On Monday, RBL Bank Ltd. (RBK:IN) stock experienced a revision in its financial outlook as JPMorgan adjusted the price target to INR225.00, a decrease from the previous INR270.00, while the Neutral rating on the bank's stock remained unchanged.
The revision follows RBL Bank's second-quarter performance, which reported a Profit After Tax (PAT) of Rs2.2 billion, a 24% year-over-year decrease, and a Return on Equity (ROE) of 6%, both falling short of JPMorgan's and market expectations.
This shortfall was attributed to a significant increase in provisions due to rising delinquencies, particularly in the unsecured credit segment. RBL Bank noted an uptick in stress within its credit card and Microfinance Institution (MFI) portfolio, with gross and net slippages climbing by 43% and 55% quarter-over-quarter, respectively.
The bank's advances growth slowed to 15% year-over-year, below the forecasted Compound Annual Growth Rate (CAGR) of over 20% for the fiscal years 2024-2026, mainly due to a reduction in unsecured lending.
Despite the challenges, RBL Bank saw a robust 20% year-over-year deposit growth. However, core Net Interest Margins (NIMs) fell by 39 basis points quarter-over-quarter due to higher reversals, and Net Interest Income (NII) increased by only 9% year-over-year.
On a positive note, other income streams remained healthy, and a moderate rise in operating expenses resulted in a relatively better Core Pre-Provision Operating Profit (PPOP) growth of 14% year-over-year.
The improvement in the Return on Assets (ROA) profile for the wholesale and secured retail businesses was a highlight, but it was overshadowed by the unsecured segment's weaknesses, which led to a 50 basis points decline in overall ROA to 0.64%.
Although management has maintained the Fiscal Year 2026 ROA target of 1.4-1.6%, the analyst expressed skepticism regarding the bank's ability to achieve this, especially if the current credit cycle persists.
In conclusion, while RBL Bank's valuations appear inexpensive at 8 times the Fiscal Year 2026 Price to Earnings (P/E) ratio, JPMorgan anticipates limited potential for valuation re-rating in the current economic environment.
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