RBL Bank, the once-fancied stock in the banking space, has been under severe pressure recently, plunging by 50 per cent in the past four months. The bank’s September quarter results have only accentuated the pain for investors. A sharp rise in slippages and provisioning have impacted earnings, and expectations of the stress to persist in the next two-three quarters is likely to dampen investor sentiment. While the bank has delivered a strong operational performance, asset quality woes are likely to weigh on the stock in the medium term.
Despite a robust 47 per cent growth in core net interest income, a sharp rise in provisions (280 per cent YoY) has led to a 73 per cent drop in net profit in the September quarter.
What’s of concern?
While the bank’s asset quality was steady until the last fiscal, the management indicating stress in its corporate book to the tune of Rs 900-1,000 crore in its June quarter earnings, has taken a toll on investor sentiment.
In the latest September quarter, the management expects the total stressed/ NPAs to be about Rs 1,800 crore (taking into account four stressed groups). Of this, about Rs 800 crore has been recognised as NPA in the September quarter, against which the bank has made Rs 350 crore provisioning.
Given that the gross NPA stood at Rs 1,539 crore in the September quarter (as against Rs 789 crore in the June quarter), the management’s indicated stress pool suggests that there could be more pain in the coming quarters.
The bank saw a sharp rise in slippages in the September quarter to Rs 1,377 crore (from Rs 225 crore in the June quarter). The bank’s write-offs also doubled to Rs 313 crore from the previous June quarter. Despite the sharp rise in provisioning in the September quarter, the bank’s provision coverage ratio has fallen significantly to 58.4 per cent in the September quarter, from 69 per cent in the June quarter.
The bank’s exposure to stressed sectors include Rs 2,500 crore to real estate, Rs 4,000 crore to the construction sector, Rs 4,100 crore to NBFCs (excluding MFI,DFI) and Rs 2,400 crore to the power sector. The bank has stated that there is no case of SMA1 and SMA 2 in these portfolios.
The bank’s BBB-rated and BB-rated book currently is about 45 per cent and 9.8 per cent respectively.
On the retail front, while for now the stress is under check, the bank’s stellar growth in the unsecured credit card business has warranted some monitoring. The bank had over 2 million credit cards as of September 2019.
Strong growth thus far
RBL Bank has transitioned into a new age private bank in the past seven-eight years, growing aggressively since 2010. Catering largely to the funding and working capital needs of large corporates and SMEs in the past, the bank 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 it 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 September quarter, too, the bank delivered strong loan growth of 27 per cent -- though lower than the past trends. The bank’s net interest income grew by a robust 47 per cent YoY. The net interest margin (NIM) that has been steadily improving over the past two years, remained stable in the latest September quarter. While continued traction in the retail and micro banking portfolio should aid NIMs, interest reversals on higher slippages can weigh on NIMs in the coming quarters.
Importantly, given that the bank’s focus will be on containing slippages and risk, loan growth could moderate, denting earnings.
Also, while the bank appears comfortably placed on the capital front for now, a rise in provisioning could require fund raising by the bank. As of September quarter, the bank’s Tier 1 capital stood at 11.3 per cent.
What for investors?
The bank’s robust loan growth, strong profitability and stable asset quality have been key positives, driving valuations of the stock. Given the persisting concerns over the weak credit environment, the stock could witness more pain. The bank’s aggressive growth in the high-yielding retail and microfinance businesses, thus far, may also need a watch from an overall risk profile of the bank.