Creating its niche in space of commons
We initiate Buy on RBL Bank (RBK) with Target Price of INR240, 1x FY23 BVe as we expect earnings (on a lower base) to rebound by 4x over FY21-23E and ROAs to improve to 1.2%+ by FY22/23E. We believe investor's concerns related to corporate exposure (recognized, provided for and de-bulked) and deposits (12% growth in 1HFY21 and LD ratio at several quarters low) are now less of a challenge. High proportion of 30% of unsecured loans (credit card and MFI) to overall loans could impact FY21e earnings as asset quality challenges would rise in this disruptive environment, but fostering of these niche segments (market share of ~5% vs. loan market share of <0.6%) which are linked to consumption and grass root level recovery would provide springboard to earnings in FY22/23e. Superior CET 1 of 17.4% and management continuity would support execution. Current valuations of 0.7x FY23 BV overlooks this potential and as comfort on unsecured businesses improve we see upsides to valuation multiples.
Differentiated lending model: RBK fostered businesses of credit card and MFI which are difficult to build but highly profitable and was able to gain disproportionate market share of 5% as compared to <0.6% in overall loans. Credit card acquisition was aided by partnership with Bajaj Finance and 60% of its customers are already carded by 2 or more players other than RBK, still spend market share for RBK is in-line with number of cards market share, reflecting acceptance of its offerings. Similarly, MFI business was built through partnership with Swadhar Finserv which RBK later acquired and other BCs; MFI outstanding exposure is geographically diversified and its average ticket sizes are lower than the industry. These segments formed 30% of its loans in FY20 and has high ROA potential of 3-4%. Though we expect ROAs for these businesses to dip in FY21e to 0.3% vs. 2.8% in FY20, we believe these segments would recover fast and we see initial signs of improvement in credit card spends and better collection efficiency and livelihood loan demand in MFI segment, this can drive ROAs normalization in these businesses to 2.5-3% in FY22/23e and provide fillip to overall ROAs.
Corporate cycle for RBK have troughed: After a strong corporate performance, asset quality deteriorated (GNPL rose to 8%+ in large corporate vs. 0.6% in FY19) in FY20 on back of few group exposures going bad. However, bank not only recognized these exposures as NPLs but also took corrective steps by (1) conservatively providing on these exposures (RBKs provision coverage ratio of 53% is much higher than RBI's regulatory requirement 30-32%) and (2) de-bulking, as wholesale loans are lower by 20%+ from its peak and now forms 44% of overall loans vs. 56% in FY19. Our read into MCA filings of 254 corporate rating indicates <5% of RBKs corporate book could be vulnerable. Therefore, we expect corporate profitability to improve as credit cost declines from 4.5% in FY20 to 2.8in FY21e and then normalize to 1- 1.2%.Deposits traction and liquidity now comfortable; deposit productivity higher than perceived: Moratorium on YES Bank had an unintended effect on flight of deposits from mid-sized new generation private banks including RBK which saw 8% QoQ deposit decline in 4QFY20. Nevertheless as things stabilized RBK reported deposit growth of 12% in 1HFY21 and liquidity improved with LD ratio of <90% at multi-quarter low and LCR of 170%, one of the best in the industry. We note that RBK deposit productivity per branch is higher than peers and with moderate asset growth in the near term, higher retail term and SA deposit rate offerings in a low deposit chase environment, branch expansion and mining of its credit card customers should help improvement in deposit profile.
Valuations at 2SD below average multiple, inept for differentiated lending model: RBK's valuation multiple of 0.8/0.7x FY22/23BVe is penalizing near term concerns on unsecured loans but is overlooking progress made on corporate and deposit concerns. Similarly, at current valuations we do not see recovery hope built in earnings which we expect to rise 4x (on a lower base), therefore there is room for positive surprise and as ROAs path towards 1%+ becomes clearer we see upside to valuation multiples.
Shares of RBL Bank Ltd was last trading in BSE at Rs.167.1 as compared to the previous close of Rs. 172.9. The total number of shares traded during the day was 719523 in over 7923 trades.
The stock hit an intraday high of Rs. 175.9 and intraday low of 166.25. The net turnover during the day was Rs. 123505038.