How Will Bajaj Finance and RBL Bank Be Impacted Post Ending Their Co-Branded Credit Card Deal?

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Introduction
The recent announcement by RBL Bank Ltd. and Bajaj Finance Ltd. to terminate their co-branded credit card issuance has created ripples in the financial sector. While existing credit cards will remain functional, the move raises questions about its impact on both companies’ growth and market share. Here’s an in-depth analysis of the implications for RBL Bank and Bajaj Finance, supported by expert insights from leading brokerage firms.

Impact on RBL Bank

1. Constrained Credit Card Market Share

  • The partnership with Bajaj Finance had previously been a significant driver for RBL Bank’s credit card business.
  • Morgan Stanley highlights that the termination could reduce RBL’s potential to expand its market share in the medium term.
  • The number of co-branded cards issued by Bajaj Finance has already fallen from 1.26 lakh in September 2023 to 37,000 in September 2024.

2. Pressure on Earnings Growth

  • The breakup adds to RBL’s challenges in the Microfinance (MFI) segment, further constraining medium-term earnings.
  • Investec predicts a 200 basis points slowdown in credit growth for FY25, resulting in a decline in Net Interest Income (NII).

3. Valuation and Market Sentiment

  • Despite trading at a 0.6x price-to-book valuation, RBL Bank struggles to attract investor confidence due to earnings concerns.
  • Brokerage ratings:
    • Morgan Stanley: Underweight with a target of ₹180.
    • Investec: Hold with a reduced target of ₹170 (down from ₹230).
    • Citi: Buy with a target of ₹255, assuming effective transition to new partnerships.

4. New Partnerships in Focus

  • RBL Bank has initiated co-branded credit cards with players like M&M Finance, Indian Oil, IRCTC, and TVS Finance.
  • Scaling these partnerships will be critical to offsetting losses from the Bajaj Finance deal.

 

Impact on Bajaj Finance

1. Minimal Earnings Impact

  • Citi estimates a limited impact on Bajaj Finance’s earnings, ranging between 1% and 1.2%, assuming a Return on Assets (RoA) on the co-branded portfolio.
  • Use-based trail fees from existing cards will continue to provide a revenue stream.

2. Strengthening Autonomy

  • The termination strengthens the case for Bajaj Finance to pursue its credit card license, enabling better profitability and control in the credit card segment.

3. Cost Management

  • According to Jefferies, the loss of origination fees could be offset by reduced costs, making the net impact limited.

4. Brokerage Ratings

  • Citi retains a Buy rating with a target of ₹8,150, reflecting confidence in Bajaj Finance’s ability to navigate this transition.

Stock Performance in 2024

Bajaj Finance:

  • Shares are down 10% year-to-date, reflecting broader market trends.

RBL Bank:

  • A sharper decline of 46% in 2024 highlights market skepticism about its growth potential post-termination.

Broader Implications for the Market

RBL Bank:

To mitigate the impact, RBL Bank must scale its new partnerships and focus on direct credit card sourcing strategies to regain lost ground.

Bajaj Finance:

Bajaj Finance’s diversified portfolio and potential pursuit of a credit card license position it better to adapt to this change, with limited financial downside in the short term.

Key Takeaways

  1. For Investors:
    • RBL Bank: Watch for its ability to scale new partnerships and improve MFI performance.
    • Bajaj Finance: Potential upside if it secures a credit card license.
  2. For the Market:
    • This transition reflects the dynamic nature of partnerships in the financial sector and the growing competition in the credit card space.

FAQs

1. Why did RBL Bank and Bajaj Finance terminate their co-branded credit card deal?

The companies have not disclosed specific reasons, but it reflects a strategic shift towards new opportunities and reduced dependence on co-branded partnerships.

2. How does this impact RBL Bank’s financial outlook?

RBL Bank faces pressure on credit growth and earnings in the medium term, with analysts forecasting a slowdown in FY25.

3. What’s next for Bajaj Finance?

Bajaj Finance may apply for a credit card license to strengthen its position and reduce reliance on co-branded agreements.

Final Thoughts

The end of the co-branded credit card deal marks a pivotal shift for both RBL Bank and Bajaj Finance. While RBL Bank faces immediate growth challenges, Bajaj Finance is better positioned for a smoother transition, potentially opening new avenues for growth in the credit card segment. Investors should monitor these developments closely for long-term opportunities.

By Shehnaz Shaikh
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