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Result Highlights

* Asset quality: Annualized slippage for 1QFY22 was elevated at 9.3%, with management citing similar slippage for 2QFY22 before normalization in 3QFY22

* Margin picture: NIM at 4.36% was up 19 bps QoQ, mainly due to decline in cost to deposits, with further deposit rate cuts in the offing

* Asset growth: Advances de-grew -3.6%/-0.3% QoQ/YoY with non-wholesale loans dragging on sequential basis even as wholesale loans saw sequential growth

* Opex control: Total opex jumped 19.3%/25.1% QoQ/YoY with management guiding for total opex remaining sticky at ~Rs 8.5bn for the next 1-2 quarters

* Fee income: Core fee income declined/rose -14.8%/135.1% QoQ/YoY due to sequentially weaker business activity in 1QFY22

Our view – Unsecured exposures, unsurprisingly, come back to bite, while bank upfronts provisions, Upgrade to BUY

Credit cards and microfinance contributed the lion’s share of the slippages at Rs 5.01bn and Rs 4.45bn, respectively, to the total addition of Rs 13.42bn: RBL made provisions of Rs 14.3bn for the quarter, of which Rs 3.65bn were accelerated specific provisions whereas Rs 2.39bn were contingent Covid provisions. Net restructured book rose from 1.41% as of March to 1.8% as of June. Again, of the gross restructured book of Rs 11.42bn, Rs 7.18bn comes from the non-wholesale book. Management has guided for an FY22 exit quarter RoA of 1% predicated on a reversion to BAU credit cost of 250 bps

Management has guided for a flattish to negative NIM in 2QFY22 before improvement in 2HFY22: Management stated that the cost of deposits could decline to below 5% in about 6 months on the back of deposit rate cuts and CASA traction. They also explained that wholesale yield would evolve positively since 20-25% of wholesale book is lowyielding book, which would be re-deployed in the short-term. Furthermore, the bank also expects the yield in the commercial banking book to improve at some point.

Non-wholesale loans plummeted -6.7% QoQ whereas wholesale loans eked out a growth of 0.9% QoQ: Management were somber when it came to providing growth guidance for FY22 and conceded that this financial year would be focused on consolidation and full year growth would be in single digits. However, they did outline a detailed plan for further traction in affordable home loans, for which they plan to activate 120 more branches over 2 years and also deploy RBL Finserve to the task.

We upgrade RBL to ‘Buy’ from ‘Add’ with a revised price target of Rs 230: We value the bank at 0.95x FY23 P/BV for an FY22E/23E/24E RoE profile of 5.8/10.5/11.7%.

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