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Buy RBL Bank Ltd For Target Rs.235

Elevated provisioning drives loss; watchful of nearterm asset quality

Credit cost to stay elevated; PCR improves sharply to ~61%

* RBL Bank (RBK) reported a weak quarter, with net loss of INR4.6b, impacted by elevated provisions (INR14.3b) – as the bank upfronted the impact of the second COVID wave and shored up its PCR to ~61%. Business growth remains muted, impacted by a weak business environment. On the other hand, margins are seeing a sequential uptick, aided by lower cost of funds, some excess liquidity deployment, and lower interest reversals v/s 4QFY21.

* The bank has suggested a change in business strategy, with an increasing focus on home loans and expansion in the Credit Cards business. On the contrary, it would de-risk the loan book by pruning the unsecured portfolio mix other than Cards/MFI.

* On the asset quality front, slippage was elevated – largely from the Retail portfolio (Cards/MFI), while higher write-offs provided some support. Thus, the GNPA ratio witnessed deterioration, while NNPA improved on heavy provisioning. Total restructuring stood at 2.03% of loans. We cut our earnings estimate sharply by 72% for FY22, factoring in higher credit cost (5.3%) and subdued loan growth, while we increase our FY23 earnings estimate marginally. We expect the bank to deliver FY23E RoA/RoE of 1.3%/11.6%. Maintain Buy.

Business growth remains muted; margins expand QoQ

* RBK reported net loss of INR4.6b (v/s PAT estimate of INR1.05b), impacted by elevated provisions of ~INR14.3b – on higher slippage as well as higher provisioning for the Retail portfolio.

* NII declined 7% YoY (3% miss), affected by weak loan growth; however, margins expanded ~20bp QoQ to 4.36%. Other income grew 108% YoY (on a low base), with core fee income growth of 138% YoY to ~INR5.6b.

* Opex surged ~25% YoY (+19% QoQ) and thus the C/I ratio increased to 51.5% (v/s 45% in 4QFY21). As a result, PPoP grew 17% YoY.

* The loan book declined ~4% QoQ to INR565b – the Retail portfolio declined 7% QoQ, while the Wholesale book edged up 1% QoQ. The Retail to Wholesale mix stood at 57:43. Among the Retail segments, the MFI portfolio declined 18% QoQ and the Credit Card book 1% QoQ. The share of Credit Card and MFI stood at 32%.

* Deposits grew 1.8% QoQ to INR745b, led by CASA growth of ~8% QoQ. Overall, the CASA ratio improved to 33.7% (v/s 31.8% in 4QFY21).

* On the asset quality front, slippage was elevated at INR13.4b, predominantly from the Retail book (~97%), impacted by lower collections. Conversely, higher write-offs (INR7.6b) provided some support. Thus, the GNPA ratio increased 65bp QoQ to ~5%, while the NNPA ratio declined 11bp QoQ to ~2%, as bank improved its PCR sharply to ~61% (v/s 52.3% in 4QFY21). Total restructured loans stood at ~INR11.5b (2.03% of loans). RBK carries additional COVID-related provisions of INR2.39b.

Highlights from management commentary

* The slippage breakup is as follows: Credit Cards (INR5.01b), MFI (INR4.45b), and other secured retail (INR3.46b), with the balance being Wholesale.

* The bank aims to increase PCR to ~65% by FY22.

* The bank expects the C/I ratio to remain higher over the next few quarters (up 100–200bp) as the focus would continue to be on ramping up the technology infrastructure.

Valuation and view

RBK reported a weak quarter on higher slippage and accelerated provisions towards the unsecured portfolio. Business growth remained muted even as margins witnessed sequential improvement. RBL guided for a change in business strategy, with an increasing focus on Home Loans, Credit Cards, and other secured assets. On the contrary, it would de-risk the loan book by pruning the unsecured portfolio mix (other than Cards/MFI business).

While collection efficiency is improving, the high mix of unsecured loans, coupled with a high BB and below book, keeps us watchful of asset quality trends over the near term. We cut our earnings estimates sharply by 72% for FY22, factoring in higher credit costs (5.3%) and subdued loan growth. We expect the bank to deliver FY23E RoA/RoE of 1.3%/11.6%. We value the bank at INR235/share (1.1x FY23 ABV). Maintain Buy.

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