (65% sequential improvement of 270bps).

Retailisation of Gross Advances further strengthened during the quarter

Gross advances showed robust growth, increasing by an impressive +22% YoY/+4.4% QoQ, reaching Rs763bn. Further, this growth was driven by retailisation of advances – RA (+35%/+8% YoY/QoQ). Moreover, in wholesale book too granularity prevailed with CB growing and QoQ decline in corporate banking.

Deposits grew by 13% led by Retail TDs; CASA under pressure (-150bps QoQ)

On the liability front, total deposits grew by +13%/+4.8% YoY/QoQ; however granular RDs grew +19%/4.1% YoY/QoQ respectively. RBL, similar to its peers, continues to experience pressure on CASA (35.8% from 37.3% as of 1QFY24). While the CDR ratio improved sequentially to 85.1% from 85.4%, it remains at comfortable levels.

Valuations provide margin of safety; BUY for 39% 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 (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. Moreover, the potential for further RoA improvements becomes evident as the proportion of retail loans exceeds initial expectations, offering a key trigger for a market re-rating. The bank's robust retail loan growth, notably outperforming the industry (35% in 2QFY24), is expected to continue without compromising asset quality.

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