Emkay Research has reaffirmed its "Buy" recommendation for RBL Bank, setting a target price of Rs 250, representing a significant upside potential of 61.3% from the current market price of Rs 155. This positive outlook hinges on the bank's strategic shift away from its co-branded credit card partnership with BFL (Bajaj Finance Limited) and an increasing focus on organic and alternative partnerships. While challenges in the microfinance (MFI) segment and transitional card-related stress persist, Emkay highlights long-term value in the bank's growing secured loan portfolio and improved risk-reward metrics.

Key Developments in RBL Bank

End of Co-Branded Credit Card Partnership with BFL

- Strategic Shift: RBL Bank's long-standing co-branded partnership with BFL has concluded, which aligns with a previously announced scale-down strategy.
- Impact on Operations: - The bank will independently manage a portfolio of 3.4 million cardholders.
- RBL aims to offset higher customer acquisition costs (CAC) from organic card sourcing (1x CAC vs. 0.75x under BFL).
- Improved RoA is expected in the card segment due to reduced spend-based fees and better cross-sell opportunities.

Card Portfolio Evolution

- Transition to Organic Growth: - The bank has rapidly increased organic card sourcing from 8% in Q2 FY24 to 33% in Q2 FY25.
- Partnerships with notable entities like Mahindra & Mahindra Financial Services, TVS, IRCTC, and IOC are projected to bolster card acquisition volumes. - Growth Disruptions: While short-term growth disruptions are likely, the transition is expected to stabilize by early FY26.

Stress in Card and MFI Segments

- Card Stress: - The handover of collections from BFL has caused temporary spikes in delinquencies, with card GNPA rising to 2.2% in Q2 FY25 from 1.5%. - Incremental slippages from the BFL card portfolio are expected to normalize by Q1 FY26. -
MFI Challenges: - The MFI segment faces tightening regulatory norms and a heavy renewal cycle in H2 FY25, potentially increasing credit costs.

Financial Performance and Projections

Key Financial Metrics

Adjusted earnings estimates for FY25/FY26/FY27 have been reduced by 17.8%, 3.4%, and 5.8%, respectively, reflecting the anticipated challenges.

Valuation Metrics

- The stock trades at a **P/B ratio of 0.6x** and a **P/E ratio of 9.3x** for FY25E, which are considered attractive given the upside potential.

Key Challenges and Mitigations

Elevated Credit Costs

- Credit costs are revised to 2.6% in FY25E, tapering to 1.8% by FY27E, as transitional stress diminishes.

Asset Quality

- While GNPAs are projected to rise marginally to 3.1% in FY25E, a declining trend is expected thereafter as the portfolio mix transitions toward secured loans.

Growth Constraints

- Loan growth estimates have been tempered to 12.6% in FY25E, rebounding to 17.2% by FY27E as the bank pivots its focus to diversified lending segments.

Emkay's Target Price Rationale

- The revised target price of Rs 250 is based on a valuation of **0.8x Dec-26E Adjusted Book Value (ABV)**, down from the previous multiple of 1.1x. - The adjustment reflects slower near-term growth, elevated credit costs, and transitional challenges but factors in a favorable risk-reward ratio over the medium term.

Investment Strategy and Actionable Insights

Long-Term Value in Secured Lending

- A gradual shift to secured loans, reducing the share of high-risk card and MFI loans from 32% to 25%, is expected to improve portfolio quality and RoA.

Diversified Card Partnerships

- New collaborations with prominent brands and a focus on commercial cards aim to sustain momentum in the credit card segment.

Investor Considerations

- With a significant upside potential of over 61%, **RBL Bank presents an attractive opportunity for long-term investors**. However, caution is advised due to near-term volatility stemming from the transition in card and MFI portfolios.