The bank has had to increase its guidance on slippages over three quarters beginning Q4FY20, while the stress book was unchanged in Q3FY20.
We upgrade RBL Bank to ‘buy’ from ‘add’ with an unchanged fair value (FV) of Rs 375, noting the recent correction in valuation. We believe the bank should be able to overcome the near-term headwinds emerging from the corporate loan book as the recognition is broadly behind and the bank has stepped up provisions on these exposures. It is well-placed from a tier-1 perspective and strong growth from the high-yielding card and MFI business.
At our fair value, we are valuing the bank at 1.5X book and 10X December 2021 EPS for RoEs at ~15% in the medium term and a relatively strong earnings growth, led by healthy operating profit growth (>30% CAGR for FY2019-21) and lower credit costs. We acknowledge it does not have the best liability franchise and has seen challenges in its MFI (demonetisation), mid-corporate and large corporate portfolio in recent years. But these risks appear to be well captured at current valuations, underpinning our change in view. Over the past few quarters, we’ve seen RBL Bank making aggressive recognition in its corporate loan portfolio. The bank has had to increase its guidance on slippages over three quarters beginning Q4FY20, while the stress book was unchanged in Q3FY20. We’ve seen few fresh downgrades in Q3FY20 in the ‘below investment grade’ book, raising concerns if the stress is adequately captured by the bank’s guidance. This should be less of a concern as the balance sheet has the strength to absorb new stress, if any. We do believe the slippages should not be as high as feared by the street. One of the strong drivers for our change in view is the bank’s tier-1 ratio, which along with a relatively higher operating profit growth, should enable it to get past this stress with negligible impact to book value. The recent capital-raising exercise has improved the bank’s CET-1 ratio to 15%, closer to the best-in-class players.