CLSA sees 31% upside in RBL Bank on stable deposits, robust credit card biz

Investors rushed to buy shares of RBL Bank on the BSE on Wednesday, driving prices as much as 8 per cent higher to Rs 271, after foreign brokerage CLSA said the bank is undergoing its "second transformation". The stock has leaped 13 per cent in the past two trading sessions.

In a report dated January 5, CLSA said the bank is re-aligning its product portfolio and is now focusing on key retail-asset niches. The bank built its credit-card and microfinance (MFI) business over the past three to four years and scaled it further through tie-ups. This, they say, will drive the bank's profitability going forward. 

"The consolidation of corporate book growth is providing the bank an opportunity to work on its liability franchise, and delivery on liabilities will be key to further re-rating," the brokerage said in the report. It initiated coverage on the stock with a 'Buy' rating and a target price of Rs 330, implying nearly 31 per cent upside from Tuesday's close.

CLSA said the IL&FS and YES Bank crisis exposed the bank's "bulky liability franchise" which warranted transformation. "The bank is now focusing on its credit-card/MFI portfolio for growth to de-risk its corporate book, which is good for profitablity, and also for the current growth phase to granulise its liabilities," it added.

Credit-card and MFI biz

CLSA observes that RBL Bank gained scale in its MFI and credit card business during the Covid-19 pandemic. Now, the brokerage expects the lender to normalise credit costs and deliver over 4 per cent ROA. 

The bank has guided for 9 per cent-10 per cent credit cost in the credit card business going forward and expects the traction in card business to remain strong. "The traction in card buisness has improved from 80,000 per month few months back to 1 Lakh plus on monthly basis. Of this, around 60 per cent is from Bajaj Finance channel and 40 per cent is from others," the management said in an analysts meet last month.

RBL Bank acquired RBS India's card business in FY14 and formed partnership with Bajaj Finance in FY17, making it the fifth largest credit card issuer now. For MFI, through partnerships with buisness correspondents and acquiring its largest MFI BC, RBL Bank has built a Rs 7,000 crore MFI portfolio.

Overall, credit cost is guided to be 3.5 per cent-4 per cent for FY21. While the bank foresees normalised rate of credit cost around 225 bps, it expects the card and retail business to grow.

Stable liabilities

The bank, CLSA notes, has stabilised its liabilities, which saw a flight of deposits post the YES Bank fiasco. While the bank's CASA saw a 40 per cent CAGR over FY15-20, the high growth has led to a relatively low CASA ratio. "The asset-side consolidation provides RBL the much-needed opportunity to build its retail deposit franchise. Lowering its cost of funds will be the key to re-rating," it added.

The bank expects lower cost of funds in H2FY21 from less than 6 per cent in September. Further, the bank expects around 30 bps further reduction in cost of funding by March. "There is headroom, since the difference will reduce to 130 bps (as compared to larger banks), which will come down by FY2021 end. Granularity will improve on the liability side and will help keep cost of funds low," the management assured.

Valuation

Challenges in credit card, MSME, wholesale (corporate accounts), and related provisioning requirement are key overhangs on the bank. The Covid-19 pandemic impacted business growth as well as credit cost of banks, but as things are normalising, the test for RBL Bank will be to maintain its credit cost and asset quality, balancing with margins, note analysts at Sharekhan.

"Growth outlook is still sluggish and asset-quality outlook will be the key monitorable going forward. 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 provision buffer and stable margins outlook are in its favour. Moreover, recent capital raising helps provide positive support to the balance sheet to address challenges," it said in a December 17 note. The brokerage values the stock at 1.2x/1.1x its FY2022E/FY2023E book value per share and has a target price of Rs 295 on the stock with a 'Buy' call. 

Those at Kotak Institutional Equities, too, have 'Buy' call with a target price of Rs 270 apiece.