Maintain REDUCE on RBL Bank - The pitfalls of 'banking' on a single engine - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

RBL Bank (RBK) reported a loss of INR 4.6bn in Q1FY22 on account of a steep increase in provisions (~10%, annualised). Having made efforts at stabilising its highly-concentrated wholesale portfolio during FY19-FY20, RBK is now witnessing the brunt of the pandemic impact on an equally highly-concentrated retail unsecured segment (CC+MFI at ~32% of loans). Slippages were high at ~9.5% (annualised) for a third straight quarter - the management expects them to stay elevated during Q2FY22 as well. Our concerns and caution on RBK stem from the disproportionately high concentration of profit pools around two unsecured business segments (>50% fee income from credit cards), both of which need time to stabilise. For a franchise that has been banking on a single engine (credit cards), the impairment in its cards business is disappointing. We hack our FY22E/23E earnings forecasts by 20%/4%; we maintain REDUCE with a revised TP of INR182 (earlier INR 189).

Portfolio stress yet to peak; provisions to stay elevated: RBK reported GNPA/NNPA at 5%/2%, with a restructured portfolio at 1.8% of loans. The impairment (9.5% annualised) was almost entirely from the retail loan book, with >70% from credit cards and MFI (vs. 32% of loans) - the two businesses also contributed to a bulk of the write-offs (5.4% annualised). RBK shored up its PCR from 52% to 61% QoQ with higher build-out towards CC (75%) and MFI (83%) portfolios, while creating INR 2.4bn of COVID provisions.

Still searching for answers: RBK reported muted loan growth of -0.3% YoY (-4% QoQ). Lack of growth avenues in its key business segments reflected in higher liquidity build-out (cash equivalents at ~13% of assets). The new growth engines - tractor finance, affordable housing (INR 15.5bn) and gold loans - are unlikely to balance the retail asset mix (highly skewed towards unsecured) in the near term. We revise our FY22/FY23E forecasts downward to account for higher credit costs, lower loan growth (MasterCard embargo) and resultant margin compression. Our REDUCE recommendation reflects a franchise that is still searching for signs of portfolio stability.

Shares of RBL Bank Limited was last trading in BSE at Rs. 186.75 as compared to the previous close of Rs. 194.45. The total number of shares traded during the day was 734489 in over 6455 trades.

The stock hit an intraday high of Rs. 193.65 and intraday low of 186.15. The net turnover during the day was Rs. 138483159.

Source : Equity Bulls

Keywords