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Improvement in growth and margin tempered by slippage outcome

Result Highlights 

* Asset quality: Gross slippages amounted to Rs 8.12bn (annualised slippage ratio of 5.4%), with net slippages amounting to Rs 4.99bn

* Margin picture: NIM at 4.55% was up 19 bps QoQ due to loanrepricing and higher loan to deposit ratio

 * Asset growth: Advances grew 4.4%/12.4% QoQ/YoY driven sequentially by commercial banking and micro-banking

* Opex control: Total opex grew 2.1%/38.9% QoQ/YoY, employee exp. grew 10.4%/43.5% QoQ/YoY and other exp. de-grew/grew -1.1%/37% QoQ/YoY

* Fee income: Core fee income grew 2.4%/7.5% QoQ/YoY, sequentially driven by all segments except general banking and distribution fees which saw a QoQ fall

Our view – Improvement in growth and margin tempered by slippage outcome

Slippages rose materially on sequential basis and while management stated that provision impact was low, PCR has declined materially: The slippages from the restructured book amounted to Rs 2.79bn. There was also a corporate account that slipped due to technical reasons and got upgraded within the same quarter. The slippages from the credit cards book amounted to Rs 2.45bn whereas, the slippages from the other retail book amounted to Rs 2.21bn. The provision impact due to the slippages was minimal since the restructured book had been well provided for. Provisions were Rs 2.42bn, down by -4.5% QoQ and -62.9% YoY, translating to a credit cost of 39 bps on non-annualised basis. However, in not making higher provisions, management has allowed PCR to decline from 72.5% to 67.8% on sequential basis.

Management is serious about the new secured lending strategy and continues to add segments in this regard: The bank is focused on growing recently launched or about to be launched secured loan segments such as rural vehicle finance, 2-wheeler loans, used car loans, housing loans, small business loans and gold loans. 2-wheeler loans, used car loans and gold loans are ready to be launched this quarter. In about 2-3 years, the share of all these loan segments, taken together, should be about 20% of loan book.

Management stated that there is headroom to increase the loan to deposit ratio: For the quarter, loan to deposit ratio rose 318 bps QoQ to 79.3%. A further rise in loan to deposit ratio would aid margin, ceteris paribus. Yield on advances rose 24 bps QoQ to 11.46%, whereas cost of deposits rose 30 bps QoQ to 5.14%, implying spread compression.

We maintain ‘Buy’ rating on RBL with a revised price target of Rs 160: We value the bank at 0.6x FY24 P/BV for an FY23E/24E/25E RoE profile of 7.8/10.3%/12.3%.

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