Focusing On Secured Lending And Operational Efficiency Will Strengthen Future Earnings Resilience

Key Takeaways

• Focus on secured retail advances and deposit growth indicates strong future revenue and stable funding, supporting earnings and lowering cost of funds.
  
• Improved collection efficiency and consolidation efforts suggest enhanced net margins and operational leverage, boosting earnings resilience and return on equity.
  
• RBL Bank's financial stability is at risk due to macroeconomic challenges, asset quality concerns, increased competition, and higher provisioning impacts on profitability.

Catalysts

Operates as a scheduled commercial bank in India.

• RBL Bank's focus on growing its secured retail advances by 38% Y-o-Y, particularly in mortgages and business banking, suggests strong future revenue growth from higher-yielding, lower-risk segments.
  
• Improvement in collection efficiency, especially in microfinance segments, and proactive risk mitigation, such as CGFMU cover, are expected to enhance net margins by reducing slippages and credit costs.
  
• The bank's strategic emphasis on granular deposit growth (20% Y-o-Y), alongside growing CASA ratios, points towards a more stable funding base, which should support future earnings through lower cost of funds.
  
• RBL Bank's consolidation efforts to drive operating synergies and cost efficiencies across its business verticals reflect a strategy likely to increase net margins through improved operational leverage.
  
• With capital buffers maintained and an expectation of normalized provisioning after tackling current asset quality issues, RBL Bank is poised to enhance future earnings resilience and potentially improve its return on equity over time.

RBL Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RBL Bank's revenue will grow by 22.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.1% today to 16.7% in 3 years time.
• Analysts expect earnings to reach ₹23.2 billion (and earnings per share of ₹38.21) by about February 2028, up from ₹9.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, down from 10.2x today. This future PE is lower than the current PE for the IN Banks industry at 10.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.22%, as per the Simply Wall St company report.

RBL Bank Future Earnings Per Share Growth

Risks

• The macroeconomic environment presents challenges such as pressure on the rupee and tight liquidity conditions, which could impact RBL Bank's revenue growth and overall financial stability.
  
• Asset quality remains a concern due to elevated slippages in the unsecured segments, particularly in the Joint Liability Group (JLG) and credit card portfolios, which could negatively affect net margins.
  
• The bank is facing increased competition in the deposit market, which could pressure revenue growth if they need to offer higher interest rates to attract deposits.
  
• The institution is experiencing higher provisioning due to asset quality issues, which might impact profitability and earnings if the trend continues.
  
• The bank’s ability to manage credit costs is critical, especially with uncertainty in unsecured lending. If this is not managed well, it could affect their net margins and earnings.

Valuation

• The analysts have a consensus price target of ₹171.95 for RBL Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹250.0, and the most bearish reporting a price target of just ₹120.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹139.0 billion, earnings will come to ₹23.2 billion, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of ₹166.16, the analyst's price target of ₹171.95 is 3.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.