Analyst Corner: Maintain ‘buy’ on RBL Bank with revised TP of Rs 700

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Published: January 30, 2019 1:10:38 AM

Loan growth remained healthy at 35% driven by non-wholesale lending which now constitutes 43% of the book, growing at 47% y-o-y.

With stable cost-income ratios and slightly higher credit costs, RoA continued to improve, albeit marginally, to 1.27% resulting in PAT growth of 36% y-o-y to `2.25 billion.

RBL’s Q3 earnings came in 2% below our estimates only because of higher provisioning which we believe was led by two one-offs — agri-related stresses and catch-up provisioning on their MFI book, but for which pre-tax profit growth would have been higher than our estimates by 10%. The stock ended 1.8% down over the previous day’s close. We believe RBL’s fortunes for the next few years lie mainly in its retail businesses, especially cards, which would drive not only higher loan growth, margins and fees but even slightly higher credit costs from the current levels (adjusted for the one-offs mentioned above).
Loan growth remained healthy at 35% driven by non-wholesale lending which now constitutes 43% of the book, growing at 47% y-o-y.

Management’s intention is to take this mix-up to 50% over the next two-three years. With CASA remaining firm at 25% and funding costs on the rise, the bank has been able to pass this on via MCLR leading to higher yields and margins. Prospects for margin increases remain bright as the mix of retail, particularly cards, increases over the next few years. With stable cost-income ratios and slightly higher credit costs, RoA continued to improve, albeit marginally, to 1.27% resulting in PAT growth of 36% y-o-y to `2.25 billion.

We trim our earnings estimates by 4%/7% for FY20E/21E especially to account for increasing credit costs on the back of a higher expected retail mix which tends to have higher risk adjusted yields, resulting in 35% PAT CAGR over FY18-20E and RoA at 1.34% in FY21E. We have not factored in any equity issuance in our numbers which, however, could be expected sometime back-ended in FY20E. RBL trades at 2.8x P/BV and 20x P/E for FY20E. We trim our target price for the above-mentioned earnings cuts to `700, yet representing a healthy 24% upside.
We maintain ‘buy’ rating on the stock.

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