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Earnings beat aided by provision write-backs

Reported NIMs rose ~10bp QoQ; asset quality improved

* RECL’s 1QFY26 PAT grew ~29% YoY to INR44.5b (~8% beat). 1Q NII grew ~19% YoY to ~INR55.7b (~in line). Other income stood at -INR3.4b (PY: INR3.5b) due to a net loss on fair value changes at INR5.8b.

* Opex declined ~12% YoY to ~INR1.9b and the cost-income ratio stood at ~2.5% (PQ: 3.1% and PY: ~3.4%). The decline in opex was driven by lower CSR and employee expenses during the quarter. PPoP grew ~5% YoY to INR50.3b (~5% miss), primarily because of higher currency translation losses.

* Yields (calc.) rose ~20bp YoY to ~10%, while CoB rose ~5bp QoQ to ~7.2%, resulting in spreads (calc.) rising by ~15bp QoQ to ~2.8%. Previous quarter’s number on yield is not comparable as it included one-off interest income from recovery in KSK Mahanadi.

* Reported NIM for 1QFY26 rose ~10bp QoQ to ~3.74% (PQ: 3.63%).

* Standard asset (Stage 1 and 2) provisions declined ~8bp QoQ to 0.87%. Provisions write-backs stood at INR6.2b (vs. MOFSLe provision of INR1.1b). This translated into annualized credit costs of -11bp (PY: 9bp and PQ: 14bp). Provision write-backs were also driven by the restructuring of TRN Energy and the rating upgrade of three distribution companies (which were downgraded in 4Q) after they submitted their audited annual financial statements.

* During the quarter, TRN Energy, with an outstanding loan amount of ~INR15.1b, was restructured. As part of the resolution, REC wrote off INR3.92b, accompanied by a corresponding reversal in ECL of INR2.7b.

* REC declared an interim dividend of ~INR4.6/share.

Disbursements grew ~36% YoY; loan book grew ~10% YoY

* AUM stood at INR5.85t, up 10.4% YoY and ~3% QoQ. Repayments during the quarter stood at ~29.5% (PQ: 31.3% and PY: ~18%). Disbursements grew ~36% YoY to INR595b.

* Sanctions stood at ~INR1t. Share of renewable in the sanction mix was ~20% and share of infrastructure in the sanction mix was only ~1%.

Asset quality improves; standard asset provisioning declines QoQ

* GS3 improved ~30bp QoQ to ~1.05%, while NS3 improved ~15bp QoQ ~0.25%. PCR on Stage 3 rose ~5pp QoQ to ~77%. Standard asset (Stage 1 and 2) provisions declined ~8bp QoQ to 0.87%.

* The company has ~11 projects (PQ: 12 projects) that are classified as NPAs. Resolutions for all the ~11 NPA projects (PCR: 77%) are being pursued under NCLT.

* CRAR stood at ~24% as of Jun’25.

Valuation and view

* RECL delivered a healthy performance, driven by strong disbursements. However, as per management guidance, overall loan growth remained modest at ~10%. Asset quality continued to improve, aided by the resolution of a stressed account (TRN Energy) during the quarter. Notably, the company reported a ~10bp expansion in NIMs, which came as a positive surprise.

* Key monitorables: 1) management’s outlook on loan growth, 2) progress on assets that are in advanced stages of resolution, 3) the NIM trajectory, given the product mix and competitive intensity, and 4) the proportion of sanctions for infrastructure and private players. We will revisit our estimates after the earnings call.

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