RBL Bank: Macro outlook remains tough; PT at Rs 240 – Morgan Stanley

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Published: December 12, 2019 3:30:44 AM

We forecast good core PPoP growth of ~25% CAGR during FY19-22. Although the bank should reduce risk and see higher NPLs in corporate banking, we expect a continuing increase in the unsecured retail loans mix (credit cards, MFI).

RBL Bank, RBL Bank share, RBL Bank share price, morgan stanley India’s macro outlook remains difficult given muted economic growth and continued risk aversion amongst lenders.

Although recent capital raising is a positive, stay UW given an uncertain asset quality outlook. Macro outlook remains tough; we build higher slippages and credit costs for the bank amid elevated exposure to BBB and below-rated corporates. Rising share of unsecured loans is another key to watch.

The bank has raised $380 m of capital via QIP and preferential allotment last week (dilution of ~18%). This helped improve the CET 1 ratio from 11.3% to 15.3% (F2Q20 proforma basis). Absent this, the stock could have been very volatile, with the growth outlook possibly affected negatively as well.

India’s macro outlook remains difficult given muted economic growth and continued risk aversion amongst lenders. This, amid RBL’s high exposure to BBB and below-rated corporates (~55% of corporate loan book), implies high risk of continued elevated slippages, in our view. We increase our slippage and credit cost estimates over FY20-21, and are now building Rs 25 bn of slippages over and above normal slippage run-rate, compared to the bank’s guided watchlist of Rs 18 bn as of Q2FY20.

We forecast good core PPoP growth of ~25% CAGR during FY19-22. Although the bank should reduce risk and see higher NPLs in corporate banking, we expect a continuing increase in the unsecured retail loans mix (credit cards, MFI). However, even after this, we expect RoE to remain at low teens over the next few years (~11% during FY21-FY22) given elevated credit costs.

Our EPS estimate cuts are driven mainly by higher credit costs and dilution, partially offset by higher PPoP (free funds impact and lower costs). Our PT remains at Rs 240 as lower earnings are offset by rolling our valuation forward by three months to December 2021 and the capital raising. The key risk to our call is a sharp recovery in macro that would imply lower slippages and faster resolutions. A downside catalyst would be further upward revision to corporate watch list and/or higher retail NPLs.

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