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Our view – Elevated slippage ratio in relatively benign cycle symptomatic of inherent cyclicality

Material rise in slippages from an already elevated level was contributed to from all key retail buckets: Gross NPA additions amounted to Rs 6.66bn for 3QFY24 compared with Rs 5.41bn during 2QFY24. Microfinance, Credit cards and Other retail contributed Rs 1bn, Rs 3.7bn and Rs 1.5bn, respectively to gross slippage. Management stated that microfinance recovery was impacted in some election states but overall collection efficiency is back to 99.4%. Provisions were Rs 4.58bn, down by -28.5% QoQ but up by 56.5% YoY, translating to annualised credit cost of 188bps. The Bank has created a contingent provision of Rs 1.15 bn on AIF investments during the quarter.

There was ~20 bps contraction in retail yield owing to slowdown in microfinance: There was somewhat adverse evolution of yield on advances, with the retail yield declining ~20 bps QoQ to 17.3%. Overall yield inched lower 3 bps QoQ to 14.0%. Yield was softer due to slow down in microfinance lending, which caused microfinance book to remain flattish on sequential basis. The bank would be able to maintain NIM at current level in 4Q.

Overall loan growth outcomes remained positive but are currently not translating into return ratios: Overall loan growth was 20% YoY and 5% QoQ. Within this, retail loans have grown faster at 33% YoY and 5% QoQ owing to the focus on the same. In terms of guidance, overall loan growth will be 20% YoY. Within this, retail loan growth will be 25% and within retail loans, secured loans would grow at 25-30%. Calculated annualised RoA and RoE for 9M is 89 bps and 7.8%, respectively, whereas, RBL already trades at 1x FY25 P/BV.

We maintain a less-than-bullish ‘ADD’ rating on RBL with a revised price target of Rs 315: We value the bank at 1.2x FY25 P/BV for an FY24E/25E/26E RoE profile of 8.4%/10.2%/11.7%.

Result Highlights (See “Our View” above for elaboration and insight)

* Asset quality: Gross slippages amounted to Rs 6.66bn (annualised slippage ratio of 3.5%), with net slippages amounting to Rs 4.66bn.

* Margin picture: NIM at 5.52% was down -2 bp QoQ as sequentially cost of deposits have moved up but yield on advances have shrunk.

* Asset growth: Advances grew 4.7%/19.9% QoQ/YoY, driven sequentially by Commercial banking and select segments of retail loans.

* Opex control: Total opex grew 7.6%/17.3% QoQ/YoY, employee exp. grew 6.4%/19.8% QoQ/YoY and other expense grew 8%/16.4% QoQ/YoY.

* Fee income: Core fee income grew 7.5%/23.6% QoQ/YoY, sequentially driven higher by Processing fees, Distribution and Payment related fees.

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