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CLSA upgrades RBL Bank to ‘buy,’ cuts earnings estimate post Q3 numbers

RBL Bank | The bank reportedly will continue to invest in branches and capacity-building, leading to elevated cost ratios and driving FY23-FY24 earnings estimate cuts, CLSA said.

January 28, 2022 / 03:29 PM IST
RBL Bank

RBL Bank

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Global brokerage firm CLSA upgraded its rating for private sector lender RBL Bank to ‘buy’ after the lender’s stable performance and steps taken by the Reserve Bank of India in December. However, it slashed the bank’s earnings estimates.

The RBL Bank stock fell sharply in December, after the RBI appointed Yogesh K Dayal, its chief general manager, as an additional director on the board of the lender for two years. The banking regulator also appointed Rajeev Ahuja as interim managing director and chief executive officer of the bank for three months after former CEO Vishwavir Ahuja went on leave abruptly.

The stock traded at Rs 148.95 on the BSE at 2:50 pm on January 28. It has declined over 25 percent over the past three months.

“RBL Bank’s Q3FY22 had nothing untoward. Stable performance after the December 2021 Reserve Bank of India (RBI) actions is clearly a relief. Net interest income (NII) trends improved in Q3 and the bank is finally gaining some growth traction. Core pre-provision operating profit (PPOP), however, was a marginal miss due to elevated opex related to increased card issuances,” CLSA said in a note on January 28.

While upgrading the rating on RBL Bank to ‘buy’ from ‘outperform,’ the brokerage kept a Rs 200 share price target as the risk-reward is better following the recent underperformance.


Profit growth

RBL Bank clocked a 6 percent on-year growth in profit to Rs 156 crore for the quarter ended December after a significant fall in PPOP. Provisions declined 30 percent on-year. Sequential growth in profit was five-fold from Rs 31 crore in the September quarter, while provisions fell 35 percent.

“This has been a turnaround quarter as we have seen a sharp improvement in both profitability and asset quality,” interim CEO Ahuja said. “Our business and advances momentum are now firmly on a positive trajectory and we expect this to continue with retail also returning to growth. As the stress from the pandemic abates and with the overall improvement in the economic environment, we are confident of continuing and improving this performance over the next fiscal.”

Net interest income, the difference between interest earned and interest expended, grew 11 percent to Rs 1,010 crore in the third quarter of FY22 with a moderate 3 percent growth in advances and a 15 basis points on-year expansion (28 bps up QoQ) in net interest margins. Growth in deposits was 10 percent on-year

RBL Bank’s margins have been negatively impacted in the past five quarters by high interest reversals from high-yielding cards/microfinance books. The management said the cost of fund improvement has now peaked as the rate cycle has reversed and near-term margins should be stable and have an upward bias in the medium term, CLSA said.

Liabilities stabilised after the initial rundown; a rising rate cycle may be a key test for RBL’s liability franchise, the brokerage added.

Other income grew 8 percent YoY, while PPOP fell 21 percent on-year to Rs 631 crore due to rising operating expenses (up 46 percent on-year).

The opex spike was mainly due to a pickup in card originations. The bank reportedly will continue to invest in branches/capacity-building, leading to elevated cost ratios and driving FY23-FY24 earnings estimate cuts, CLSA said.

Now the brokerage expects return on equity of 10.1 percent and 11.3 percent in FY23 and FY24, respectively, following the cut in estimates.

“While ROEs remain uninspiring and below cost of equity, recent underperformance has led to 31 percent upside to unchanged target price of Rs 200, based on 0.8x Dec-23 book,” it said.

Asset quality

Asset quality improved on a sequential basis with gross non-performing assets as a percentage of gross advances falling 56 bps QoQ to 4.84 percent and net NPAs declining 29 bps QoQ to 1.85 percent in Q3. Provision coverage ratio improved to 78.6 percent in December, up from 76.6 percent in September.

Gross slippages declined 37 percent to Rs 766 crore from Rs 1,217 crore in Q2 and the slippage ratio fell to 1.37 percent (of loans) from 2.15 percent in Q2. Net restructured advances to net advances dropped 35 bps QoQ to 3 percent.

“Net slippages of Rs 310 crore fell about 65 percent from 1HFY22. There were no negative surprises on asset quality, especially after the December 2021 RBI action, which was a positive in itself. Barring microfinance and business loans, asset quality normalised across most asset categories,” CLSA said.

The bank’s credit costs fell 35 percent QoQ to 0.8 percent of loans.

“Resolutions are already at pre-Covid levels and hence we expect credit costs of 250 bps in FY23-FY24 versus 320 bps of annualised credit costs in Q3FY22,” CLSA said.

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Moneycontrol News
first published: Jan 28, 2022 03:29 pm
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