CMP (NSE) 15:57, 18 Jun

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Last updated on

16 Dec, 2020

RBL Bank (erstwhile The Ratnakar Bank Limited) is one of India’s fastest growing private sector banks with an expanding presence across the country. RBL offers wholesale and retail banking services. In wholesale banking, it caters to large and mid-size corporates and offers working capital, transaction banking and financial advisory services. In retail, it caters to individuals and small businesses in semi-urban and rural areas. 
Several crises have led to a tighter business model: Three consecutive crises forced RBL to focus on i) reducing concentration in its corporate portfolio, ii) the need to build its retail deposit franchise more aggressively, iii) provisioning aggressively and recognising stress sooner than later and iv) re-orienting its business model towards more profitable asset portfolios like credit cards, MFI, affordable housing and MSE. The bank has further tightened risk mitigation measures. 
Several drivers would ensure more resilient profitability: A change in loan mix towards ~65% retail from 59% currently will boost RoA. This, along with a higher CASA ratio, an eventual decline in deposit rates and lower balance sheet liquidity will drive NIM in the medium term. Credit costs will likely normalise to ~1.6% by FY23ii (3.5% in FY21ii), driving substantial RoA expansion. 
Attractive Valuations:  As compared to the period before YES Banks’ restructuring, RBL has fortified itself with ~230bps of additional capital, built additional provisions of ~6% of its 2QFY21 Networth and has reduced the concentration in its corporate portfolio. Estimates of stress from MFI, credit cards and BB & below portfolio in our/Street estimates remain more conservative than management commentary. Despite significant de-risking, it’s discount to peers like IIB/CUBK/AUBANK and larger banks like AXSB/ICICIBC has widened considerably versus historic averages. A shift in the business mix is likely to drive RoA/RoE to 1.6/12.8% by FY23ii. At 1x FY22ii BVPS, the stock does not price in these positives, making it an attractive investment   We recommend a BUY on RBL Bank with a target price of Rs273.

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