Rising confidence around 1.2%+ RoA delivery in FY22; Upgrade to BUY with 12m PT of Rs230
Capping of potential losses in the high-risk businesses of Cards and MFIs, improvement in rating profile and less vulnerability of the corporate portfolio and impressive handle over cost leads us to upgrade earnings estimates (10-13% for FY21/22) and rating (from ADD to BUY) on the stock. With normalization of credit cost in key product lines, we expect RoA to bounce back sharply to 1.3%. The in-process capital raise will bolster CET-1 to 17.5%, thus strengthening the balance sheet and positioning the bank well to pursue growth in ensuing quarters. Overall, we believe that Q2 FY21 performance and commentary improves the visibility of 1%+ RoA delivery in FY22 and this should uplift valuation.
Cost control leads PPOP beat
- RBL Bank's core PPOP came in 10% higher than our estimate and core PPOP margin stood at 2.7%. The beat came despite the bank proactively reversing interest income on non-wholesale advances expected to slip by Q3 FY21. Thus, reported NIM at 4.34% was 50bps lower qoq.
- The decline in NIM weighed on NII growth (-10% qoq and 7% yoy). There was strong recovery in core fee income (up 52% qoq and stood at 93% of Q2 FY20 level) with revived traction in card fees and processing income. Treasury income was elevated, and stood similar to Q1 FY21 at Rs950mn.
- Notwithstanding higher business activity levels in non-wholesale products on sequential basis, the absolute opex came-off in Q2 FY21 and exhibited no growth on yoy basis. Cost/income remained below 50%.
- Advances stood at Rs562bn (-1% qoq and -4% yoy); non-wholesale grew 7% qoq and 23% yoy with its contribution rising to 57%. Cards (portfolio up 10% qoq), LAP (up 5% qoq) and Micro Banking (up 9% qoq) witnessed substantial portfolio expansion.
- CASA deposits were up 8% qoq and its share improved to 31% (26.5% in Q2 FY20).
- Provisioning at Rs5.25bn was in-line with expectations. Covid provisions were ramped up by Rs3.1bn to Rs6.64bn (now at 121 bps of advances). PCR was improved by 600 bps qoq to 59.5%.
- SC order pending slippages marginal at Rs858mn (15 bps of advances). Bank has created contingency provision against them.
- Overall capital adequacy at 16.50% with Common Equity Tier 1 ratio of 15.12% at the end of Q2FY21.
Shares of RBL Bank Ltd was last trading in BSE at Rs.174.7 as compared to the previous close of Rs. 175.65. The total number of shares traded during the day was 1556967 in over 15926 trades.
The stock hit an intraday high of Rs. 181.9 and intraday low of 171.2. The net turnover during the day was Rs. 274220141.