Earnings Call Transcript Analysis Report #
RBL Bank Limited Q3 FY ‘25 Earnings Call Analysis #
Financial Performance #
- Key Financial Metrics:
- Net Interest Income (NII): INR 1,585 crores (up 3% YoY, down 2% QoQ).
- Net Interest Margin (NIM): 4.9% (down sequentially).
- Total Other Income: INR 1,073 crores (up 38% YoY, up 16% QoQ), including a one-time gain of INR 144 crores.
- Core Fee Income: INR 871 crores (up 19% YoY, up 6% QoQ).
- Total Net Income: INR 2,658 crores (up 14% YoY, up 8% YoY excluding the one-time gain).
- Operating Expenses (Opex): INR 1,662 crores (up 7% YoY, up 2% QoQ).
- Cost-to-Income Ratio: 62.5% (down from 64.2% last quarter and 67.1% YoY).
- Pre-Provision Operating Profit (PPOP): INR 997 crores (up 30% YoY), INR 853 crores (up 11% YoY) excluding the one-time gain.
- Provisions: INR 680 crores for JLG, including INR414 crore additional prudent basis, INR473 crores for credit cards.
- Net Profit: INR 33 crores (impacted by high provisioning).
- Gross NPA: 2.92%.
- Net NPA: 0.53% (down from 0.79% in September).
- Provision Coverage Ratio (PCR): 82.17% (up from 73% last quarter).
- Total Capital Adequacy Ratio: 15.4%.
- CET1 Ratio: 13.7% (down from 15.9% and 14.2% at the end of September).
- Total Deposits: INR 106,753 crores (up 15% YoY, down 1% QoQ).
- Granular Deposits: INR 53,719 crores (up 20% YoY, up 3% QoQ).
- CASA Ratio: 32.8%.
- Advances : INR 90,412 ( 13% Y-o-Y)
- Retail advances : INR 55,199 crores(19%Y-o-Y)
- Comparison with Previous Periods: NII growth was lower sequentially due to interest reversals and lower JLG disbursals. NIM also declined. However, other income, core fee income, and PPOP showed significant YoY growth. Provisions were significantly higher due to asset quality issues in the unsecured segment.
- Revised Guidance/Forecasts: Management expects cost of deposits and cost of funds to remain steady for the next 1-2 quarters. They anticipate margin pressure in Q4. No specific FY26 guidance was provided.
- Areas of Growth/Decline: Wholesale and secured retail businesses grew well. Retail advances grew 19% YoY, with secured retail advances up 38% YoY. Granular deposits showed strong growth. Credit cards and JLG segments faced challenges, with JLG experiencing elevated slippages.
Strategic Initiatives & Business Updates #
- Strategic Announcements: Focus on strengthening the balance sheet with quality assets and granular deposits. Emphasis on cross-selling and leveraging synergies across business verticals (RBL 2.0).
- New Products/Services/Markets: Continued build-out in affordable housing finance.
- Operational Changes: Risk filters strengthened in response to the macro environment. Increased focus on recovery in the unsecured segment.
- Ongoing/Completed Projects: Consolidation of business verticals to achieve operating synergies. Stabilization of the credit card team after a transition.
Market & Competitive Landscape #
- Industry Trends: Moderation in economic growth, pressure on the rupee, tight liquidity conditions, and asset quality challenges in the unsecured segment. Competitive dynamics in the deposit market.
- Competitive Positioning: RBL Bank is focusing on profitable growth with appropriate risk, leveraging opportunities at this convergence.
- Market Challenges/Opportunities: Challenges in the rural (JLG) and urban consumer (credit cards) segments. Opportunities in wholesale and secured retail businesses.
- Market Share/Positioning: Not explicitly mentioned, but the focus is on strengthening the franchise and improving customer engagement.
Risk Factors & Challenges #
- Concerns/Challenges: Elevated slippages in the JLG segment and challenges in the credit card segment. Concerns about over-leveraged customers in both rural and urban areas.
- Regulatory Issues: Implementation of MFIN guardrails, initially scheduled for January 1, 2025, was pushed to April 1, 2025. Change in risk weight for JLG book from 75% to 125%.
- Operational Constraints: No specific supply chain constraints mentioned, but challenges in collection efficiency in the JLG segment were highlighted.
- Market Uncertainties: Uncertain geopolitical environment and its impact on the economic outlook.
Forward-Looking Statements #
- Outlook/Projections: Expect slippages to be broadly similar in Q4 as compared to Q3 in the JLG segment. Expect to see material reduction in slippages from Q1 FY ‘26 onwards. Expect improvement in bucket one collection efficiency.
- Expect slippages to keep trending down in cards. Normalisation expected by Q1 to Q2 FY26.
- Expect margin to decrease for Q4.
- Commitments/Targets: Commitment to minimizing any potential impact on balance sheet stability. Focus on establishing clarity on focus areas and ensuring clear risk guardrails.
- Planned Investments/Priorities: Continued growth in wholesale and secured retail businesses. Increased focus on branch catchment area customers in secured retail.
- Expects to use the INR 273 contingency reserve.
- Sentiment about Future Performance: Cautiously optimistic, acknowledging near-term challenges but emphasizing long-term strengths and preparedness. Stated: “Our biggest achievement and priority has been to ensure coherence in whatever we do.” and “There’s a long journey ahead of us on this. And this, we believe, is the strength that will stand as well, not just in FY ‘26, but years beyond.”
Q&A Insights #
- Most Pressing Analyst Questions: Questions focused on collection efficiency in MFI, the impact of MFIN guardrails, capital adequacy, provisioning policy for JLG, and the outlook for slippages in both MFI and credit cards.
- Management’s Responses: Management provided detailed explanations about the steps taken to address challenges, including increased provisioning, risk mitigation measures, and strengthened collection efforts. They emphasized the improvement in December collection efficiency and the expectation of further improvements.
- Questions Evaded/Answered Indirectly: Management resisted providing specific guidance on cost-to-income ratio or cost-to-asset ratio over the next 2-3 years, citing the uncertain environment. No explicit FY26 guidance provided.
- New Information Revealed: The bank has already adopted stricter underwriting standards than MFIN guidelines. Approximately 10%-11% of MFI borrowers have exposure to four or more lenders.
Management Tone & Sentiment #
- Overall Tone: The tone was cautious but resolute. Management acknowledged the challenges but emphasized their proactive approach to addressing them and their confidence in the bank’s long-term prospects.
- Changes in Language: More emphasis on risk mitigation and balance sheet strengthening compared to previous calls.
- Areas of Confidence/Concern: Confidence in the wholesale and secured retail businesses. Concern about the unsecured segment, particularly JLG, but with a clear plan to address the issues.
Summary of Most Important Takeaways #
- Asset Quality Pressures: RBL Bank is facing significant asset quality challenges in its unsecured portfolio (MFI and credit cards), leading to elevated slippages and increased provisioning.
- Proactive Measures: The bank is taking proactive steps to address these challenges, including accelerated provisioning, strengthened risk filters, increased collection efforts, and a shift in focus towards secured lending.
- Near-Term Focus: The primary objective for Q4 is to minimize the carry-forward of stressed assets into FY ‘26, even if it means utilizing contingency reserves.
- Long-Term Strategy: The bank remains committed to its long-term strategy of building a strong balance sheet with quality assets and granular deposits, leveraging synergies across its business verticals.
- Cautious Optimism: While acknowledging near-term headwinds, management expressed confidence in the bank’s ability to navigate the challenges and emerge stronger in the long run. They see improving collection efficiencies, which will start normalizing slippages.
- No new capital raise is planned in the foreseeable future.