Indian Fintech Surge And Credit Risks Will Weaken Banking

Key Takeaways

• Rising digital competition and funding challenges threaten RBL Bank's margins and long-term market position despite ongoing digital investments.
  
• Elevated risk in unsecured lending and mounting regulatory requirements create persistent cost pressures and earnings instability versus larger, better-capitalized peers.
  
• Strategic shift to secured lending, digital expansion, and improved efficiency are driving better asset quality, revenue growth, and long-term profitability.

Catalysts

Operates as a scheduled commercial bank in India.

• The increasing shift of the Indian population towards digital-first fintech and alternative payment platforms threatens to erode RBL Bank's traditional deposit and lending base over the next decade, likely compressing both top-line revenue growth and overall market share even as the bank attempts massive digital investments.
  
• Persistent elevated credit risk in the unsecured loan segments, especially microfinance and credit cards, could result in cyclical spikes in non-performing assets and require heavy provisioning, leading to unstable net margins and a structurally higher cost of credit despite management's near-term optimism.
  
• The bank's ongoing struggle to significantly improve its low-cost CASA (Current Account Savings Account) deposit mobilization will maintain higher funding costs, putting consistent downward pressure on net interest margins and limiting future earnings growth relative to better-positioned, larger peers.
  
• Intensifying competition from well-funded private banks and increasingly sophisticated neo-banks is set to accelerate margin compression and customer attrition, making it increasingly difficult for RBL Bank to deliver sustainable fee income or benefit from scale-driven efficiencies over the long term.
  
• Ever-tightening regulatory requirements and the need for substantial, ongoing investment in cyber-security and compliance will further escalate operating costs, squeezing profitability and undermining returns on equity, especially as RBL Bank lacks the scale advantages required to absorb such structural industry headwinds.

RBL Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on RBL Bank compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming RBL Bank's revenue will grow by 21.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.8% today to 13.7% in 3 years time.
• The bearish analysts expect earnings to reach ₹18.0 billion (and earnings per share of ₹28.86) by about July 2028, up from ₹7.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.4x on those 2028 earnings, down from 22.4x today. This future PE is lower than the current PE for the IN Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.57%, as per the Simply Wall St company report.

RBL Bank Future Earnings Per Share Growth

Risks

• The bank has demonstrated meaningful stabilization in asset quality, especially within the JLG and credit card portfolios, underpinned by robust provisioning and the adoption of insurance cover like CGFMU, which can significantly reduce future credit costs and support ROA improvement.
  
• RBL has successfully executed a strategic shift towards secured retail and wholesale banking with strong year-on-year growth in mortgages, business loans, and a steady increase in granular deposits, indicating that both revenue growth and profit margins may trend up as higher-risk unsecured portfolios are intentionally curtailed.
  
• Focused expansion in digital banking services, a refreshed mobile app, and increased core system scalability position the bank to benefit from long-term secular trends in digital adoption, potentially leading to new customer acquisition and higher fee-based income, supporting overall revenue and earnings growth.
  
• Operating efficiency is improving, with cost-to-income ratios showing a declining trend and a public commitment to keep operating expense growth near 10 percent, suggesting enhanced operating leverage is likely to drive higher pre-provision operating profits in coming years.
  
• Strengthening of customer franchise through more branch-led origination, cross-sell initiatives, and new leadership for branch and operations is expected to deepen wallet share, foster sustainable balance sheet growth, and support stable or rising net margins and earnings over the long term.

Valuation

• The assumed bearish price target for RBL Bank is ₹144.68, which represents two standard deviations below the consensus price target of ₹236.11. This valuation is based on what can be assumed as the expectations of RBL Bank's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹300.0, and the most bearish reporting a price target of just ₹140.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹131.1 billion, earnings will come to ₹18.0 billion, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹263.14, the bearish analyst price target of ₹144.68 is 81.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.