RBL Bank, a leading private sector lender, has shown a visible pickup in loan disbursements, primarily driven by retail and MSME segments. Morgan Stanley’s latest report highlights that while growth acceleration is a positive, the pressure on net interest margins (NIMs) and deposit mobilization continues to pose challenges for sustainable profitability. The brokerage believes the bank needs to strike a balance between aggressive loan growth and risk management to improve its overall earnings quality.

RBL Bank’s performance is being closely watched by institutional investors as it attempts to reposition its balance sheet post the COVID-era stress. The latest improvement in gross advances, up 14% year-on-year, signals revival, but the cautious stance reflects underlying sectoral risks.

Morgan Stanley notes that loan growth has outpaced expectations, with retail and microfinance segments leading the uptrend. However, deposit growth has not kept pace, leading to a potential rise in the cost of funds. The brokerage expects the bank’s core NIM to remain under mild pressure as competition for high-quality deposits intensifies across the banking industry.

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The brokerage’s report mentions that asset quality indicators have remained stable with limited stress visible in retail portfolios. The bank has maintained prudent provisioning levels, and slippages are largely contained. That said, Morgan Stanley expects credit costs to normalize gradually as incremental stress formation declines in the microfinance and unsecured lending categories.

The management’s strategy to rebalance the loan mix towards secured retail and SME segments is viewed positively. Over the next few quarters, sustaining the 14% growth rate while preserving asset quality will be crucial for valuation re-rating.

RBL Bank’s deposit growth has normalized at around 20% year-on-year, providing sufficient liquidity buffers. However, the share of high-cost deposits remains elevated, leading to concerns about long-term funding costs. Morgan Stanley advises investors to watch the evolution of the current and savings account (CASA) ratio closely, as any decline could affect profitability in subsequent quarters.

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At the current valuation, RBL Bank trades at a modest premium to its historical book value multiples. Morgan Stanley sees limited upside given the modest ROE profile and a gradual recovery in margins. The Underweight stance reflects a conservative approach toward private sector lenders with mid-tier balance sheets that are yet to achieve consistent profitability metrics.

For investors, this means tracking quarterly margin trends and deposit traction will be vital in assessing whether the bank can deliver sustained value creation in the medium term.

Morgan Stanley’s Underweight rating on RBL Bank signals cautious optimism — recognizing growth but prioritizing stability. While gross loans have expanded impressively, maintaining asset quality and defending margins will be key. Investors are advised to stay selective within the banking space, focusing on balance sheet strength and funding efficiency before positioning for any re-rating opportunities.

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