With steady loan growth, RBL Bank draws many similarities to HDFC Bank

When RBL Bank (RBL) was listed close to three years ago, investors had said that it stood a good chance to become the next HDFC Bank-like franchise. 

A look at some data points throws up some interesting facts. 

For instance, RBL has maintained a quarterly loan growth rate of 30-35 per cent consistently for nine quarters, a trend that reminds investors of HDFC Bank’s consistent growth. 

The January-March quarter (Q4) will be the fourth in which net interest margin (NIM or profitability) has been upwards of 4 per cent — another striking similarity between the two banks. 

RBL’s rich valuations, at 3.5 times its FY20 estimated book, is similar to HDFC Bank’s, which continues to remain among the most expensive banking stock for its ability to maintain a clean loan book. 

There is yet another similarity — though not very comforting for investors — the growing share of unsecured loans. For RBL, the share of unsecured loans stood at 25 per cent of its total loan book in FY19, up from 21 per cent a year ago. 

This factor has been the key loan growth driver for RBL, lately. Comprising credit cards and personal loans, the book grew nearly 90 per cent in FY19, outpacing retail loan growth of 58 per cent. 

Growth has been largely led by a near-doubling of credit card outstanding dues during the year. While the industry, as a whole, is witnessing faster growth in unsecured loans, such loans don’t lend themselves towards a granular loan book accretion — a crucial factor for RBL Bank to be viewed as a worthy competitor for its large peers. 

The second aspect that needs focus is the bank’s low-cost current account-savings account (CASA) franchise. At 25 per cent of total deposits, it’s well below the 40-per-cent mark maintained by the top rung private banks. 

Cost of funds is already on the rise for RBL — up 40 bps year-on-year to 6.8 per cent, in FY19.

Money market rates, too,  aren’t as lucrative as before. It will be interesting to see if RBL sustains its current premium when it goes to the market in the ongoing financial year.

The RBL stock hit an all-time high of Rs 716 on Monday, and continues to trade near this level. To sustain high valuations, the bank must maintain loan growth and NIM, and also improve CASA. Analysts at Emkay Global say the stock is richly valued despite its strong earnings momentum. Investors could hence consider it on dips.


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