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Loan growth still muted; Low incremental restructuring in 2Q

* REPCO reported a 2QFY22 PAT of INR859m (16% beat), up ~6% YoY and 168% QoQ, driven by a 12% YoY and 8% QoQ growth in NII (8% beat) and a healthy improvement in other income. Credit costs declined by 78% QoQ to INR169m, driven by a minor sequential improvement in the asset quality and lower incremental restructuring.

* PPOP rose 14% YoY and 8% QoQ to INR1.32b, with operating expenses up 10% YoY and 15% QoQ.

* Loan growth continued to remain muted, led by REPCO’s inability to significantly improve its levels of disbursements and stem the elevated levels of balance transfers.

* Performance in 2QFY22 was characterized by healthy NIM of 5.2%, improvement in GNPA (down 10bp QoQ), incremental restructuring of ~60bp under RBI OTR 2.0, and ~102% QoQ increase in disbursements, leading to an AUM that was largely flat QoQ and down 2% YoY.

* The current term of Repco MD & CEO Mr. YashPal Gupta is getting over in January’22 and he has expressed his willingness to be relieved from his current responsibilities (perhaps because of health reasons). Board will potentially be looking for a (likely external) candidate to succeed the current MD & CEO.

* Given the collection/recovery/resolution efforts being made by Repco, we are optimistic that it can deliver an improvement in asset quality in the remainder of FY22 and get closer to its guidance of 3.5% GNPA by Mar’22. We have a Buy rating on the stock with a TP of INR410 (0.9x Sep’23E BVPS).

Loan growth remained muted

* Loan book continued to consolidate, with reported AUM ~INR119b, largely flat QoQ and down 2% YoY. Run-off in the book continues to remain high at 19% (annualized; similar levels as 3Q/4QFY21), suggesting that balance transfers continue to stay elevated.

* Customer mix between salaried/self-employed and product mix between Home loans/LAP remained stable on a sequential basis.

* Disbursements stood at INR4.8b, up ~102% QoQ and 4% YoY. We do expect disbursements to pick up significantly in 3Q/4Q but until it can go back to quarterly disbursement run-rate of at least INR8b-9b there will still remain a lot to be desired.

Continued to run its lean machinery in operating expenses

* REPCO continued to remain frugal on OPEX, with a cost-to-income ratio of ~18% and OPEX-to-average assets of ~95bp (annualized).

* There were no new branch additions in 2QFY22 and other expenses rose 29% QoQ.

* Repco guided that it would be looking to add 10-15 branches every year. In addition to this, we expect Repco to start expensing its digital/ technology spends from FY23 onwards which could lead to a slight uptick in other operating expenses.

NIM and spreads at record highs

* Reported spreads rose 30bp QoQ and 60bp YoY to 4%. This was driven by a 50bp QoQ increase in yields, led by interest income reversals and settlements/recoveries on some legacy NPA accounts.

* Cost of borrowings was sequentially stable at 7%, with a minor decline in WAC of bank term loans, mitigated by an increase in WAC of NHB loans.

* Reported NIM stood at 5.2%, up 60bp YoY and 40bp QoQ.

Minor improvement in asset quality; incremental restructuring ~60bp in 2QFY22

* Reported GS3/NS3 stood at 4.3%/2.5% (down 10bp each QoQ). PCR on S3 improved to ~43%, up 130bp QoQ.

* REPCO restructured INR320m/INR6.78b (~0.3%/~5.7% of the loan book) under OTR 1.0/2.0. Total restructured pool (including OTR 1.0 and 2.0) stood at INR7.1b (6% of the loan book).

* Total ECL provisions increased by 10bp QoQ to 3.2% (of the loan book). This included COVID-19 provisions of INR174m (~15bp of the loan book). Credit cost stood ~57bp (annualized) v/s 260bp in 1QFY22.

Capital adequacy improved further given no growth in the B/S

* Capital adequacy remains comfortable at 32.3% (large part of which is Tier I capital).

Valuation and view

* Incremental restructuring of only ~60bp in 2QFY22 is a positive. While REPCO has reported a minor improvement in asset quality during the quarter, it has had issues of the legacy NPA advances remaining sticky for far too long and a large part of which feeds into elevated levels of gross stage III. We expect resolutions to start coming through leading to an improvement in the headline GNPA given that SARFAESI has now been initiated on three-fourths of the Stage III loan-book.

* While the improvement in spreads/margin is a positive, loan book growth continues to remain muted on the back of tepid disbursements and elevated levels of balance transfers.

* REPCO trades at 0.7x FY23E P/BV and the risk-to-reward ratio is still very favorable. Management guided that it will embark on a healthy loan growth trajectory from FY23 onwards. We increase our FY22E PAT estimate by 6% to factor in higher NII and lower operating expenses while FY23/FY24E estimates are largely unchanged. We now build a ~7% CAGR in loan growth over FY21- FY24E and model RoA/RoE of 2.6%/14% over FY23-FY24E. Loan growth estimates could change meaningfully if there is a change in approach/strategy under a new MD/CEO who could potentially assume office by Apr’22. We maintain our Buy rating on the stock with a TP of INR410 (0.9x Sep’23E BVPS)

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