Rating- HOLD; RBL Bank- Aggressive retail growth plans

Rating: HOLD; RBL Bank: Aggressive retail growth plans

We recently met with RBL Bank’s MD and CEO, Subramania Kumar, and Executive director, Rajeev Ahuja, to discuss the bank’s newly unveiled strategy for the FY23-FY26. Since the appointment of the new MD&CEO, RBL has made significant changes in its senior management team, hiring six talented individuals externally and promoting 21 internally over the past year. The bank has also enhanced its compliance measures and sharpened its focus.

RBL Bank reconfirmed its guidance of achieving a CAGR of over 20% in loans from FY23-FY26, primarily driven by the retail segment. While continuing to prioritise card services, microfinance (MFI), and commercial banking, RBL Bank aims to aggressively expand its recently launched retail products, including housing loans, vehicle loans, gold loans, and small business loans. The bank intends to target tier-2 and tier-3 locations, where there is substantial untapped demand for these secured loan products. These businesses offer higher yields and require relatively less capital.

To support its growth objectives, RBL Bank plans to increase its branch network from the current count of approximately 517 branches to 800 branches within the next three years. Additionally, the bank aims to leverage its business correspondent (BC) points for lead generation, further facilitating its expansion efforts.

RBL has already invested significantly into its asset platform, systems, processes, technology and feet-on-street. It thus believes a large part of fixed costs have already been incurred and that incremental costs would be volume-led. Management sounded confident of improving the sourcing of incremental business from branches vs DSAs/connectors from a ratio of 20:80 currently to 50:50 by FY24 led by improving productivity and technology stack. RBL reiterated its guidance of revenue growth exceeding opex growth and thus improving RoA by 10-20bps every year through FY23-FY26. RBL has tier-1 capital at 15.3% and believes the current levels are sufficient for the next 18-24 months.

We believe RBL’s strategy to grow exponentially in secured retail products (housing, wheels, SBL, gold) is reasonably scalable, NIM-accretive and less risky though it is more cost-intensive. We build-in a loan CAGR of 15% during FY23-FY25E, which is lower than the management guidance (of 20%), due to our view of moderation in systemic credit growth and higher competitive intensity.

Leadership gaps being almost filled by promoting internal talent: Under the leadership of new MD&CEO since Jun’22, RBL has filled almost every senior management role (hired 6 talents laterally and elevated 21 internally) in the past 12 months. Notable changes are Chief information officer (Ravi Pichan), Head of Corporate centre (Alok Rastogi) and has elevated Vijay Anandh as head of Retail Assets and Collections. The bank has finalised the person for CFO and Wheels head.

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RBL reiterated its FY23-FY26 strategy with >20% CAGR in loans and deposits with sharp focus on granularity. It plans to build on the existing core businesses (credit card, MFI, Commercial) and expects exponential rise in the share of new businesses (housing, gold, small business and wheels). Overall, the bank targets 10-20bps per annum rise in RoA and 100-150bps rise in RoE for the FY24-FY26 period.

Retail segment is likely to be the key driver for growth. The bank expects the share of Retail business to rise to 60-65% by FY26 vs 54% now. While retaining focus on cards, MFI and commercial banking, RBL intends to aggressively grow its newly launched retail products (housing, wheels, gold, and small business loans), predominantly in tier-2 and tier-3 locations.