RBL Bank's Q4FY21 earnings reflect the anticipated asset quality stress: 1) slippages of Rs14.4bn (cumulative run-rate of 5.4% in FY21) and restructuring of 1.4%; 2) aggressive write-offs of Rs6.7bn and recoveries/upgrades of Rs7.8bn contained GNPLs below Q3FY21 proforma levels at 4.34%; 3) credit cost elevated upward of 5% (accelerated provisioning on unsecured pool). Nonetheless, sharp spike in fee income, stable NIMs and contained cost supported operating profit growth. Management's focus is on reducing inherent business risk through granularity in the portfolio, scaling up secured lending segments, and fortifying the balance sheet through provisioning. Through this transitioning, the bank will take more quarters to normalise its earnings trajectory and we revised our earnings by 5-6% for FY22E/FY23E. Also modest RoA/RoE in the interim will cap valuation at 0.75x FY23 ABV. Maintain HOLD with a revised target price of Rs 190 (earlier: Rs 210). Key risks: 1) credit card / wholesale businesses exhibiting better stability and quality; 2) premium deposit rate weighing on NIMs.
- Credit card, micro banking and SME hurling more than anticipated stress: Stress accretion was anticipated to be higher for RBL - given the vulnerability of the pool (credit card, MFI, MSME, etc). True to this, slippages of Rs14.4bn in Q4FY21 made RBL end the year with full-year slippages at 5.4%. Of Rs31bn of FY21 slippages, Rs13bn accrued from credit card, Rs3.9bn from MFIs, Rs7.5bn-8.0bn from SMEs, and the balance Rs6bn from wholesale segment. Upgrades of Rs3.2bn in Q4FY21 pertained to both wholesale as well as retail segment: an old corporate NPA got upgraded due to change in management control. Recoveries of Rs4.5bn in Q4FY21 were largely towards retail portfolio. RBL has also written-off aggressively Rs14.5bn in H2FY2). Gross NPA declined to 4.34% vs proforma 4.57% in Q3FY21 and, with coverage of 72%, net NPA ratio settled at 2.12% vs 2.52% in proforma Q3FY21. Excluding the write-offs, coverage was 52%, which the bank plans to increase to 60%. RBL restructured Rs9.27bn of advances (1.4%) - well within the expected range. Of this, Rs3.47bn was in wholesale and Rs5.8bn in retail.
- No new contingency buffer is discomforting; credit cost normalisation some time away: Bank has accelerated provisioning on credit card, MFI and other unsecured retail against the existing contingency buffer. With this, credit cost during the quarter came in higher at Rs7.7bn taking cumulative credit cost for FY21 upward of 500bps. Of the FY21 credit of Rs24bn, provisioning in credit card was Rs10.7bn, MFI Rs1.8bn, other retail/SME Rs3bn and the balance was in wholesale segment. While the management sounded confident of corporate banking portfolio being adequately provided, credit cost with resurgence of covid 2.0 can keep credit cost elevated in H1FY22. Getting into FY22E/FY23E, we are building-in credit cost of 2.9%/2.2%, which suggests the bank is still some time away from stabilisation.
- NIMs were flat QoQ at 4.17%. In FY21, there was almost 50bps impact of interest reversal on slippages. RBL expects NIMs to normalise in FY22 to 4.75% levels as excess liquidity will be deployed and reversal on incremental stress would be low. Despite scaling up the retail segment, the focused products are relatively higher yielding including credit cards, MFI as well other retail products like affordable housing, gold lending generating yields of 9-11%.
- Lending portfolio rebalancing imminent: Advances after 4% QoQ growth was up 1% YoY. Retail advances grew 13% YoY and 4% QoQ. Corporate and commercial banking advances too grew 3% QoQ. RBL plans to reduce the proportion of unsecured lending by 7-10% points - primarily by de-emphasising corporate unsecured lending and other non-collateralised lending in retail (ex-credit card and MFI). It will continue to scale up its domain expertise and gain market share in both MFI and credit cards. Also, it will push through more of secured lending - scale up gold lending, build tractor financing (in rural markets) and ramp up home loan portfolio.
- Credit card business - profitable even in the period of stress: Credit card business despite witnessing more than 12% slippages and 10% credit cost was a profitable product segment in FY21. This enhances confidence that performance of the portfolio is at least equal to that of peers, if not better. Credit card portfolio was flat QoQ - as cards in force increased QoQ from 2.82mn to 2.96mn continuing with monthly acquisition run-rate of 0.13mn. Total spend for the period was up 5% QoQ led largely by retail segment. Collection efficiency in credit card business has reached the pre-covid level of 100%.
- Microfinance - to also remain mainstay in unsecured vertical: Disbursements in MFI were up from Rs15.3bn to Rs22.9bn and grew 6% QoQ. RBL is witnessing collection efficiency of >99% excluding four states witnessing stress, namely West Bengal, Assam, Maharashtra and Punjab. Going by the moderating trend of 1+ dpd with improved collections, it seems credit cost will be managed in the MFI portfolio at 5% (this will be offset by coverage of first loan default guarantee (FLDG) arrangement with the business correspondents). However, we will review and monitor collections, stress and political developments (if any) amidst covid resurgence to tweak our stance.
- Housing - a new feather in the cap for secured business diversification: To reduce inherent risk in the business model, management is looking to scale up the secured retail portfolio (affordable housing and low-cost mortgages). Having already rolled out 66 branches for housing finance, it expects to add another 75 branches in FY22. Through such network expansion, it is targeting accretion of Rs15bn in housing portfolio (~2-3% of total advances). Overall, the bank is looking forward to RoA of 1.5% on a steady-state basis from this business. Also, it will focus on rolling out more products in the rural segment, namely 2-wheeler financing and home extension loans (besides micro banking).
- Building capabilities to position itself for growth: FY21 has been a year of building resilience through balance sheet fortification. RBL was focused on building granularity both on asset as well as liability fronts. Granularisation of deposits, reducing concentration of corporate exposure, building out new secured lending products, and accelerating provisioning on unsecured lending was effected in FY21. The objective was to ensure consistent growth in operating profits. With tightening of risks, strengthened collections, portfolio diversity and building digital capabilities, RBL is now prepared for growth in FY22 and beyond.
Shares of RBL Bank Ltd was last trading in BSE at Rs.181.75 as compared to the previous close of Rs. 181.1. The total number of shares traded during the day was 1109261 in over 7413 trades.
The stock hit an intraday high of Rs. 188.45 and intraday low of 180. The net turnover during the day was Rs. 204366291.