Secured Retail And Diversified Deposits Will Fuel Stability

Key Takeaways

• RBL Bank's focus on secured retail segments and credit card business is expected to enhance revenue, portfolio stability, and profitability through deeper customer engagement.
  
• Emphasis on cost optimization and a diversified deposit base aims to reduce funding costs, improve margins, and stabilize earnings despite short-term pressures.
  
• Rising delinquencies and strategic shifts away from high-yield segments could constrain net interest margins, impacting overall profitability.

Catalysts

Operates as a scheduled commercial bank in India.

• RBL Bank's secured retail segment, which includes mortgages and gold loans, is projected to grow at a robust 25% to 30%, suggesting significant future revenue potential and improved portfolio stability.
  
• The bank is prioritizing high-quality customer acquisition in its credit card business, aiming for deeper multiproduct engagement which is expected to enhance cross-sell opportunities and improve profitability, impacting both revenue and earnings.
  
• Continued focus on cost optimization, including rationalizing deposits and enhancing operational efficiencies, is likely to drive improved net margins, despite some near-term pressures from deposit repricing.
  
• Implementation of a prudent, forward-looking provisioning strategy, especially with increased coverage under CGFMU for JLG loans, is designed to strengthen the credit cost outlook, contributing to more stable earnings.
  
• The shift towards a more granular and diversified deposit base, with retail deposits growing by 16% Y-o-Y, is aimed at reducing funding costs over time, supporting margin improvement and enhancing overall profitability.

RBL Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RBL Bank's revenue will grow by 26.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 15.1% in 3 years time.
• Analysts expect earnings to reach ₹22.4 billion (and earnings per share of ₹36.8) by about May 2028, up from ₹7.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹25.0 billion in earnings, and the most bearish expecting ₹18.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, down from 17.0x today. This future PE is lower than the current PE for the IN Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.01%, as per the Simply Wall St company report.

RBL Bank Future Earnings Per Share Growth

Risks

• The bank's increase in delinquencies, mainly in the card segment, due to challenging macroeconomic conditions and consumer over-leverage, poses a risk to net margins and overall earnings.
  
• Declines in the JLG segment point to borrower over-leverage issues impacting collection efficiencies, which could negatively affect revenue and profitability.
  
• Lower year-on-year growth in unsecured segments like credit cards and personal loans could lead to reduced net interest income, thereby impacting revenue.
  
• The shift away from high-yielding segments like microfinance may reflect in a lower margin profile for FY '26, impacting net margins despite being strategically sound.
  
• Potential pressure on net interest margins (NIMs) in the first half of FY '26, as a result of deposit rate cuts being effective with a delay, might constrain net interest income and earnings.

Valuation

• The analysts have a consensus price target of ₹198.789 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 ₹140.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹147.6 billion, earnings will come to ₹22.4 billion, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 14.0%.
  
• Given the current share price of ₹200.37, the analyst price target of ₹198.79 is 0.8% lower. 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.