Buy RBL Bank Ltd for the Target Rs. 350 by Motilal Oswal Financial Services Ltd
Emirates NBD deal to unfold new growth opportunities
NII in line; higher provisions lead to slight earnings miss
* RBL Bank (RBK) reported 2QFY26 PAT of INR1.8b (5% miss), down 20% YoY, due to higher-than-expected provisions and lower other income.
* Emirates will invest USD3b to acquire a 60% stake in RBK through a preferential issue at INR280 per share, triggering an open offer for an additional 26% stake, potentially increasing its holding to 74% after the transaction, subject to regulatory and shareholder approvals. This strategic investment will enhance capital and strengthen ties between India and the UAE, and increase RBK's net worth to INR420-445b.
* This capital infusion will help RBK scale its existing business and expand into non-resident, trade, and cross-border corporate banking, leveraging Emirates’ global presence and technology integration. With a 50% board representation but no management control for Emirates NBD, the deal aims to accelerate RBK’s growth through organic and inorganic opportunities while maintaining core operations and enhancing shareholder value.
* NII grew 4.7% QoQ (down 4% YoY) to INR15.5b (in line). NIM expanded by 1bp QoQ to 4.51%.
* Fresh slippages moderated to INR9.25b from INR10.6b in 1QFY26. GNPA ratio improved by 46bp QoQ to 2.32%, while NNPA ratio increased by 12bp QoQ to 0.57%. PCR moderated to 75.9%.
* Given the fund infusion from Emirates NBD expected in 1QFY27, we increase our earnings estimates by 19%/17% for FY27/28E. We estimate FY27/28E RoA of 1.2% /1.4%. Reiterate Buy with a TP of INR350 (premised on 1.3x FY27E BV).
Advances growth healthy; margins expand 1bp QoQ
* RBK reported 2QFY26 PAT of INR1.8b (5% miss, 20% YoY decline), due to higher provisions and lower other income.
* NII grew 4.7% QoQ (down 4% YoY) to INR15.5b (in line). NIM expanded by 1bp QoQ to 4.51%. RBK expects to see ~4.8% of exit NIMs in 4QFY26.
* Other income was down 13% QoQ and flat YoY at INR9.3b (7% miss) as it is impacted by INR440mn on account of MTM on unlisted equities. Treasury gains stood at INR67m vs. INR2.8b in 1QFY26. Total revenue thus declined 2% YoY (3% QoQ) to INR24.8b (in line). Opex rose 8% YoY to INR17.6b (4% lower than MOFSLe). The C/I ratio thus moderated 177bp QoQ to 70.7%.
? PPoP declined 20% YoY (up 3.6% QoQ) to INR7.3b (6% beat). Provisions stood at INR5b vs. MOFSLe of INR4.4b.
* Advances grew 14.4% YoY (up 6.5% QoQ) to INR1t. Retail book grew 9.9% YoY (6.2% QoQ) and wholesale grew 22% YoY (6.9% QoQ). Business loans grew 15.7% QoQ and housing loans grew 1.7% QoQ. Personal loans declined 6% QoQ, and credit cards were flat QoQ, with the mix of cards standing at 17.1% of loans. MFI book grew 8.3% QoQ with the mix at 5.9%.
* Deposits grew 8.1% YoY/3.5% QoQ. CASA mix moderated 62bp QoQ to 31.9%. The C/D ratio, thus, increased to 86.2%.
* Fresh slippages moderated to INR9.25b vs. INR10.6b in 1Q. GNPA ratio improved by 46bp QoQ to 2.32%. NNPA ratio increased by 12bp QoQ to 0.57%. PCR decline to 75.9%. 2Q credit costs stood at 54bp vs. 50bp in 1Q.
Highlights from the management commentary
* Emirates stake in RBK: On paper the stake can go up to 86% (60% infusion+ 26% open offer), hence the open offer will be done first, and depending on how much is offered, the stake sale will be scaled down to keep the maximum stake at 74%.
* The corporate write-off of INR1.4b is a technical write-off and is already 100% provided for.
* Slippages have inched up in credit cards and PL, which will take a couple of quarters to normalize.
* RBK holds a 5% stake in Utkarsh SFB Holdco. Due to ECL, holdco reported a decline in net worth, leading to a one-off loss of INR440m. The bank does not expect that to recur.
* NIM trajectory will improve by 10-15bp every quarter. The bank expects NIMs of 4.7-4.8% by 4QFY26 end.
Valuation and view
RBK reported a slight earnings miss due to higher provisions and lower other income even as margins expanded by 1bp QoQ. Business growth was steady, with advances growing 6.5% QoQ. The bank is looking to grow unsecured business going forward as macro stress eases. Moreover, the comfortable CD ratio will further support credit growth. GNPA ratio improved, whereas NNPA ratio deteriorated. Slippages moderated but remained at elevated levels. Emirates will invest USD3b for a 60% stake in RBK, triggering an open offer to acquire up to 26%. This will enable RBK to scale up its operations and expand into cross-border and NR business. The deal, subject to regulatory and shareholder approvals, brings strategic capital and global synergy without changing senior management. Given the fund infusion from Emirates NBD expected in 1QFY27, we increase our earnings estimates by 19%/17% for FY27/28E. We estimate FY27/28E RoA of 1.2%/1.4%. Reiterate BUY with a TP of INR350 (premised on 1.3x FY27E BV).
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