Current valuations of RBL Bank provide for an attractive entry point for investing in the stock: Ventura

Burgeoning asset quality issues from the fallout of concentrated bets on select corporate portfolios took a toll on RBL Bank’s profitability in FY22. As if these were not enough, ensuing friction with the RBI on the issue of management leadership and street perception on the ballooning losses on the credit card business led to a sharp de-rating of the stock. In our opinion, the pessimism on the stock is overdone and the current valuations more than capture all the negatives.

Corrective action with the appointment of a new CEO, Mr R. Subramaniakumar, more than adequate provisioning on the NPLs, early positive traction on the new business plan and the possible recall of the RBI nominated director is indicative of an early path to recovery. In our opinion, the current valuations provide for an attractive entry point for investing in the stock with a good risk-return profile over the next 2 years.

We initiate coverage on RBL with a BUY for a price target of INR 256.2 (~1.0x FY25 P/B) which represents a potential upside of 70.8% from the CMP over the next 24 months. Our model builds in a conservative outlook with a robust NPL recovery.

We expect:

► Advances and NII to grow at a CAGR of 12.0% & 14.2% to INR 86,889.6 cr & INR 6,391.7 cr, respectively, over FY22-25 supported by branch expansion (80-100 branches every year). Other income is expected to grow at 8.6% CAGR over FY22-25 as new credit card issuances should help drive fee income. We have modelled ~70bps expansion in NIM’s as the bank increases share of retail pie in the overall lending.

► PPoP is expected to grow at 6.7% CAGR to INR 3,220.3 cr over FY22-25. RBL Bank is now expected to slow down provisioning given that majority of the stress on the wholesale book is already out and hence we do not expect any big surprises. Net earnings are expected to turn positive going forward (FY25 PAT expected at INR 1,083.9 cr) unlike loss of INR 166.2 cr reported in FY22.

► Return ratios namely RoAA and RoAE are expected to grow by ~98bps & ~864bps over FY22-25 to 0.8% and 7.3%, respectively. We expect cost to income to stay above >60% over the forecast period. Disruption by fintech players and incremental stress on new loan book remain key risks to our investment thesis.