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Asset quality ratios improve; higher provisioning drives earnings miss

Deposit franchise showing steady traction

* RBK reported weak earnings in 4QFY21, affected by elevated provisions and tepid NII growth. The management increased provisioning in its delinquent unsecured portfolio. On the business front, deposit growth picked up sequentially led by CASA, while loan growth improved QoQ. However, growth in its Credit Cards portfolio remains muted.

* The management hinted at a change in business strategy, with increasing focus towards Home, Two-Wheeler, Tractor, and Gold loans, while de-risking its loan book by pruning the mix of unsecured portfolio other than Credit Cards/MFI.

* On the asset quality front, slippages stood elevated – largely from the Retail portfolio – while higher recoveries and upgrades aided improvement in asset quality. Total restructuring stood ~1.6% of loans (in line with its earlier guidance). We cut our FY22E/FY23E earnings estimates by 7%/9% to factor in higher credit cost and subdued loan growth over FY22E, while we estimate credit cost to moderate slightly to 3.4% this fiscal. We expect the bank to deliver FY22E/FY23E RoA of 0.9%/1.1% and value RBK at INR250 (1.1x FY23E ABV). Maintain BUY.

Earnings miss aided by elevated provisions; asset quality ratios improve

* PAT stood ~INR753m (significantly below our estimate) in 4QFY21, affected by higher provisions of ~INR7.7b towards its unsecured delinquent portfolio. NII/PPOP grew ~4%/12% YoY, while PAT growth was muted in FY21.  NII fell 11% YoY (4% miss), with NIMs declining 2bp QoQ to 4.17%, affected by higher interest reversal on slippages. Other income reflected improving trends and grew 38% YoY to ~INR6.9b, supported by core fee income (+40% YoY) to ~INR6.6b. Retail contributed 77% of total fees.

* Opex declined ~7% YoY. C/I ratio stood at 45% (v/s 45.9% in 3QFY21). PPOP grew at 17% YoY.

* Loans grew ~4% QoQ to INR586b, with Wholesale/Retail portfolio growing 3%/4% QoQ. The Wholesale-to-Retail mix stood at 41:59. Among Retail segments, the MFI portfolio grew 6% QoQ, while Credit Cards growth was muted. The share of both Credit Cards and MFI stood at 33%.

* Deposits increased 8.8% QoQ to INR731b, led by CASA growth of ~11%. CASA ratio improved to 31.8% v/s 31.1% in 3QFY21. However, average CASA ratio was broadly stable.

* On the asset quality front, slippages stood elevated at INR14.4b, predominantly from Retail. However, higher recoveries (INR4.5b) and upgrades (INR3.2b) aided improvement in asset quality ratios. The GNPA/NNPA ratio improved to 4.34%/2.12% (v/s pro forma GNPA/NNPA ratio at 4.57%/2.37%). PCR ratio improved to 52.3% (v/s pro forma PCR ratio of 49.3% in 3QFY21). Total restructured loans stands ~INR9.3b (1.6% of loans).

Highlights from the management commentary

* The management’s focus is on improving provision coverage by 7-10% in FY22.

* Currently, it remains cautious in disbursing MFI loans in key stressed states of West Bengal, Assam, Maharashtra, and Punjab.

* The management suggested it may de-risk its loan book by pruning the mix of unsecured portfolio other than Credit Cards/MFI business. Its new focus segments will be Home loans, Gold loans, Tractors, and Two-Wheelers.

Valuation and view

* We expect loan growth to remain weak as the management remains cautious in growing its unsecured segments due to a challenging environment and a resurgence in COVID-19 cases. It has guided at a change in business strategy, with increasing focus towards Home, Two-Wheeler, Tractor, and Gold loans, while de-risking from some of its unsecured portfolio other than Cards/MFI business. While asset quality ratios have improved and collection efficiency across business segments have recovered, we continue to remain watchful, given the higher proportion of unsecured assets and uncertain environment. We cut our FY22E/FY23E earnings estimates by 7%/9% to factor in higher credit cost and subdued loan growth this fiscal. We estimate the bank to deliver FY22E/FY23E RoA of 0.9%/1.1% and value the bank at INR250 (1.1x FY23E ABV). Maintain BUY.

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