Asset quality woes may spook RBL Bank's capital raising plans

RBL Bank’s near-10 per cent fall on Wednesday, in reaction to the private lender’s wobbly asset quality, coupled with its 60 per cent value erosion since July, highlights the rising scepticism among investors over the stock. 

Following the June quarter results, not many were happy with the bank’s admission that the gross non-performing assets (NPA) ratio could touch 2.5 per cent in FY20, and that the lender had identified a pool of stressed loan assets (commonly referred to as watch-list) worth Rs 1,000 crore.

However, the September quarter (Q2) commentary from the bank was a bigger blow to handle. 

Not only has the gross NPA ratio at 2.6 per cent breached the guided level, but the watch-list has almost doubled in Q2 to Rs 1,800 crore. What’s more, provisioning costs could remain elevated for another quarter or two. “We find this trend rather alarming and asset quality seems perched on a slippery slope,” say analysts at HDFC Securities, which expects slippages to touch 3.2 per cent in FY20-22. 

This is more than twice the past expectations on slippages or loans likely to turn bad. 

What also did not find appreciation is the fact that most banks are turning cautious on unsecured retail loans — a segment that remains an important source of growth for RBL Bank. 

At a time when the lender’s pace of capital consumption is on the rise, analysts at Kotak Institutional Equities note that they will monitor if the bank reassesses its loan mix. “We prefer a more granular loan portfolio and are comfortable with a lower return on equity, as compared to what we have seen with the bank so far,” they add. 

Asset quality and the composition of RBL Bank’s book assumes larger relevance, especially when it is gearing up to raise Rs 3,000 crore of capital by end of FY20. Valuations have eased significantly since July, and any further threat to earnings may spoil the show. 

“We believe risk-reward has turned unfavourable for investors, and bottom-fishing in the stock should be avoided,” say analysts at Sharekhan. This is despite the RBL Bank stock trading at 1.2x its FY21 estimated book. 

While the worst hit the bank in Q2, meeting its guidance will be extremely imperative for it to win back some of the lost investor faith.