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Improving growth, asset quality to drive-up RoE

* For Q2FY23, RBL Bank reported a slight miss in PAT at Rs2bn (vs. est.: Rs2.2bn). This was mainly on account of higher staff cost, which in turn was led by delayed increments/payouts and some front-loading of provisions. Despite higher slippages (mainly from the restructured pool), GNPA ratio improved by 28bps qoq to 3.8% due to higher recoveries/w-offs and is expected to continue going forward.

* Credit growth during the quarter improved to 12% yoy/4% qoq because of improving traction in retail/SME. MFI AUM improved for the first time after a gap of five quarters, as disbursements picked up. Management expects growth to improve in H2 and has guided for 15% growth in FY23, post which it should improve to ~20%, led by acceleration in new product lines. Deposit growth is also expected to accelerate, led by improvement in branch productivity and cross-selling.

* The bank has guided for continued healthy margin trajectory as growth improves, while it will continue to invest in branches, technology, and new products, which shall keep operating profit growth in check. However, improving asset quality and, in turn, lower LLP should drive up the bank’s RoA to 0.8-1.2%/RoE to 7-12% over FY22-25E from a loss in FY22.

* We believe the new MD’s strategy on prioritizing management stability, accelerating profitable growth, and NPA recoveries is comforting. The bank’s regulatory compliance should also improve and, thus, reduce the risk of regulatory friction. With improving growth/RoE visibility, we upgrade our TP to Rs160 (earlier Rs125), based on 0.6x Sep-24 ABV. We retain our Buy rating on the stock.

* What we liked – Improving credit growth, with MFI/Card disbursements picking up, and assetquality improvement with GNPA ratio down 28bps qoq to 3.8%. What we did not like – Higher stress flow the from restructured pool, reduction in specific PCR, and slower deposit growth.

* Growth set to improve with a focus on asset diversification: Overall credit growth improved to 12% yoy/4% qoq, mainly driven by retail and SME. MFI AUM improved for the first time after a gap of five quarters as disbursements picked up. Growth in the card business is also gradually accelerating, which could be a key growth and margin driver. That said, RBL would also focus on increasing the share of the secured portfolio, including housing, vehicle loans (new/used), gold, and TW, thus taking the share of secured retail to 25-30% of the book. The bank has been consuming internal excess liquidity but would now focus on driving deposit growth as well as CASA, led by improved productivity at existing branches, new branch addition, and cross-selling liabilities.

* Higher stress flow from restructured loans, but NPA formation moderates: Although fresh slippages were higher than expected at Rs 8.1bn/5.8% of loans (due to slippages from RSA pool), higher recoveries/w-offs led to a 28bps qoq decline in the GNPA ratio to 3.8%. Specific PCR slipped sequentially, but it remains healthy at 68% levels. The restructured book moderated to 1.9% of the loans due to relapse into NPAs and is expected to run down as repayment improves. As a strategy, the bank is likely to focus on recovery from its old NPAs, including CCD and so on, which should further improve NPA ratios.

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