Analysis reveals contained increments to stress pool — upgrade to LONG
Post RBL Bank’s (RBK) guidance of a stressed corporate asset pool of Rs 10bn, the stock has tanked ~50% and there are concerns on the quantum of additional stress that can emerge. To delve further into this, we mined charge data from MCA of RBK’s sanctions to ~216 corporates (sanctioned amounts: >Rs 500mn) since CY17 with cumulative sanctions above Rs 200bn. Our analysis reveals that the “stress+watchlist” for the bank would be ~Rs 20bn with LGDs, below industry average, as the bank’s exposure is predominantly working capital-linked and not capex/infra funding. Also, RBK’s entity-level exposures are contained at Rs 1bn-3bn. We feel the stock is trading at attractive valuations of 1.6x FY21ABV; consequently, we upgrade RBK to LONG (from REDUCE) with a Sep’20 TP of Rs 440 (Rs 520 earlier) set at 2.0x (vs 2.2x earlier) Sep’21 ABV.
External ratings largely stable:
Of these 216 corporates RBK is exposed to, 37/28 have seen rating upgrades/downgrades in the past two years. Of the downgrades, 14 are still rated ‘A- & above’ while 5 have been cut to ‘BB & below’. We estimate RBK’s exposure to the known stressed groups as follows: Eveready at ~Rs 5bn, CCD at ~Rs 4bn, Essel at ~Rs 4bn, and Sintex at ~Rs 2bn (Annex. 1). In other larger exposures, Emami has been taking measures to deleverage, while Indiabulls, post its recent rating downgrade, remains a watchlist for us. RBK’s exposure to sectors identified with a ‘fragile’ outlook by CRISIL has slid to 7.4% from 10.7% in FY17. Also, its credit decision seems to be based on the business outlook and borrower cashflows rather than collateral, with hardly any high-fee structured deals.
FY20 NIMs to expand ~20bps; capital raising imminent by 1HFY21:
We expect the share of non-wholesale loans to increase to ~50% by FY20-end vs. ~44% in FY19; this would drive NIM expansion given yields in non-wholesale loans are higher at 15.2% vs. 9.4% for wholesale. With CET 1 at ~11.3%, RBK has room to increase advances by ~21% over 1QFY20, assuming RWA/TA remains stable at 74% and the CET 1 ratio remains above 10%. However, if RWA/TA increases to 77%/80%, headroom for loan growth declines to 17%/12%, making it imminent to raise capital by 1HFY21 to support future growth.
Loan growth estimates toned down; credit cost estimates at ~190bps:
We have toned down our FY20 loan growth estimates to 20% vs 32% earlier as we expect single-digit wholesale growth. We expect FY20/FY21 credit cost at 190/170bps on account of proactive/aging provisions from slippages in FY20.
(a) Material slowdown in the economy leading to higher slippages a key risk to our upgrade call as RBK is chiefly a working capital lender,
(b) Delayed capital raising,
(c) slowdown in retail loan growt
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