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Management saga could delay business normalization story

In a surprising turn of events, the RBI has appointed its chief general manager, Mr Yogesh Dayal, as an additional director on RBL’s board for two years; current MD & CEO Mr Vishwavir Ahuja has gone on medical leave; and Executive Director Mr Rajeev Ahuja has been elevated as interim MD & CEO for a smooth transition. Here are our views and key takeaways from management’s call:

* Management did not provide satisfactory reasons for the RBI’s appointment of its official as an additional director on the bank’s board and the sudden management rejig. But we believe that the RBI’s long-term discomfort with 1) the unsecured heavy asset-side construct ((MFI + Cards at 31%) creating asset quality risks as seen during Covid and 2) poor compliance with its directives (about risk management/governance/succession) could have possibly led to its swift intervention, apart from ensuring a smooth management transition and comforting the stakeholders.

* Management emphasized that the change in the top management/board is not due to any asset quality issues/divergence and that recovery trends are largely in line with expectations, barring in MFI. Management reiterated its guidance to bring down NNPAs to below 2% from current 2.1% by improving PCR and achieving exit RoA of 1% by Q4. The medium to longterm strategy to build the retail deposit base and diversify the asset book toward a more secured portfolio, including mortgages, will continue and possibly be accelerated.

* The Nomination and Remuneration Committee (NRC) under the oversight of the board will search and recommend a candidate to replace Mr Vishwavir Ahuja in due course, which could typically include internal/external candidates. Mr Rajeev Ahuja (interim MD & CEO) has expressed his interest in the permanent MD & CEO candidature.

* RBL carries a liquidity buffer of Rs120-130bn (16-17% of deposit base) to deal with the initial deposit run-down scare amid the turn of events, which could be limited. Management believes that it has built a reasonably strong retail deposit franchise in past three years after the deposit scare in Mar’19 - Yes Bank saga and is now battle-tested to deal with any eventuality.

Our view: We believe, in order to comfort investors, more explanation will be required from management to justify the sudden exit of Mr Vishwavir Ahuja nearly six months before his term ends (Jun’22) and the RBI’s intervention (typically seen in weak banks like Ujjivan, Dhanlaxmi, LVB, J&K Bank). We believe the story will unfold in due course. That said, we draw some comfort from the appointment of Mr Rajeev Ahuja (part of the turnaround journey) as interim MD & CEO, healthy liquidity buffers/capital ratios (Tier I at 15.5%) and management’s strategic intent to change the portfolio mix toward secured assets. However, near/medium-term business/asset quality dislocation is inevitable. Thus, we cut our earnings estimates for F22/FY23/FY24 by 176%/13%/12%. We also cut our P/ABV multiple to 0.7x Dec’23E from 0.9x. Accordingly, we cut the TP to Rs165 from Rs215, given lower RoE (8- 10% over FY23-24E vs. earlier 9-11%) and near-term management uncertainty. Retain Hold with UW in EAP. We will keep an eye on any further development at the bank.

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