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Downgraded a year ago, sub-optimal stress outcomes continue to fructify

Our view – Credit card and microfinance exposures pose dual problem

Asset Quality –

Gross slippages spiked further from already elevated levels due to credit cards and microfinance stress: Gross NPA additions amounted to Rs 10.26bn for 2QFY25, translating to an annualized slippage ratio of 4.8% for the quarter. Gross NPA additions had amounted to Rs 7.20bn during 1QFY25. Credit card slippages were Rs 6.3bn whereas Microfinance slippages Rs 2.4bn. We had downgraded RBL in October 2023 (see report) and have maintained our stance throughout this period. The key reason for higher slippages on the credit card portfolio was the transition of collection effort, which got completed by 31st July. Hence, credit card slippages have peaked and will decline from 3Q itself and there would be a reversion to earlier levels by 4Q. However, credit cost on microfinance portfolio is likely to move up in 3Q. Overall credit cost may not sharply decline in 3Q but would move lower in 4Q.

Balance sheet growth – Management reiterated prior loan growth guidance even though loan growth has slowed at 15% YoY: Advances grew 1.4%/15.1% QoQ/YoY, driven sequentially by select segments of retail loans and Commercial Banking (Mid-corporates & SME). Retail secured book can grow in the high 20s and microfinance disbursement is already improving. Overall loan growth for FY25 can reach 18-20% guided for earlier.

Net Interest Margin – Margin declined materially on sequential basis due to interest reversals and lower interest on income tax refund: NIM at 5.04% was down -63bps QoQ. Higher than trend slippages in credit cards and MFI led to interest reversals worth Rs 1.2bn for the quarter. Lower interest on income tax refund also impacted margin, adjusted for which the margin decline would have been lower at 35-40 bps QoQ. Margin in 3Q is expected to be flattish on sequential basis before improvement is seen. We maintain a less-than-bullish ‘ADD’ rating on RBL with a revised price target of Rs 230: We value the bank at 0.8x FY26 P/BV for an FY25/26/27E RoE profile of 7.4%/11.0/12.6%. (See Comprehensive con call takeaways on page 2 for significant incremental colour.) Other Highlights (See “Our View” above for elaboration and insight)

* Opex control: Total cost to income ratio was at 64.2% down by -150/-225bps QoQ/YoY and the Cost to assets was at 4.7% down by -13/-11bps QoQ/YoY.

* Fee income: Core fee income grew 6.9%/21.2% QoQ/YoY, sequentially driven higher by Distribution Fee, Payment Related Income and Trade & Others.

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