RBL Bank CEO shares views on private lender; stock price target at Rs 240, says Motilal Oswal Securities

Motilal Oswal Securities recently met with the RBL Bank management led by MD and CEO R Subramaniakumar and Head–Strategy Jaideep Iyer to discuss the performance of new businesses, bank’s growth outlook, profitability goals and other key focus areas. Key takeaways from the visit included hopes of a quick turn in the margin trajectory and expectations of a steady improvement in net interest margin (NIM) over FY24-26. RBL Bank expects scale-up of new businesses and continued traction in MFI/Cards to drive healthy loan growth. The bank is looking to improve liability growth gradually and is aiming for retail deposit mix of 50 per cent. Cost-to-income ratio and asset quality is seen improving going ahead.

RBL Bank, Motilal Oswal said reported steady margins in FY23 but a sharp rise in funding costs resulted in a 17 basis points drop in NIM in the June quarter.  The management is anticipating a quick turn in the margin trajectory and expecting NIM to improve steadily over FY24-26.

“The margin expansion will be primarily driven by continued traction in new businesses and steady growth in the credit card and MFI segments while the mix of wholesale loan declines to 30 per cent by FY26 from 44 per cent currently. On the funding cost side, the bank expects the majority of its deposits to be re-priced by 2QFY24; hence, the cost of deposits will stabilise by 2Q-3QFY24 and thereafter decline gradually as RBL Bank does not anticipate any further rate hikes by the RBI," Motilal Oswal said.

Motilal Oswal is expecting net interest income (NII) for RBL Bank to grow at a higher pace than loans at a 23 per cent compounded annually over FY23-FY25.

The domestic brokerage said RBL Bank has improved its underwriting, collections and data analysis significantly and has sharpened its focus on cross-selling of products.

RBL Bank expects advances to grow at 20 per cent over FY24, led by continued scale-up of new businesses and steady traction in the credit card and MFI businesses (up 23%-25% YoY).

"However, the bank aims to maintain the mix of unsecured book at less than 40 per cent. On the wholesale side, the bank is focusing more on SME/Mid-corporates as those segments are witnessing strong activity and offer better risk-adjusted returns. Thus, the ongoing pace of capacity building, rapid investments in new businesses and higher cross-selling will enable the bank to sustain a healthy growth rate over the coming years. We thus estimate a 19 per cent CAGR in advances over FY23-FY25," Motilal Oswal said.

RBL Bank is focused on deploying excess liquidity on the balance sheet and is making use of refinancing wherever the bank is earning good returns.

"The bank follows a systematic customer on-boarding plan with a ‘liability led by an asset’ approach and has witnessed 2 times increase in account opening against the earlier run-rate. Alongside, the bank is focusing more on granular deposits as it expects the retail deposit mix to increase to 50 per cent of total deposits by FY25 against 44 epr cent currently. The CASA ratio is healthy at 37 per cent but is expected to moderate slightly as high rates drive faster growth in term deposits," the brokerage said.

"RBL Bank has reported a healthy recovery in loan growth and the management expects to sustain this momentum, led by steady growth in retail segments. The continued business investments and healthy cross-selling will further help to diversify the loan book and enable faster growth in retail liabilities. While the bank’s RoE remains low, it is well capitalised to support growth momentum and the management expects to raise capital only toward FY25 end,”  Motilal Oswal said.

It expects return on asset (RoA) to improve to 1.4-1.5 per cent by FY26E and raised its  estimated FY25 earnings by 8 per cent. Motilal Oswal expects RBL to deliver a 38 per cent earnings CAGR over FY23-25, as it  suggested a target price of Rs 240 on the stock. 

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