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Published on 7/02/2020 11:25:38 AM | Source: ICICI Securities Ltd

Buy RBL Bank Ltd For Target Rs.513 - ICICI Securities

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On track despite slower growth

RBL Bank reported Q3 profit 25% below our estimate at Rs700mn predominantly due to higher provisioning even as operating profits met our estimate of a robust 47% YoY growth. With the pool of identified stressed assets not increasing and experiencing slippage in line with earlier guidance, we don’t worry about the higher than expected provisions as Q4 is likely to see some relief on the same. However, slower than expected loan growth (as wholesale growth was almost flat) prompts us to cut our estimates for the same even as we factor-in higher margins and fees after incorporating the recent capital raising. Thus, our revised target price of Rs513 values the stock at 2.3x book value on a post-capital basis, prompting our reiteration of BUY rating on the stock.

 

Key risks remain an expansion of the stress list and higher-than-expected provisioning.

* Result summary: With the non-wholesale book growing a robust 42% YoY, partly offset by a slowing wholesale book, the 20% overall loan growth was more than adequately funded profitably with CASA mix. This led to NIMs expanding to 4.57% - with the full impact of the recent capital raising in late-Dec yet to be factored in. With continued expansion in the distribution setup, operating costs continued to climb. However, higher provisioning acted as a drag.

* Asset quality: The identified pool of stressed assets worth Rs18bn did not expand further and saw expected slippages of Rs7bn; the pool has thus reduced to ~Rs3bn now. With 48% provisioning taken on the same along with BAU provisioning, credit costs remained expectedly elevated at 427bps. Q4 is likely to see ~40% lower slippages and consequently lower credit cost at ~300bps. The ‘BB & below’ rated book (6.1% of the total) also appears less susceptible to slip, based on management’s guidance.

* Earnings outlook: We cut our PAT estimates by 14% for FY20E due to higher provisions, but increase it by ~2% for FY21E/FY22E due to improved margin and fee growth prospects. Consequently, we estimate RoA of ~1.3%/1.45% by FY21E/FY22E.

* Valuations and target price: RBL currently trades at 1.5x P/BV and 12x P/E for FY21E. We increase our target price by 11% to Rs513 implying a target multiple of 2.3x FY21E on the back of the recent equity raising and fine tuning estimates. Maintain BUY.

 

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