Q3 earnings impact: RBL Bank shares drop to a 52-week low—further challenges ahead??

Synopsis: RBL Bank reported a sharp 86% decline in net profit for the third quarter of FY25, posting ₹33 crore against ₹233 crore in the same period last year. Shares fell 6% to a 52-week low of ₹140 as the lender grappled with increased provisioning, growth moderation, and asset quality challenges. Analysts remain divided, with downgrades from some brokerages and a cautious "buy" from others.

Sharp Decline in Profitability:

RBL Bank reported a significant 86% year-on-year drop in net profit for Q3 FY25, with ₹33 crore compared to ₹233 crore in the previous year. 

The decline was primarily driven by higher provisioning and asset quality pressures.

Market Reaction:

Following the disappointing earnings report, RBL Bank shares plunged 6%, hitting a 52-week low of ₹140 on the BSE. 

The stock is trading below its 5-day, 10-day, 50-day, 100-day, 150-day, and 200-day moving averages, with an RSI of 43.5, indicating neither overbought nor oversold conditions. 

The bank's market capitalization stands at ₹9,192 crore.

Provisioning and Asset Quality:

The gross non-performing asset (NPA) ratio increased marginally to 2.92% as of December 31, 2024, compared to 2.88% in the previous quarter. 

However, it showed an improvement from 3.12% a year ago. 

Net NPA ratio improved to 0.53% from 0.79% in September 2024 and 0.80% in December 2023.

Provisions nearly doubled year-on-year to ₹1,189 crore in Q3 FY25, compared to ₹458 crore in Q3 FY24. 

This included additional provisions of ₹414 crore for its Joint Liability Group (JLG) portfolio, raising the NPA coverage for this segment to 85%.

Brokerage Recommendations:

1. Motilal Oswal:
   Maintains a "Neutral" stance with a target price of ₹170, citing suppressed asset quality and near-term pressure on margins and credit costs. FY26 return on assets (RoA) and return on equity (RoE) are projected at 0.8% and 7.9%, respectively.

2. Nirmal Bang:
   Downgraded the stock to "Sell" from "Hold," with a reduced target price of ₹144 (from ₹172). The brokerage highlighted increased provisioning, stress in microfinance, and credit card portfolios as key concerns. It also cut profit estimates for FY25, FY26, and FY27 by 39.6%, 20.4%, and 11.7%, respectively.

3. Emkay Global:
   Maintains a "Buy" recommendation with a target price of ₹225, acknowledging near-term challenges but emphasizing long-term value. The brokerage believes the bank's cleanup efforts in Q3 will continue into Q4, though slower growth has been factored into its revised earnings estimates.

Stress in Card Portfolio and JLG Segment:

The breakup with Bajaj Finance has exerted stress on RBL Bank's credit card portfolio, contributing to the subdued performance. 

Loan CAGR is projected at 11.8% for FY24-27E, with credit costs estimated at 2.9% during the same period.

Conclusion:

RBL Bank's Q3 FY25 results reflect significant challenges, including asset quality issues, increased provisioning, and slower growth. 

While some brokerages have downgraded the stock, others maintain a cautious optimism, recommending it for investors with a long-term perspective. 

The bank's cleanup measures and increased provisioning for high-risk segments indicate its focus on stabilizing operations, but near-term pain seems inevitable.

Disclaimer: The information provided is for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.