Neutral RBL Bank Ltd For Target Rs.170 by Motilal Oswal Financial Services Ltd
Weak quarter; fresh slippages remain elevated
NIM contracts 14bp QoQ to 4.90%
* RBL Bank (RBK) reported a 3QFY25 PAT of INR326m (53% miss, 86% YoY decline) amid higher-than-expected provisions. The bank prudently made additional provisions of INR4.14b on its JLG loans to take PCR on this portfolio to 85%.
* NII grew 2.5% YoY (down 1.9% QoQ) to INR15.8b (in line) as NIM moderated 14bp QoQ to 4.90% during the quarter.
* Advances grew 13.1% YoY/2.9% QoQ, while deposits declined 1.1% QoQ (up 15.1% YoY). CASA mix moderated to 32.8%. The C/D ratio stood at 84.7%.
* Fresh slippages increased to INR13.1b, mainly due to the JLG book, which was expected given the high SMA in Sep’24. GNPA rose 4bp QoQ to 2.92%, while NNPA improved 26bp QoQ to 0.53%. PCR increased to 82.2%.
* We cut our EPS estimates by 8.6%/10.0% for FY26/FY27 as the asset quality will likely remain suppressed given the stress in the MFI sector. This will also keep margins and credit costs under pressure over the near term. We thus estimate FY26 RoA/RoE at 0.8%/7.9%. Reiterate Neutral with a TP of INR170 (premised on 0.6x Sep’26E ABV).
Business growth muted; asset quality deteriorates
* RBK reported a PAT of INR326m (53% miss, -86% YoY) amid higher-thanexpected provisions. In 9MFY25, earnings declined 23% YoY to INR6.3b, and we estimate 4QFY25 earnings to decline 75% YoY to INR893m.
* NII grew 2.5% YoY (down 1.9% QoQ) to INR15.8b (in line) as NIM moderated 14bp QoQ to 4.90%.
* Other income grew 38% YoY/15.7% QoQ to INR10.7b (broadly in line). Treasury gains stood at INR2b vs. INR1b in 2QFY25. Opex grew 6.6% YoY to INR16.6b (in line). The C/I ratio, thus, improved 170bp QoQ to 62.5%. PPoP increased 30.2% YoY/9.5% QoQ to INR9.97b (in line).
* Provisions accelerated sharply, up 92.3% QoQ (29% higher than MOFSLe at INR11.9b) due to additional provisions of INR4.14b in the JLG book.
* Advances grew 13% YoY (up 2.9% QoQ) to INR904b. Retail books grew 19% YoY (1% QoQ), and wholesale grew 5% YoY (6.2% QoQ). Housing loans rose 5.9% QoQ, and business loans were up 11.6% QoQ. Personal loans declined 5% QoQ, and credit cards dipped 1% QoQ, with the mix of cards standing at 19.1% of loans.
* Deposits inched up 15.1% YoY (down 1.1% QoQ). The CASA ratio moderated 75bp QoQ to 32.8%. Outflows have reduced over the last two quarters; the bank has also been preparing for the new LCR guidelines implementation, which led to a sharp jump in LCR to 143% from 129% in 2QFY25.
* Fresh slippages mounted to INR13.1b, mainly due to the JLG book. GNPA increased 4bp QoQ to 2.92%, while NNPA improved 26bp QoQ to 0.53%. PCR increased to 82.2%. The restructured book declined to 0.32% (from 0.38% in 2QFY25).
* Credit costs were elevated at 139bp due to ~49bp additional provision on the JLG loans.
Highlights from the management commentary
* Lower disbursal in JLG business and interest reversal on slippages have led to a lower NIM.
* Credit cost for FY25 would be higher as the aim is to have negligible NNPA in the unsecured book.
* Collection efficiency in Dec’24 was 98.4% vs. 97.5% in Sep’24; however, Oct and Nov’24 were similar to Sep’24. Expect slippages to be higher even in 4QFY25, although recovery to be better. The improving trend in Dec’24 should be sustained, and the bank will see a material reduction in slippages from 1QFY26.
* In JLG, slippages were elevated; gross slippage was INR5.36b vs. INR2.4b in 2QFY25. This was expected given high SMA 1 &2 balances as of Sep’24. The situation on the ground has been in flux; however, Dec’24 has seen an improvement in collections and recovery of old NPAs.
Valuation and view
RBK reported a large miss in 3Q earnings due to higher-than-expected provisions and a 14bp QoQ moderation in margins. Asset quality ratios deteriorated during the quarter as slippages were high, mainly in the microfinance segment. Deposits too saw a modest growth, with the CASA ratio moderating sequentially and leading to a C/D ratio of 84.7%. Advances grew 3% QoQ, and the comfortable CD ratio will further support credit growth. The credit cost was also high during the quarter due to the JLG book, and the management expects 4Q slippages and credit costs to remain higher. We cut our EPS estimates by 8.6%/10.0% for FY26/FY27 as the asset quality will likely remain suppressed given the stress in the MFI sector. This will also keep margins and credit costs under pressure over the near term. We thus estimate FY26 RoA/RoE at 0.8%/7.9%. Reiterate Neutral with a TP of INR170 (premised on 0.6x Sep’26E ABV).
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