Buy RBL Bank; target of Rs 665: Motilal Oswal
Motilal Oswal is bullish on RBL Bank has recommended buy rating on the stock with a target price of Rs 665 in its research report dated October 25, 2017.
October 27, 2017 / 05:37 PM IST
Motilal Oswal's research report on RBL Bank
RBL's 2QFY18 PAT increased 68% YoY (7% below estimate), mainly due to opex missing estimates by 5% (higher expansion costs), despite total income (INR6.6b, +4%/+40% QoQ/YoY) being largely in line with estimates. Key positives are: a) Loan growth of 8% QoQ and 35% YoY. b) Fee income growth of 38% YoY, driven by a 150% increase in distribution/CC fees. c) Margin improvement of 20bp QoQ to 3.7%, driven partly by a reduction in cost of funds from CASA inflows and partly by capital from QIP. Absolute GNPAs increased 6% QoQ (+77% YoY) to 1.44% of loans (-2bp QoQ). Sequential decline in asset quality was caused by a 30%/20% increase in DB&FI/BBB portfolios, where GNPA ratios stood at 2.81%/1.49% (+42bp/+8bp QoQ), while asset quality in Commercial Banking improved with a decline in GNPA to 2% from 2.6% in the earlier quarter. Loan growth was led by non-wholesale book growth of 41% YoY, increasing the share of non-wholesale to 40.4% from 38.8% a year ago. Strong CASA growth of 56% YoY (ahead of deposit growth of 31% YoY) led to CASA ratio improving 380bp YoY (+160bp QoQ) to 23.7%. Other highlights: a) PAR>90 dpd in micro-banking stood at 4.68% (the bank maintained PAR guidance of 5% and credit cost guidance of 2.5% on this book). b) Post QIP in August 2017, Tier 1 ratio stood at 13.87%. c) Fees to assets improved 10bp QoQ to 1.6%. d) Cost to core income ratio stood at 57% v/s 58% in 1Q.
With a diverse product portfolio, no legacy issues, highly capable management and low market share, we expect RBL to report industry-leading loan CAGR of ~35% over FY17-20. We expect stable/improving margins due to a changing loan mix toward high-yielding loans, a sharp fall in cost of bulk deposits and an improvement in the CD ratio. Strong balance sheet growth is expected to drive operating leverage. We cut FY18E PAT by ~5% to account for continued high expansion costs, and maintain Buy with a TP of INR665 based on 3.5x Sept-19E BV.
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