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MOSL: RBL BANK (Buy)-Earnings momentum to take a breather-guided for elevated slippages during FY20E

RBL BANK: Earnings momentum to take a breather; guided for elevated slippages during FY20E

(RBK IN, Mkt Cap USD3.1b, CMP INR500, TP INR640, 28% Upside, Buy)

 

• RBK reported 1QFY20 PAT at INR2.7b (41% YoY growth, inline) though the guidance on asset quality will drive elevated credit cost and impact earnings trajectory over the coming quarters.
• GNPA increased 4.6% QoQ to INR7.9b (1.4% of loans) while NNPA stood flat at INR3.7b enabling 230bp QoQ improvement in PCR to 52.9% (69.1% including TWO). RBK guided for: (i) Elevated stress in a few corporate accounts (exposure: INR9-10b), (ii) Incremental credit cost of ~35-40bp towards these exposures, and, (iii) GNPA ratio to increase to 2.3-2.5% by end-FY20 from 1.38% currently.
• NII grew 48% YoY to INR8.2b, led by 35% YoY growth in advances and 8bp QoQ expansion in the margin to 4.3%. Core fees increased 41% YoY (+5% QoQ) to INR4.1b, driven by credit cards (+66% YoY; ~47% of total fees).
• Loan book grew 35% YoY, led by strong growth in retail book (+62% YoY), while wholesale book grew 23% YoY. The share of retail loans increased by 160bp QoQ to ~46%. Deposits base increased 35% YoY led by a robust 73% YoY increase in SA deposits. CASA ratio increased to 25.8% (+80bp QoQ).
• Other highlights: (i) Tier-1 ratio declined to 11.3% due to higher capital charge on unrated assets, (ii) MFI book declined 1% QoQ to INR49.7b (8.7% of total loans), (iii) Cards portfolio grew to 2m (1.7m in FY19), while credit card book grew 129% YoY to INR66.5b (11.7% of total loans), and, (iv) Mix of BB and below book increased 110bp QoQ to 7%.
• Valuation view: RBL has demonstrated strong momentum in business growth and earnings. However the exposure to a few stressed corporate accounts is likely to drive an increase in provisioning expenses and dent the earnings trajectory. We, thus, cut our PAT estimates by 12%/9% for FY20/21 as we factor in higher credit cost of 160bp/140bp for FY20/21 (~100bp in FY19) though robust margins and improving profitability in the cards business will still facilitate 30% earnings CAGR over FY19-21. We revise our TP to INR640 (2.5x FY21E BV). Maintain Buy.