Shares of RBL Bank came under significant selling pressure during the trading session on Monday, October 21, falling 14.5% to hit a 16-month low of ₹175.50. The decline was driven by the bank’s disappointing September quarter performance, which highlighted challenges in the unsecured credit segment. The weak results prompted several brokerages to lower their target price on the stock.

The private sector lender, on Saturday, reported a 24% year-on-year (YoY) and 40% quarter-on-quarter (QoQ) drop in standalone net profit at ₹223 crore for the September quarter. The figure fell short of analysts’ expectations due to sluggish microfinance disbursements, higher slippages in the credit card segment, and compression in net interest margin (NIM).

Net Interest Income (NII) came in at ₹1,615 crore, representing a 9.5% YoY increase but a 1% QoQ decline, below analysts’ estimates of ₹1,660 crore. The NII was impacted by interest reversals from slippages and reduced disbursements in high-yielding segments. The bank reported an NIM of 5.04%, the lowest in the last five quarters.

Pre-provision operating profit (PPoP) rose by 20.6% YoY and 19.6% QoQ to ₹923 crore supported by a sharp increase in non-interest income and a 1% sequential reduction in operating expenses.

However, provisions surged by 69% to ₹640 crore, compared to ₹366 crore in the previous quarter, driven by higher slippages in the credit card and microfinance portfolio. Last year’s Q2 provisions included ₹252 crore in contingent provisions still held by the bank.

Fresh slippages for the quarter reached ₹1,026 crore, marking a significant increase of nearly 100% YoY and a rise of about 43% from the preceding quarter.

Brokerages cut RBL Bank stock’s target price

Following RBL Bank’s Q2 results, global brokerage firm JP Morgan trimmed its target price on the stock to ₹225, while maintaining a ‘neutral’ rating. The bank’s Q2 PAT and ROE of 6% came in well below JP Morgan’s estimates.

Citi has also lowered its target price for the stock to ₹255 from ₹281, citing challenges in the credit card and MFI segments. 

“The bank’s return on assets (ROA) and return on equity (ROE) were much lower than guided levels, contributing to sharp earnings miss. The higher Special Mention Account (SMA) pool in the MFI segment and lingering credit card stress have resulted in underwhelming credit costs,” said the brokerage. 

Citi has cut its earnings estimates by 15%/12%/9% for FY25E/26E/27E, factoring in unsecured asset stress, NIM pressure, and lower-than-expected growth. It noted that the bank’s current valuation of 0.7x FY26E book reflects a steep discount due to its subpar RoA/RoE profile.

Investec has downgraded the stock from ‘buy’ to ‘hold’ and lowered its target price to ₹230 from ₹300. The brokerage cited the miss in NII and RoA estimates as being driven by interest reversals and a sharp increase in provisioning.

Growth remains muted as the bank scales back disbursals in its core verticals. MFI stress has increased due to over-leveraging and attrition in collection staff, while credit card delinquencies have risen following changes in collection processes, it said.

Centrum Broking has maintained its ‘buy’ rating on RBL Bank, setting a target price of ₹291 per share, highlighting the stock’s attractive valuation following its significant decline in 2024. Despite the steep drop in the stock’s value, Centrum believes that concerns regarding growth, asset quality, and profitability are already factored into the price.

While both internal and external challenges have caused disruptions, the management’s long-term strategy for achieving diversified and sustainable growth is gradually materialising, it said.

Looking ahead, Centrum expects RBL Bank to improve its RoA to around 1.1%, supported by a potential interest rate-cut cycle and a recovery in the microfinance (MFI) and credit card segments. With the stock trading at an attractive 0.7x P/ABV multiple for the first half of FY27, Centrum sees this as a compelling buying opportunity.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.