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RBL accelerates card addition but we await announcement on permanent CEO

Result Highlights

* Asset quality: Gross slippages amounted to Rs 7.66bn (annualized slippage ratio of 5.5%), with net slippages amounting to Rs 3.13bn

* Margin picture: NIM at 4.3% was up 24 bps QoQ on account of lower interest reversals, among other factors

* Asset growth: Advances grew 3.8%/3.0% QoQ/YoY driven by wholesale loans, even as specific parts of retail lending displayed divergent trends

* Opex control: Total opex grew 23.3%/46.3% QoQ/YoY, employee expenses grew 6.6%/20.3% QoQ/YoY and other expenses rose 28.7%/57.9% QoQ/YoY

* Fee income: Core fee income rose 17.4%/19.5% QoQ/YoY with the bank registering one of its best quarters in terms of card spends

Our view – RBL accelerates card addition but we await announcement on permanent CEO

Management effectively sub-divided unsecured lending into 3 buckets, accelerating credit cards, staying neutral on microfinance and de-focusing the rest: Credit card issuance for the quarter amounted to 0.6mn, which is 80-100% higher than normalized levels and the bank expects to add another 0.55mn credit cards during 4QFY22. According to management, the market environment is very conducive for cards since spends are growing but not the revolve rates. Credit card dues rose 5.7% QoQ. The share of the microfinance book has declined from 12% at the peak to about 8% currently and this share will remain static as such. Microfinance book de-grew -2.7% QoQ.On business loans, the unsecured exposures are being run off and the business loans’ book de-grew - 7.0% QoQ. Affordable housing and agri loans grew 6.7% and 10.5% QoQ, respectively and wholesale loans grew 8.0% QoQ.

On evidence of reported disclosures, RBL seems to be exiting the asset quality woes that emanated from previous waves of Covid-19: Annualized slippage ratio for the quarter at 5.5%, though still elevated in the absolute sense, was materially lower than8.6% registered in 2QFY22. Also, net slippages were 41% of gross slippages on account of reasonable recoveries and upgrades. Management has guided for a sequential decline in slippages for 4QFY22. Importantly, of the gross restructured book of Rs 19.98bn (3.4% of advances), Rs 11.85bn is derived from business loans, which management stated is primarily secured LAP loans, which are behaving well and where any LGD should be relatively low.

We maintain ‘Buy’ rating on RBL with a revised price target of Rs 186: We value the bank at 0.8x FY23 P/BV for an FY22E/23E/24E RoE profile of 1.5/9.9/12.0%.

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