In its latest research update, Motilal Oswal Financial Services has upgraded RBL Bank from 'Neutral' to 'Buy' with a target price of Rs 220, implying an upside of 17% from the current levels. The report highlights a steady improvement in loan growth, asset quality metrics, and operational efficiency, forecasting a recovery in profitability over the next two fiscal years. As slippages normalize and provisioning pressures ease, RBL Bank is well-positioned to deliver better returns, with projected RoA and RoE rising significantly by FY26. Investors are, however, advised to conduct due diligence before making investment decisions.

Strong Loan and Deposit Growth Underpins Recovery

RBL Bank’s advances grew by 10.3% year-on-year to Rs 926 billion, while deposits expanded by 7.2% YoY to Rs 1.1 trillion during Q4FY25. The CASA ratio improved by 130 basis points sequentially to 34.1%, offering a more stable liability franchise.

The bank maintained a healthy Credit-to-Deposit (C/D) ratio of 83.5%, suggesting ample headroom for expanding its loan book further without stretching its balance sheet.

Margins Stable Despite Pressures; NII Remains Resilient

Net Interest Income (NII) for Q4FY25 stood at Rs 15.6 billion, slightly down by 2.3% YoY, but largely in line with Motilal Oswal’s estimates. Net Interest Margins (NIMs) remained stable at 4.89%, despite industry-wide margin compression pressures due to rising deposit costs.

Management expects margins to remain flattish through the first half of FY26, with recovery likely in the second half.

Improved Asset Quality with Strong Provisioning Buffer

Asset quality exhibited robust improvement:

• Gross NPA (GNPA) moderated by 32bps QoQ to 2.6%
• Net NPA (NNPA) improved by 24bps QoQ to 0.29%
• Provision Coverage Ratio (PCR) increased sharply to 89%

The bank made additional provisions of Rs 2.48 billion to fully provide for existing GNPAs and took a 75% provision against its SMA book. This strategy reinforces the bank’s balance sheet strength heading into FY26.

Cost Metrics Under Control with Positive Operational Leverage

While operating expenses rose by 7.2% YoY, the Cost-to-Income (C/I) ratio increased to 66.4%, largely due to seasonally higher costs and incremental provisioning.

However, management remains confident of controlling operating expenditure, aiming for 10% opex growth in FY26, driven by improved efficiencies in secured retail and wholesale lending.

Management Commentary Highlights Strategic Focus

Management guided for 16-17% blended loan growth in the coming years.

Other key takeaways:

• Secured retail and business banking to drive future growth
• Personal loans and credit card portfolios to undergo cautious expansion
• Margins expected to recover post H1FY26
• Strong liquidity position maintained with 133% LCR

Upgraded EPS Estimates and Valuation Upside

Motilal Oswal has raised its EPS estimates for RBL Bank by 12% for both FY26 and FY27, driven by better-than-expected operating profit growth and normalization of slippages.

Key financial projections:

The valuation looks attractive with P/BV estimated at 0.7x FY26E and 0.6x FY27E, supporting the upgraded Buy recommendation.

Risks to Watch

Despite improving fundamentals, a few key risks remain:

• Higher-than-expected credit costs in unsecured loans and credit cards
• Slower margin recovery if deposit costs remain stubbornly high
• Macroeconomic headwinds impacting asset quality or loan growth

Investors should monitor these factors closely while positioning in the stock.

Conclusion: A Turnaround Story in Motion

Motilal Oswal’s upgrade of RBL Bank to ‘Buy’ reflects rising confidence in the bank’s operational and financial recovery. With asset quality stabilizing, robust provisioning buffers in place, and credit growth momentum building up, the risk-reward equation for RBL Bank appears attractive at current valuations.

As earnings recovery gains pace through FY26 and beyond, long-term investors could benefit from holding this turnaround story — albeit with a watchful eye on evolving asset quality trends and macro conditions.