On Monday, RBL Bank Ltd. (RBK:IN) received an upgrade from Citi from 'Sell' to 'Buy', with an increased price target of INR281.00, up from the previous INR257.00. The change in rating follows a detailed analysis of the bank's financial performance and market position.
The bank's return on assets (RoA) was reported at 1.14%, which included the benefits of interest on income tax refund amounting to Rs650 million and a provisioning reversal from Alternative Investment Funds (AIF) totaling Rs904 million.
These positive factors were, however, balanced out by a decline in earnings due to a transition in card collection operations. Despite these adjustments, the bank's core RoA remained below 1%. This was attributed to its net interest margin (NIM) holding steady at 2.45%, and high slippages and credit costs, which were reported above 3.4% and 2.4% respectively.
RBL Bank has taken strategic steps to slow down its microfinance activities while focusing on growth through secured segments. Citi noted that previous expectations for the bank's RoA were conservatively set at 1.0-1.2% for fiscal years 2025 and 2026, which is below the bank's guidance of 1.4-1.5%. Despite the lower-than-expected core earnings, the estimates for the bank's performance have only been revised down by 1%.
The bank's recent performance in the market has shown underperformance relative to the Bank Nifty, with a decline by 10%, 15%, and 25% over the past one, three, and six months respectively. This trend is seen as having already accounted for the near-term challenges facing the bank. The valuation of RBL Bank at 0.8 times its forecasted FY26E book value is considered reasonable when compared to its mid-sized private banking peers.
The bank's improving return on equity (RoE), which is projected to reach 10%, 12%, and 14% in fiscal years 2025, 2026, and 2027 respectively, along with a growth profile that suggests a greater than 30% earnings per share (EPS) compound annual growth rate (CAGR), were key factors in Citi's decision to revise the price target upwards. The new target price is set at 1.0 times the bank's FY26E adjusted book value (ABV), an increase from the previous valuation of 0.9 times.
InvestingPro Insights
Following the upgrade by Citi, RBL Bank Ltd. (RBK:IN) appears to be in a pivotal phase. An InvestingPro analysis reveals that the bank is trading at a low P/E ratio relative to near-term earnings growth, which could indicate that the stock is undervalued compared to its future earnings potential. This aligns with Citi's raised price target and suggests that the bank's stock might be an attractive investment for those looking at earnings growth.
Despite facing challenges such as high slippages and credit costs, RBL Bank is a prominent player in the Banks industry. It's worth noting that analysts predict the bank will be profitable this year. This optimism is reflected in the projected improvement in return on equity (RoE) and the anticipated greater than 30% EPS compound annual growth rate (CAGR). Such forecasts could be a signal to investors that the bank's strategic focus on growth through secured segments may pay off in the medium to long term.
InvestingPro Tips also highlight that RBL Bank has been profitable over the last twelve months, which could lend additional confidence to investors about the bank's ability to navigate through its transitional phase. For those interested in a deeper analysis, InvestingPro offers additional tips on RBL Bank and other companies in the sector. Use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, and gain access to valuable insights that could inform your investment decisions. There are 6 more InvestingPro Tips available that can provide further guidance on RBL Bank's financial health and market position.
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