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Earnings trajectory to improve gradually

Signs of recovery in loan growth; asset quality remains under watch

* RBK reported a 5.5x YoY jump in net profit to INR2b (in line) in 2QFY23, aided by a 63% decline in provisions.

* There was a pick-up in loan growth momentum, up 12% YoY and 4% QoQ to INR629b. Deposit growth was muted at 5% YoY, but flat QoQ at INR794b.

* Fresh slippages grew 24% QoQ to INR8.1b. However, the management is confident that these will be upgraded in future quarters. GNPA ratio improved by 28bp QoQ to 3.8% while NNPA ratio increased by 10bp QoQ to 1.26%. PCR ratio, as a result, fell by ~470bp to 67.8%.

* We expect RBK to deliver a RoA/RoE of 1%/9% in FY24. We maintain our Buy rating.

Loan growth led by a 7% QoQ increase in Retail assets; share in the business mix improves to 51.9% v/s 50.6% in 1QFY23

* RBK reported a PAT of INR2.01b (in line), aided by a 63% decline in provisions. NII grew 16% YoY (in line), while other income fell 2%. NIM rose 19bp QoQ to 4.55%. The bank expects margin to improve from here on as it deploys excess liquidity over the next few quarters.

* Other income fell 2% YoY (in line) due to a flat fee income and a 49% QoQ fall in treasury profits. OPEX rose 39% YoY, led by investments in building the franchise. This resulted in an elevated C/I ratio at 68.9%. Consequently, PPOP declined by 26% YoY to INR5.1b (7% miss).

* Loan book grew 12% YoY and 4% QoQ to INR629b, driven primarily by a 7% QoQ growth in Retail loans. The Retail-to-Wholesale mix stood at 52:48. Within Retail, Housing loans grew 35% QoQ and the MFI portfolio grew 22%. Credit Cards grew at a steady pace of 4% QoQ. The share of Credit Cards stands at 23% of total loans, while the same for Home loans is on a low base of ~6%.

* Deposits were flat QoQ, but grew 5% YoY. CASA deposits grew 8% YoY and 1% QoQ. The CASA ratio increased by 20bp QoQ to 36.2%.

* Fresh slippages grew 24% QoQ to INR8.1b. However, the management is confident that these will be upgraded in future quarters. GNPA ratio improved by 28bp QoQ to 3.8% while NNPA ratio increased by 10bp QoQ to 1.26%. PCR ratio, as a result, fell by ~470bp to 67.8%.

Highlights from the management commentary

* RBK plans to launch its 2W, Used Cars, and Gold loans in 3QFY23.

* Overall, the bank is targeting a loan growth of 15% in FY23 and more than 20% over the medium term.

* Credit cost is likely to be significantly lower ~2% in FY23.

Valuation and view

RBK reported an in line earnings in 2QFY23, led by lower provisions. Business trends were mixed, with a loan growth of 12% YoY and 4% QoQ. It reported a steady improvement in headline asset quality (GNPA), along with a lower restructured book. However, net NPA ratio saw a moderate increase, accompanied by a lower PCR. OPEX remains elevated as the bank continues to invest in newer areas of business and branch expansion. RBK expects to end FY23 with 15% growth and over 20% growth from FY24, led by growth in retail as well as wholesale book. We expect RBK to deliver a FY24E RoA/RoE of 1%/9%. We maintain our Buy rating with a TP of INR160 (0.7x FY24E ABV).

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