Buy RBL Bank Ltd for the Target Rs 475 by Emkay Global Financial Services Ltd
RBL’s 2Q PAT stood at Rs4.8bn/ROA at 0.9%, which is 4% below our estimates largely due to higher provisions (32% above our estimate). However, the bank continues to report accelerated growth driven by broad-based growth along with FCNR B leverage, while its cards portfolio is muted. RBL carries surplus liquidity, which it plans to deploy into wholesale and secured retail lending. Margins are expected to moderate in 3QFY27 due to the full-quarter impact of FCNR(B)-led leverage and surplus funds parked in lower-yielding assets, and partly offset by repo rate hike benefits, before recovering gradually in 4QFY27. Asset quality continued to improve, with gross slippages at 2.5% of loans, albeit still elevated. So far, the management has not seen any stress from the rural business or the Middle East conflict, although it remains watchful. However, the management expects card slippages to stabilize at ~Rs4bn in 3Q/4QFY27. We tweak our earnings estimates and retain BUY on RBL, while raising TP by 10.5% to Rs475 from Rs430 (roll forward to 1.6x Sep-28E ABV).
Credit growth accelerates; margin recovery likely in 4QFY27
Credit growth accelerated to ~42% yoy/~22% qoq, driven by broad-based growth across segments along with FCNR B leverage, while the cards portfolio remained muted. The bank continues to hold surplus liquidity, which was partly utilized to retire high-cost borrowings and bulk TDs, with the rest deployed in short-term investments and wholesale loans. Going forward, the bank plans to deploy this liquidity into wholesale lending and secured retail expansion. Management expects credit card balances to stabilize in the coming quarter and retrace positive growth over the next 6M. Margins are likely to decline modestly next quarter due to the full-quarter impact of FCNR(B)-led leverage and surplus liquidity parked in lower-yielding assets, partly offset by repo rate hike benefits before likely gradually recovering in 4Q as funds are deployed into advances
Asset quality improves; card slippages expected to stabilize in 2HFY27
Gross slippages improved (albeit remaining elevated) to Rs8.9bn (2.5% of loans) which, coupled with higher write-off, led to a 28bps improvement in GNPA at 1.0%. However, slippages for cards has improved (though still elevated), while MFI slippages increased qoq. Further, Management indicated Retail collections, including rural businesses, were stable, with no material impact from the Middle East conflict so far. Management expects card slippages to stabilize at ~Rs4bn in 3Q/4QFY27, with credit costs declining to ~6% from a low double-digit level.
We retain BUY on RBL; raise TP by 10.5% to Rs475
We tweak our earnings estimates and expect the bank to deliver a gradual improvement in ROA to 1-1.3% over FY27-29E. We retain BUY, while revising up our TP by 10.5% to Rs475 from Rs430, based on 1.6x Sep-28E ABV. Key risks: Delay in asset quality recovery in MFI/cards, slower business growth, and KMP attrition.
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