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Buy RBL Bank, target Rs 803: HDFC Securities

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HDFC Securities has given a buy recommendation on RBL Bank with a target price of Rs 803. Shares of RBL Bank traded at Rs 631 around 9:30 am on 11 July, 2019.

The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale-Corporate credit qualityIn spite of exposure to stressed sectors (declining) like infra (7.4 per cent), NBFCs (3.9 per cent), Power (3.4 per cent) and CRE (6.6 per cent), RBK’s asset quality has been better than some peers, indicating better credit filters.

As per the brokerage, RBK’s exposure to stressed names is near nil.

While the share of BBB and below rated exposures (as per internal ratings) has moved up (nearly 56 per cent against 53 per cent YoY), these ratings are two notches below external benchmarks, providing some comfort.

"We have conservatively factored in slippages of nearly 1.58 per cent over FY19-21E against 1.5 per cent in FY19," said the brokerage. Sustainability and reporting of fee income Fees were a whopping 2.03 per cent of average assets in FY19 against sub 1.50 per cent on average for peers like FB, KVB and CUBK.

Fee income rose at nearly 42 per cent CAGR over FY17-19.

Card fees contributed nearly 40 per cent in the FY19 mix against nearly 29 per cent YoY.

Interchange fees were nearly 40 per cent of card fees, while joining and renewal fees form nearly 17-18 per cent of card fees.

The share of processing fees has remained stable at nearly 23 per cent.

Overall processing fees averaging nearly 70bps of disbursals.

The healthy chunk of interchange fees and limited corporate loan fees provide comfort on the sustainability and recognition of fees.

Further, with processing fees constituting a fourth of overall fees, reporting under Ind AS should not change materially.

"We have built a fee CAGR of nearly 23 per cent over FY19-21E," said the brokerage. Micro finance RBK had taken a hit in the DB-FI segment (including micro finance) with GNPAs peaking at nearly 3.4 per cent in Q3FY18.

It has since taken significant steps to reduce risk by diversifying (GNPAs now at nearly 74bps after write-offs).

RBK has introduced state-wise caps on the micro finance book (nearly 15 per cent, aims to reduce it to nearly 12 per cent).

Further, it plans on introducing branch and districtwise (nearly 1 per cent) caps as well.

Thus, it intends on doubling its existing footprint of nearly 300 districts in the next 3 years in tandem with its growth aspirations.

Fund raise on the cardsWith Tier-1 at nearly 12 per cent and ambitious growth plans, a fund raise in FY20E is virtually certain.

It will be BV accretive (FY20E/21E ABVs up by nearly 20/18 per cent, respectively) and keep valuations attractive.

"We have built in nearly Rs 3,500 crore equity raised at Rs 650 per share," said the brokerage.




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