RBL Bank’s choice of riskier assets (retail and wholesale) and its higher share of dependence on wholesale liabilities have resulted in discussions moving on either sides of the balance sheet.
The early headline performance for Q4FY20 includes less-than-expected drawdowns on the deposit side, stable operating performance and lower impairments for Q4FY20 addressing the key near-term business concerns. We are gradually building the possible negative outcome of the lockdown in our estimates, though we note that these are still early days on this issue. As liability concerns ease, we should see a re-rating on the bank. Maintain ‘buy’ with a fair value of Rs 300 (Rs 375 earlier).
Key highlights of the business update for Q4FY20: deposit base declined by 8% q-o-q, mainly led by an outflow of bulk deposits by government and corporate entities, while LCR remains healthy at 127%, stable q-o-q operating profit growth in Q4FY20 with higher NIM and lower cost of funds q-o-q, Q4FY20 will see higher slippages in SME and retail while there was ‘no material change’ stressed book; overall slippages will be lower q-o-q (7.2% in Q3FY20), credit card spends are at ~40% of normal run-rate while collection efforts have been impacted which will lead to higher credit costs in March and April, microfinance operations have come to a halt, although March collections were largely completed, wholesale and business loans: low exposure to impacted sectors including travel, hospitality, aviation etc.
RBL Bank’s choice of riskier assets (retail and wholesale) and its higher share of dependence on wholesale liabilities have resulted in discussions moving on either sides of the balance sheet. FY20 saw defaults in the bank’s corporate loan portfolio gradually gravitating to the other side of the balance sheet. The key positive has been its CAR (tier-1 at 15%) which should help navigate the current reported or possible incoming stress (aftermath of the current lockdown). We are building these in our estimates resulting in a steep earnings revision for FY21-22. The credit card and MFI had a high contribution to earnings, which is likely to see an impact if the current lockdown persists longer. The impairment recognition cycle is likely to be faster given the nature or duration of loans (MFI and credit cards). We are building 280bps of loan-loss provisions for FY20-22 resulting in RoEs remaining subdued at <10% in this period. We shall monitor these as we have better quality of incoming data.
We revise our FV to Rs 300, valuing the bank at 1.3X book and 15X March 2022 EPS for RoEs in the range of 8-10%. Apart from the higher provisions, we are building lower NIM, fee income (lower card spends) and lower opex growth (lower card-related payouts).