RBL Bank: Concerns over asset quality overshadow recent fund raise

Last week's Rs 2,025 crore fund raising has boost its capital adequacy by 400 basis points, but asset quality remains questionable

When money comes in at the right time for a bank and in proper measure, it’s a huge relief for investors. What’s more, if it comes when asset quality clean-up is underway, it sends out a message that investors haven’t lost faith in the franchise. However, considering RBL Bank’s share price movement — down about 10 per cent in a week — these positives aren’t really showing up. 

This is despite the bank’s common equity tier-1 (CET-1) ratio increasing from 11.3 per cent to 15.3 per cent, after last week’s fund raising of Rs 2,025 crore.  

The reasons are asset quality-related concerns, and the Street not being sure of the extent of provisioning that awaits the bank, its impact on return profile, and more importantly, when the trouble is likely bottom out. 

To be fair, RBL Bank, in its September quarter (Q2) results, spelt out its exposure to real estate companies, non-banking financial companies, and certain other business groups, the watch list for which totalled Rs 1,800 crore. However, what didn’t go down well with the Street was the gross non-performing asset (NPA) ratio touching 2.6 per cent, which breached the full-year NPA guidance earlier provided by the bank at 2.5 per cent. 

In this context, analysts at Morgan Stanley have increased their slippage and credit cost estimates for FY20 and FY21 building in Rs 2,500 crore of incremental slippages (loans turning bad), compared to the bank’s guided watch list. 

Further, while no new pressure has emerged in the last month, analysts still remain sceptic on the bank’s asset quality. Those at Emkay Global Financial Services say that given the rising systemic corporate stress, the bank’s corporate stress pool will remain dynamic. They anticipate the bank’s return on assets to touch a low of 0.9 per cent in FY20, weakest since listing.

Considering these unsettling issues around asset quality, analysts expect the RBL Bank stock to remain under pressure and advise investors to stay on the sidelines. For now, the good part is that most analysts tracking the stock haven’t changed their stance significantly in the last six months. However, a weak December quarter may nudge them to reconsider their stand.