RBL Bank Positive performance Stock Update Stock

Powered by the Sharekhan 3R Research Philosophy Banks & Finance Sharekhan code: RBLBANK Result Update Update Stock

3R MATRIX + = - Summary Š RBL Bank’s results were positive, with operational performance coming below expectations Right Sector (RS) ü due to tepid advances growth. However, margins were stable and on a sequential basis asset quality improved (as compared to proforma NPLs), which was positive. Right Quality (RQ) ü Š Asset quality improved with GNPA/NNPA declining to 4.34%/2.12%, down 23 bps/40 bps when compared to proforma NPLs as of December 2020. Š Going forward, management commentary was cautious; RBL Bank currently trades at Right Valuation (RV) ü 1.06x/0.95x its FY2022E/FY2023E book value per share. The stock has corrected by ~33% from its recent highs and now risk reward is in favour of long-term investors. + Positive = Neutral - Negative Š We maintain our Buy rating on the stock with an unchanged PT of Rs. 240.

What has changed in 3R MATRIX RBL Bank’s results were positive, with operational performance coming below expectations, due to tepid advances growth. However, margins were stable and on sequential basis asset Old New quality improved (as compared to the proforma NPLs), which was positive. NII came at Rs. 906 crore, which declined by 11% y-o-y and came below expectations. Pre-provision operating RS  profit (PPOP) came at Rs. 877 crore, up 17% y-o-y and was above expectations, helped by strong growth in fee income. Strong traction in other income was seen at Rs. 688 crore, up RQ  38% y-o-y; Core fee income was Rs. 660 crore, up 40% y-o-y. Retail constituted 77% of the bank’s core fee income. Core profitability was stable with NIM at 4.2%, stable sequentially, RV  but down 70 bps y-o-y. Strong growth in total deposits was seen, which grew by 26% y-o-y and 9% q-o-q to Rs. 73,121 crore. CASA ratio improved to 31.8% versus 29.6% in Q4FY2020 and Reco/View Change retail deposits (as per LCR definition) grew by 43% y-o-y and 12% q-o-q to Rs. 27,236 crore. Asset quality improved with GNPA/NNPA declining to 4.34%/2.12%, down 23 bps/40 bps Reco: Buy  when compared to proforma NPLs as of December 2020. Going forward, while management commentary was cautious, the bank is better placed in terms of balance sheet strength and CMP: Rs. 182 capitalisation. BB exposure was at 5.7% of the book compared to 6.5% in Q2FY2021, which is Price Target: Rs. 240 an improvement. However, management indicated elevated credit costs for the medium term  mainly from segments such as credit cards and MFI. The bank had indicated its cautious view á Upgrade  Maintain â Downgrade on segments such as credit cards and unsecured lending and shared its longer-term vision of reducing the unsecured segment to reduce the overall business mix. While the second Company details wave of the pandemic is a challenge, the bank is better prepared today in terms of business continuity solutions. Improving collection efficiency in rest of the business along with BB and Market cap: Rs. 10869 cr below book being well secured etc. are silver linings. We maintain our Buy rating on the stock with an unchanged price target (PT) of Rs. 240. 52-week high/low: Rs. 274/106 Key positives NSE volume: 202.3 lakh (No of shares) Š PCR further improved to 72%; PCR including provisioning on proforma slippages stood strong at 70.7%. BSE code: 540065 Š Core fee income traction is healthy; and for Q4FY2021, it grew by 40% y-o-y and 33% q-o-q, NSE code: RBLBANK and is above pre-COVID levels. Free float: Key negatives 59.8 cr (No of shares) Š NIM for Q4FY2021 was at 4.2%, sequentially flat; but for FY2021, NIM declined by ~10 bps y-o-y for the year due to reversal of interest income on slippages Shareholding (%) Our Call Promoters 0.0 RBL Bank currently trades at 1.06x/0.95x its FY2022E/FY2023E book value per share. The stock has corrected by ~33% from its recent highs and now risk reward is in favour of long- FII 49.8 term investors. RBL Bank is in an improved position vis-à-vis its balance sheet and valuations are reasonable. We believe while asset-quality performance is yet to stabilise, adequate DII 21.9 capitalisation and limited overhang from the legacy book are positives. Even though the second wave of the pandemic is a challenge, the bank is better prepared today in terms of business Others 29.6 continuity solutions and experience of the past year. Moreover, BB and below book being well secured and incremental book quality performing better etc. are silver linings. We maintain our Price chart Buy rating on the stock with an unchanged PT of Rs. 240.

400 Key Risks 350 300 Upside risks to current MFI, credit card book etc. due to second wave of the pandemic may 250 affect GNPAs and credit cost estimates for the bank. 200 150 100 Valuation Rs cr 50 Particulars FY19 FY20 FY21 FY22E FY23E 20 21 20 21 - - - - NII 2540.0 3629.6 3788.0 5670.8 6487.2 Jan Sep May May PAT 867.4 505.7 508.0 1308.2 1706.0 Price performance EPS 20.3 9.9 8.5 21.9 28.5 ABVPS 168.2 199.6 204.7 223.7 248.5 (%) 1m 3m 6m 12m ROE (%) 12.2% 5.6% 4.0% 9.5% 11.2% Absolute -12.3 -14.9 3.9 -46.4 ROA (%) 1.2% 0.5% 0.5% 1.0% 1.2% Relative to -9.8 -19.1 -15.2 -64.2 P/E (x) 11.6 23.7 27.8 10.8 8.3 Sensex P/ABV (x) 1.40 1.18 1.15 1.06 0.95 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

May 04, 2021 7 Powered by the Sharekhan

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Key Concall Highlights MFI Collections: Management has been able to strengthen collections operations via phone for MFI, which is reducing the fraud instances. Management has been able to change business operations and now is more resilient and will quickly ramp up as the situation normalises. Credit Cards: Issued 3.82 lakh new card issuance for Q4 versus 14.5 lakhs cards for FY2021. Spends were strong and gained market share in cards during Q4FY2021. Restructured book is Rs. 274 crore, which is around 2%, and credit cost was 10.4% for FY2021 and is in line with estimates for banks. Management believes GNPA will start to come down in Q1 and credit cost will peak in Q2. MFI: Assam, West Bengal, Maharashtra, and Punjab are the affected states. New portfolio is at 99.5% collection efficiency. The bank will be cautious on the four states’ growth and there are no disbursals in these four states. Credit cost was on 2.5% of the book. Management expects GNPA levels will continue for the next year. Abacus: It is an internal application to broaden the customer pool. Risk management principles that the bank will adhere to include: 1) granularising deposits and reducing cost of funds; 2) reasonable diversification of assets between secured and unsecured loans; 3) maintaining strong capital position; 4) increasing PCRover the next few years; and 5) improving earnings diversity and predictability. Provision buffer: Accelerated provisioning on unsecured book and yet to be restructuring assets. Not carrying any burden on the advances side. Not specifically additional COVID-19 provision but taken provision for NPAs. Credit Cost: Total credit cost breakup is: Rs. 1,300 crore - cards; Rs. 390 crore - MFI; and Rs. 750 crore-800 crore - retail; and Rs. 600 crore – wholesale. Collection efficiency has improved. Restructured book is Rs. 280 crore, which is around 2% of the total book. Preparation of the second wave: The existing portfolio will become more resilient and incremental book is holding up well despite the second wave. Management has also further tightened the credit filters etc. The bank believes that it is better prepared to face the second wave impact and expects the duration to be lower. Book mix going forward: Due to the dynamic environment, in two years the bank will look to reduce unsecured book mix outside retail and cards. Most new products in retail are being introduced or scaling up on the secured side, leveraging distribution network. Proportion of unsecured will continue to go down, and on two- year basis, it may reduce by 7%-8% (of the mix). Microfinance duration: Average duration of MFI book is around 18-24 months and has not changed much pre-COVID and post-COVID period. Collection model is largely monthly. Wholesale book: The bank is in a transition mode in the wholesale book. Once the normalising of credit cost happens, management expects it will be making reasonable ROA. Wholesale gives presence, opportunity for cross sell, and diversification benefits; hence, it should not be seen only on ROA basis. Credit cost of two books of non-Bajaj, Bajaj book: Non-Bajaj book is 25-30 bps higher credit cost. Overall slippages from the card book were Rs. 1,300 crore. Card book provisions made are around Rs. 1,100 crore.

Results Rs cr Particulars Q4FY21 Q4FY20 YoY % Q3FY21 QoQ % Net interest income 906.0 1021.0 -11.3 908.0 -0.2 Non-interest income 688.0 500.5 37.5 580.0 18.6 Net total income 1594.0 1521.5 4.8 1488.0 7.1 Operating expenses 704.5 769.6 -8.5 677.5 4.0 -Employee expenses 195.5 199.9 -2.2 188.0 4.0 -Other operating expenses 509.1 569.7 -10.6 489.5 4.0 Pre-provisioning profit 889.5 751.9 18.3 810.6 9.7 Provisions 625.5 601.2 4.1 638.3 -2.0 Profit before tax 263.9 150.8 75.1 172.3 53.2 Tax 36.1 36.4 -0.8 23.9 50.8 Profit after tax 227.8 114.4 99.2 148.3 53.6 Source: Company; Sharekhan Research May 04, 2021 8 Powered by the Sharekhan

3R Research Philosophy Update Stock

Outlook and Valuation n Sector view - Credit growth yet to pick up, private banks placed better System-level credit offtake, which is still subdued, is now improving, with credit growth of over 6% in the recent few prints. On the other hand, deposits rose by ~12%, which indicate a reasonably healthier economic scenario. Moreover, the accommodative stance of the Reserve Bank of India (RBI), resulting in surplus liquidity, provides succor in terms of easy availability of funds and lower cost of funds for banks and financials. Going forward, collection efficiency is likely to be a function of book quality, client profile, as well as economic pickup along with the likely pace of pandemic-induced lockdowns and the severity of the same. At present, we believe the banking sector is likely to see increased risk-off behavior, with tactical market share gains for well-placed players. We believe private banks, with improved capitalisation and strong asset quality (with high coverage and provisions buffers), are structurally better placed to take-off once the situation normalises. n Company outlook - Steady fundamentals, but challenges persist Challenges in credit card, MSME, tepid profitability of wholesale (corporate accounts), and related provisioning requirement are key challenges for the bank. The COVID-19 pandemic impacted business growth as well as credit cost of banks, and the second wave is a challenge, which will also remain to be addressed. The test for RBL Bank will be to maintain its credit cost and asset quality, balancing with margins. Growth outlook is still cautious and asset-quality outlook will be the key monitorable going forward. We believe management’s strategy to reduce dependence on unsecured loans will stand in good stead in the long term. Notably, although faster growth in unsecured (PL and CC) business is margin accretive, it can be a potential high-risk category and, hence, will need to be monitored. We believe the outlook has uncertainties for RBL Bank, but its stable margin outlook and augmented capital base [sufficient capital (for ~3 years in the normal course of business] will help provide positive support to the bank to address the challenges. n Valuation - Maintain Buy with an unchanged PT of Rs. 240 RBL Bank currently trades at 1.06x/0.95x its FY2022E/FY2023E book value per share. The stock has corrected by ~33% from recent highs and now risk reward is in favour of long-term investors. RBL Bank is in an improved position vis-à-vis its balance sheet and valuations are reasonable. We believe while asset-quality performance is yet to stabilise, adequate capitalisation and limited overhang from the legacy book are positives. Even though the second wave of the pandemic is a challenge, the bank is better prepared today in terms of business continuity solutions and experience of the last year. Overall capital adequacy at 17.5% with common equity Tier 1 ratio of 16.6% at the end of Q4FY2021. Moreover, BB and below book being well secured and the incremental book quality performing better etc. are silver linings. We maintain our Buy rating on the stock with an unchanged PT of Rs. 240.

One-year forward P/BV (x) band

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Source: Sharekhan Research

Peer Comparison CMP P/BV(x) P/E(x) RoA (%) RoE (%) Particulars Rs/Share FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E RBL Bank 182 0.7 0.7 8.3 6.4 1.0 1.1 8.6 10.2 Axis Bank 700 1.9 1.8 21.0 19.7 0.8 0.7 9.5 9.4 ICICI Bank 592 2.5 2.2 20.1 16.2 1.3 1.4 12.7 14.0 HDFC Bank 1389 3.3 2.9 19.5 17.5 2.0 1.9 18.2 17.8 Source: Bloomberg, Sharekhan Research May 04, 2021 9 Powered by the Sharekhan

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About company RBL Bank is a private sector bank that offers specialised services under six business verticals namely corporate and institutional banking, commercial banking, branch banking, retail assets, development banking, and financial inclusion, treasury, and financial market operations. The bank currently services over 9.08 million customers through a network of 403 branches, 1,344 business correspondent branches (of which 259 banking outlets), and 412 ATMs spread across 28 Indian states and Union Territories.

Investment theme RBL Bank has progressed well from a regional bank to a pan-India bank, with an expanding bouquet of product and services. In the past few years, the bank has been investing on building business and infrastructure and has now been successfully able to grow its products and services and has transformed into a full services bank. The retail division of RBL Bank is progressing well, thereby presenting cross-sell opportunities as well as better liability mix. We believe diversification of income streams and a strong retail are positive for the sustainability of margins and profitability of the bank. The recent pandemic-related lockdown is likely to impact the banking sector as well as RBL Bank with slower growth and higher credit costs for the medium term. We believe while medium-term uncertainties continue, strong capitalisation and stable margins outlook will help the bank tide over medium-term uncertainties.

Key Risks Upside risks to current MFI, credit card book etc. due to second wave of the pandemic may affect GNPAs and credit cost estimates for the bank.

Additional Data Key management personnel Mr. Vishwavir Ahuja Managing Director & CEO Mr. Amrut Palan Chief Financial officer Mr. Deepak Kumar Chief Risk Officer Mr. Pankaj Sharma Chief Operations Officer Mr. Neeta Mukerjee Chief Credit Officer Mr.Sankarson Banerjee Chief Information Officer Source: Company

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 United Kingdom of Great Britain an 4.7 2 JASMINE CAPITAL INVESTMENTS PTE 3.9 3 Norges Bank 2.7 4 Kotak Mahindra Asset Management Co 2.6 5 Asian Development Bank 2.4 6 Government Pension Fund 2.4 7 HDFC Trustee Co Ltd/India 2.4 8 HDFC Asset Management Co Ltd 2.4 9 Credit Suisse Singapore 2.4 10 Ward Ferry Management BVI Ltd 2.3 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

May 04, 2021 10 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services

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