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Modest return profile in the interim; transitioning underway

RBL Bank’s Q4FY21 earnings reflect the anticipated asset quality stress: 1) slippages of Rs14.4bn (cumulative run-rate of 5.4% in FY21) and restructuring of 1.4%; 2) aggressive write-offs of Rs6.7bn and recoveries/upgrades of Rs7.8bn contained GNPLs below Q3FY21 proforma levels at 4.34%; 3) credit cost elevated upward of 5% (accelerated provisioning on unsecured pool). Nonetheless, sharp spike in fee income, stable NIMs and contained cost supported operating profit growth.

Management’s focus is on reducing inherent business risk through granularity in the portfolio, scaling up secured lending segments, and fortifying the balance sheet through provisioning. Through this transitioning, the bank will take more quarters to normalise its earnings trajectory and we revised our earnings by 5-6% for FY22E/FY23E. Also modest RoA/RoE in the interim will cap valuation at 0.75x FY23 ABV. Maintain HOLD with a revised target price of Rs 190 (earlier: Rs 210). Key risks: 1) credit card / wholesale businesses exhibiting better stability and quality; 2) premium deposit rate weighing on NIMs.

* Credit card, micro banking and SME hurling more than anticipated stress: Stress accretion was anticipated to be higher for RBL – given the vulnerability of the pool (credit card, MFI, MSME, etc). True to this, slippages of Rs14.4bn in Q4FY21 made RBL end the year with full-year slippages at 5.4%. Of Rs31bn of FY21 slippages, Rs13bn accrued from credit card, Rs3.9bn from MFIs, Rs7.5bn-8.0bn from SMEs, and the balance Rs6bn from wholesale segment. Upgrades of Rs3.2bn in Q4FY21 pertained to both wholesale as well as retail segment: an old corporate NPA got upgraded due to change in management control. Recoveries of Rs4.5bn in Q4FY21 were largely towards retail portfolio. RBL has also written-off aggressively Rs14.5bn in H2FY2). Gross NPA declined to 4.34% vs proforma 4.57% in Q3FY21 and, with coverage of 72%, net NPA ratio settled at 2.12% vs 2.52% in proforma Q3FY21. Excluding the write-offs, coverage was 52%, which the bank plans to increase to 60%. RBL restructured Rs9.27bn of advances (1.4%) – well within the expected range. Of this, Rs3.47bn was in wholesale and Rs5.8bn in retail.

* No new contingency buffer is discomforting; credit cost normalisation some time away: Bank has accelerated provisioning on credit card, MFI and other unsecured retail against the existing contingency buffer. With this, credit cost during the quarter came in higher at Rs7.7bn taking cumulative credit cost for FY21 upward of 500bps. Of the FY21 credit of Rs24bn, provisioning in credit card was Rs10.7bn, MFI Rs1.8bn, other retail/SME Rs3bn and the balance was in wholesale segment. While the management sounded confident of corporate banking portfolio being adequately provided, credit cost with resurgence of covid 2.0 can keep credit cost elevated in H1FY22. Getting into FY22E/FY23E, we are building-in credit cost of 2.9%/2.2%, which suggests the bank is still some time away from stabilisation

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