Taking Stock. What’s spooking investors of RBL Bank

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 35 per cent value since its June quarter results, declared in July. While the bank has delivered strong performance, a possible deterioration in asset quality in the next two to three quarters, as indicated by the management, has rattled investors.

But over the past week, the selling pressure intensified. News reports of some employees selling shares had stoked insider trading concerns. But the management on Wednesday clarified that the transactions by employees (did not include any management committee member or key managerial personal) were a ‘routine activity’.

The exchange filing stated that employees hold 3.46 crore shares (works out to 8 per cent of the total outstanding shares as of June) with over 25 per cent of them holding such shares, and that the ESOPs exercised and the sale of shares by the employees for 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 over asset 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 valuation until now.

A possible rise in provisioning eating into earnings could temper the bank’s loan growth and necessitate fund-raising.

Strong growth so far

RBL Bank (formerly Ratnakar Bank), an old private sector bank set up in 1943, has transitioned into a new-age private bank in the past seven to 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 past three to four years.

After its stellar run between FY13 and FY16 (pre-IPO on a small base), when its loan book grew 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 been behind the bank’s good performance. 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. Its net interest income grew by a robust 48 per cent Y-o-Y. The bank’s asset quality remained stable with GNPA at 1.38 per cent of loans.

What’s 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 ₹900-1,000 crore. It stated that GNPAs could rise to 2-2.5 per cent in the next two to three 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 its earnings.

The bank’s BBB-rated and BB-rated books stand at about 47 per cent and 7 per cent respectively.

While on the retail front, the stress book is under check for now, the bank’s stellar growth in the unsecured credit card business warrants some monitoring. The bank has about 20 lakh credit cards as of June 2019. The NPAs in the cards business stood at 1.15 per cent in the June quarter.

The bank’s net interest margin (NIM) has been improving steadily 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, NIM has gone up to 4.3 per cent, as of June 2019. While continued traction in retail and micro banking portfolio should aid the NIM going ahead too, interest reversals on higher slippages can weigh on the margin in the coming quarters. 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.

What for investors?

Trading at a premium of 2.5 times the one-year forward book until a month ago, the stock has plummeted sharply, hurting investors. Given the already weak sentiment in the market and growing concerns over leverage positions of certain promoters, investors are likely to face more pain.

While stress in the bank’s corporate book has been factored in, what’s possibly bothering investors is the uncertainty over how the management will be able to contain it.

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 two to three quarters.

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