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RBL sticks neck out to guide for near-BAU credit cost and vastly improved growth

Result Highlights

* Asset quality: Gross slippages amounted to Rs 6.19bn (annualized slippage ratio of 4.3%), with net slippages amounting to Rs 2.92bn

* Margin picture: NIM at 5.04% was up 70 bps QoQ where it had a benefit of about 45-50 bps due to recognizing interest income on restructured book

* Asset growth: Advances grew 3.2%/2.4% QoQ/YoY driven by wholesale loans, even as specific parts of retail lending displayed divergent trends

* Opex control: Total opex de-grew/grew -1.4%/37% QoQ/YoY, employee exp. grew 10%/34.8% QoQ/YoY and other exp. de-grew/grew -5.3%/38% QoQ/YoY

* Fee income: Core fee income fell -7.4%/-4.4% QoQ/YoY as there was a reversal of fee income worth Rs 500mn on cards in the late fees and over-limit buckets

Our view – RBL sticks neck out to guide for near-BAU credit cost and vastly improved growth

While credit cards and microfinance book still threw up material slippages, RBL looks forward to a relatively benign FY23: The sectoral breakup of slippages was credit cards contributing Rs 2.1bn, microfinance Rs 1.63bn, the rest of retail Rs 1.82bn and wholesale Rs 0.73bn. Provisions were Rs 4,007mn, down by -5.5% QoQ and -36.1% YoY. The bank has made accelerated provisions with a view to meeting expected loss and is now entering FY23 on a strong footing, as per management. Credit cost in FY23 is expected to be markedly lower, incrementally supported by healthy recoveries from wholesale and retail accounts. The bank is targeting a credit cost range of 2-2.25% for FY23

After closing out year with tepid growth, RBL stands ready to deliver far healthier growth in FY23: While there was decline in micro banking for the year, there was a 25% QoQ growth in disbursement for the quarter. There was a decline in business loans due to conscious rundown of unsecured business loans worth about Rs 15bn. As regards guidance, retail loan growth in FY23 is expected to be in the mid to high 20s, driven by cards, microfinance, housing and rural business. Overall, the loan growth is expected to be in the 15-20% range in FY23

While margin benefited on sequential basis due to a one-off, loan mix evolution augurs well for structural margin expansion: Management stated that, over a period of time, share of non-wholesale loans would rise to 65% from 52% currently. Furthermore, while overall retail growth in FY22 is expected to be in the mid-to-high 20s, the growth for credit cards and microfinance is expected to be in excess of 30%.

We maintain ‘Buy’ rating on RBL with a revised price target of Rs 126: We value the bank at 0.6x FY23 P/BV for an FY23E/24E RoE profile of 9.5/11.2%

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