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RBL signals clear path to rehabilitating return ratios

Result Highlights

* Asset quality: Gross slippages amounted to Rs 12.17bn (annualized slippage ratio of 8.7%) and recoveries and upgrades amounted to Rs 4.7bn

* Margin picture: NIM at 4.06% was down 30 bps QoQ on account of higher excess liquidity, among other factors

* Asset growth: Advances de-grew -0.9%/-0.3% QoQ/YoY as non-wholesale loans dragged, while wholesale loan growth offset most of this de-growth

* Opex control: Total opex changed -4.6%/22.3% QoQ/YoY, employee expenses grew 2.6%/10.4% QoQ/YoY and other expenses changed -7.3%/27.9% QoQ/YoY

* Fee income: Core fee income rose 2.4%/46.2% QoQ/YoY with traction in card fees offsetting slack in retail lending activity

Our view –

RBL signals clear path to rehabilitating return ratios

Management had earlier guided that slippages in 2QFY22 would be similar to 1QFY22 levels and now guide for sharp improvement in 2HFY22:

Management stated that net slippages in 2HFY22 would be half the level seen in 1HFY22. Futhermore, provisions in 2HFY22 would be less than half that observed in 1HFY22 and added that, in FY23, provisions would be half of levels seen in FY22. Recoveries and upgrades for the quarter amounted to Rs 4.71bn. Provisions declined 53% QoQ to Rs 6.52bn. The bank is holding Rs 1.34bn worth of Covid provisions and restructured book provisions of Rs 2.58bn. Total restructuring amounted to 3.66% of loan book. 21% of the restructuring book came from the wholesale book and the rest from retail.

Excess liquidity rose as indicated by the 181bps sequential decline in loan to deposit ratio to 74.1%:

Average LCR also rose from 134% to 155%. Interest reversals remained elevated at Rs 1.3bn negatively impacting NIM by 58 bps, ceteris paribus, though not the key difference sequentially. The bank expects to revert to a 4.3% NIM in 3QFY22 and 4.5% in exit quarter of FY22 on the back of normalisation in interest reversals and decline in cost of deposits, where RBL has already partly bridged the gap with larger peers.

Large corporate loans made a comeback, growing 5.1% QoQ, driving overall wholesale growth of 3.1% QoQ:

Non-wholesale loans de-grew -4.0% QoQ, dragged by micro banking, which de-grew -16% QoQ. Business loans also de-grew -7.6% QoQ. Credit cards and retail agri segments displayed growth of 3.7% and 6.1% QoQ. Management stated that the bank would grow 7-8% in 2HFY22 and in the mid to high teens in FY23.

We maintain ‘Buy’ rating on RBL with a revised price target of Rs 237:

We value the bank at 1.0x FY23 P/BV for an FY22E/23E/24E RoE profile of 2.9/10.9/12.4%.

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