RBL Bank Q2: Investors impressed, analysts not. What should you do?

The company recently appointed a new CEO and MD and analysts advise caution till the transition phase is over

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RBL Bank— a midcap private lender that has been in news in recent months for all the wrong reasons—has reported impressive growth profits and net interest income in the September quarter even as its credit and deposit grew at a slower pace than most of its peers.

While investors have been impressed with RBL Bank’s earnings, analysts are not. The stock, however, has jumped about 10 percent to Rs 136 on October 27. The contradiction begs the question if the buying will sustain.

ICICI Securities, while downgrading the stock to “hold” from “add” with the target at Rs 125, said the stock trades at 0.5 times FY24 expected book value, which reflects lower confidence during this transitioning phase.

Stability concerns

The company recently appointed a new CEO and MD after the lender was hit by some controversies. It is in a transition phase under its new head and analysts advise caution till the change is completed.

“Lack of visible triggers for any further surprise to estimated returns on assets (RoA) is likely to cap valuations at 0.5 times,” said Kunal Shah, banking analyst at ICICI Securities.

“We expect RBL Bank to deliver RoAs of 0.9-1 percent and return on equity (RoE) of 7-9 percent over FY23-FY24.”

As of September 2022, RoA print was still sub-par at 0.75 percent. Slippages were elevated at 5.4 percent. Slippage in banking parlance refers to the rate at which a good loan becomes bad—a higher rate signals bigger worries.

Analysts at HDFC Securities also said since the company’s quarterly numbers were in line with estimates, “portfolio stability continues to remain elusive”.

“We lower our FY23/FY24 earnings forecasts by about 6 percent to factor in higher opex; maintain ‘reduce’ with a revised target price of Rs 113. It also rates the stock at 0.5 times Sep-24 adjusted book value,” it said.

RBL Bank Q2 Result | Profit jumps over 6 times to Rs 202 crore on low base

RBL bank said its loan growth gained traction–at 12.4 percent year on year (YoY)–as unsecured retail credit rebounded, as did wholesale loans. However, deposit growth was muted at 5 percent YoY.

HDFC Securities said deposit mobilisation is likely to increasingly become challenging, given the tight liquidity environment and the bank’s weak deposit franchise.

The bank has said it will continue to invest in branches, technology, and new products, which shall keep operating profit growth in check. It also guided for a continued healthy margin trajectory as growth improves.

In light of the above mentioned concerns, its bigger peers look more attractive. For instance, almost every analyst tracking ICICI Bank has a “buy” rating. HDFC Bank and SBI are also rated highly.

Not all are unimpressed 

Some analysts, however, do find value in RBL Bank as they see improving growth and RoE visibility. Analysts at Emkay Global are among them. They have upgraded the stock’s target price to Rs 160 while retaining the “buy” rating.

“We believe the new MD’s strategy on prioritising management stability, accelerating profitable growth, and NPA recoveries is comforting. The bank’s regulatory compliance should also improve and, thus, reduce the risk of regulatory friction,” said Anand Dama, analyst at Emkay Global.

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