Why the stock of RBL Bank has fallen by about 40 per cent since its Q1 results

BL Research Bureau

RBL Bank has been the stock market darling ever since it hit the primary market in 2016. But the stock has come under severe pressure recently, losing about 40 per cent over the past month, since it announced its June quarter results. While the bank delivered strong performance, the management indicating possible deterioration in its asset quality in the next 2-3 quarters, had rattled investors.

But over the past two days, the pressure on the stock has intensified, with the stock falling by over 20 per cent. News reports of some employees selling shares, had stoked insider trading concerns. But the management on Wednesday clarified that the transactions by employees was a ‘routine activity’ and did not include any management committee member or key managerial personal.

The exchange filing stated that total employees hold 3.46 crore shares (works out to 8 per cent of total outstanding shares as of June) with over 25 per cent of the employees holding such shares, and that the ESOPs exercised and sale of shares by the employees for the month of July, 2019 was in line with the past.

While it needs to be seen whether the bank’s clarification will soothe the frayed nerves of investors on the matter, concerns on assets quality and possible slowdown in growth could continue to weigh on the stock. The bank’s robust growth in loans, under-control asset quality and strong return ratios have been a big draw for investors driving the stock’s valuations, until now. Possible rise in provisioning eating into earnings could temper the bank’s loan growth and necessitate fund raising.

Strong growth

RBL Bank (formerly known as Ratnakar Bank), one of the old private sector banks established in 1943, has transitioned into new age private bank in the past 7-8 years, growing aggressively since 2010. The bank largely catering to the funding and working capital needs of large corporates and SMEs in the past, has been increasing its focus on the profitable retail and microfinance business over the last three to four years.

After its stellar run between FY13 and FY16 (pre-IPO on a small base) when its grew its loan book by 49 per cent annually, the bank continued to deliver strong growth in advances (by about 36 per cent CAGR) over the past two years.

The aggressive growth in retail and microfinance business has led growth for the bank. Within retail, credit cards and LAP (secured loans) have been the key drivers of growth. In the June quarter too, the bank delivered strong loan growth of 35 per cent, led by retail loans. The bank’s net interest income grew by a robust 48 per cent YoY. The bank’s asset quality remained stable with GNPA at 1.38 per cent of loans.

What is the matter of concern?

While the bank’s asset quality has been steady so far, the management in its June quarter earnings, indicated stress in its corporate book to the tune of Rs 900-1000 crore. It stated that GNPAs could rise to 2-2.5 per cent in the next 2-3 quarters, leading to higher provisioning. This is expected to weigh on the bank’s earnings and capital. Importantly given that the bank’s focus will be on containing the slippages and risk, loan growth could get tempered, denting the bank’s earnings.

The bank’s BBB rated and BB rated book currently is about 47 per cent and 7 per cent respectively.

On the retail front, while for now the stress is under check, the bank’s stellar growth in unsecured credit card business has been warranting some monitoring. The bank has about 2 million credit cards in force as of June 2019. The NPAs in the card business stood at 1.15 per cent in the June quarter.

The bank’s net interest margin (NIM) has been steadily improving over the past two years, thanks to strong traction in the high-yielding retail and micro banking loans. From 3.5 per cent towards the end of FY17, NIMs have gone up to 4.3 per cent as of June 2019. While continued traction in retail and micro banking portfolio should aid NIMs going ahead too, interest reversals on higher slippages can weigh on the NIMs in the coming quarters. The bank’s strong return on asset of 1.3 per cent (as of June quarter) could come under pressure.

While the bank appears comfortably placed on the capital front for now, rise in provisioning on account of corporate slippages could require fund raising by the bank. As of June quarter, the bank’s Tier 1 capital stood at 11.3 per cent.

For the investor

The stock that was trading at a premium 2.5 times one year forward book up until a month ago, has plummeted sharply hurting investors. Given the already weak sentiment in the market and growing concerns over leverage positions of certain promoters, it is likely that the stock will witness some more pain. While the bank’s upcoming stress in its corporate book is factored in, the uncertainty over how the management will be able to contain it, is possibly bothering investors.

In this context, the bank’s aggressive growth in high-yielding retail and microfinance businesses thus far, may have also increased the overall risk profile of the bank.

Until there is clarity on all this, the stock could be under pressure over the next 2-3 quarters.

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