RBL Bank: Regaining investor confidence an uphill task post Q3 results

RBL Bank posted its weakest-ever asset quality in the December quarter (Q3), prompting analysts to downgrade their earnings expectations by 10-15 per cent. 

This, however, does not seemed to have soured the Street’s mood, which remained optimistic on Thursday. 

According to the management, Rs 1,500 crore of the identified pool of stressed assets (of Rs 1,800 crore) went bad, for which the bank had taken 40-50 per cent provisioning. 

Slippages at Rs 1,048 crore in Q3 (4x increase year-on-year) and a Rs 700-crore rise in loans in the below-investment grade (BB and below rated) book surprised many. 

Analysts at Kotak Institutional Equities note that at 6 per cent exposure to the below-investment grade book, RBL’s exposure to this category is higher than peers. 

“How much of this portfolio could potentially slip (into stressed loans) needs to be seen, as there is high movement in this book,” they note.

One also needs to be wary of the stress building in unsecured portfolio, of largely microfinance loans and credit cards. 

With collection efficiencies at 85 per cent in Assam, well below the comfort level of 95-plus per cent, the bank hasn’t made fresh disbursements in the state. 

Though the share of Assam in its loan book is small, it could still add to the overall asset quality stress of RBL Bank (see table). 

Analysts at HDFC Securities caution that manifestation of the political unrest could result in non-performing assets across the industry, due to which RBL Bank could also be impacted.

Further, with credit cards now accounting for 43 per cent of RBL’s retail loans (19 per cent in Q3FY19), asset quality of this book will assume greater importance, going ahead. 

In Q3, nearly 5 per cent of outstanding credit card balances were written off on account of delinquencies, though gross NPA of this segment remained steady at 1-1.5 per cent. 

In addition, the share of credit card products to RBL’s fee income now stands at 57 per cent, as against 41 per cent a year-ago. 

Therefore, any future decision to go slow in the fast-growing cards business could hurt RBL’s credit growth. 

Lower growth was also the key reason for analysts slashing their earnings estimate for RBL Bank. 

The lender has guided for a return to normalcy by next year, following the the clean-up drive in FY20. 

However, considering the current operating environment, Siddharth Purohit of SMC Capital says investors should wait for the March (Q4) results before they turn positive. 

Valuations halving in a year to 1.8x its FY21 estimated book also mirrors weak investor sentiment.

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