RBL Bank - Earnings and return normalization still sometime away - ICICI Securities

RBL Bank's Q3FY21 earnings were reflective of anticipated asset quality stress: 1) proforma slippages of Rs14.7bn (cumulative 9MFY21 run-rate of 4%); approved restructuring of 0.9%; 2) Aggressive write-offs of Rs7.8bn (predominantly in wholesale segment) contained proforma GNPLs at 4.57% (3.49% in Q2FY21); 3) credit cost elevated at 440bps (after utilising 50bps contingency buffer). Higher than anticipated stress in MSME and micro-banking, coupled with incremental write-offs in credit cards, does not provide confidence on credit cost subsiding in Q4FY21/FY22. Management's stance of reducing inherent business risk and lowering earnings volatility will lead to below-average balance sheet and operating profit growth. Bank will take more quarters to normalize on earnings trajectory, delivering modest RoA/RoE in the interim. This will cap valuation re-rating beyond 1x FY22 adjusted book and we downgrade it to 'HOLD' with target price of Rs210 (earlier Rs246). Key risks: 1) credit card/wholesale businesses exhibiting better stability and quality; 2) premium deposit rate may weigh on NIMs.

- MSME and micro banking hurling more than anticipated stress: Expectations from RBL Bank on stress accretion was relatively higher than peers - given the vulnerability of the pool (credit card, MFI, MSME, commercial banking etc). True to this, proforma slippage run-rate was higher at Rs14.7bn - 45% flowing from credit card, <10% from MFI (for now), 35% from MSME and balance from corporate/agri. Besides 5% write-offs and 2% SMA-1/2 pool in credit card, stress in MSME and micro banking is higher than anticipated. This coupled with any further stress from corporate portfolio, will keep slippage run-rate elevated in coming quarters.

- Subsuming contingency buffer not comforting, credit cost normalization sometime away: The bank has created NPA equivalent provisioning on proforma slippages at the rate upwards of 70%. This was managed with ~440bps annualised credit cost as it utilised contingency buffer of 50bps (50% of existing buffer) this quarter. With proforma GNPAs anticipated to rise for MFI advances (from 2.6% to 5.0-5.5%), business lending (from 4.5% to 6%) and incremental provisioning in credit card portfolio, we expect similar run-rate of credit cost in Q4FY21 as well. Even getting into FY22, we are building in credit cost of 2.4%, suggesting the bank is still sometime away from normalization.

- Effective consolidation and stability of corporate banking imbibes confidence to grow: Management highlighted that wholesale banking is demonstrating stability over few several quarters. Having consolidated wholesale portfolio with incremental focus on better rated corporates and steady BB & below pool, it would now look to grow the portfolio now onwards. Infact, it is evident from this quarter itself as it added almost 180 incremental wholesale customer relationship.

Shares of RBL Bank Ltd was last trading in BSE at Rs.215 as compared to the previous close of Rs. 218.55. The total number of shares traded during the day was 900360 in over 8689 trades.

The stock hit an intraday high of Rs. 220.3 and intraday low of 209.3. The net turnover during the day was Rs. 193127416.

Source : Equity Bulls

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