RBL Bank may not achieve FY20 target due to expected rise in costs

The expected increase in costs of deposits likely to offset margin gains from high-yield loan segments, say analysts

Despite expectations of strong loan growth, mainly coming from high-yield unsecured segments such as credit cards, RBL Bank may not achieve its FY20 target for return on assets (RoA) of 1.5 per cent, thanks to the expected rise in costs. This could curb the rally in the bank’s stock (up 16 per cent since February). RoA measures the efficient use of a bank’s assets, which the Street considers while valuing banking stocks.

The rising share of high-yield unsecured business had marginally improved RBL’s NIM in the December-2018 quarter (Q3) despite tight liquidity and subdued deposit growth for the sector. The unsecured retail portfolio stood at 24 per cent of overall loan book as of December 2018 versus 20 per cent a year back. RBL has been focusing on the credit cards business due to high fee income and superior return on assets (around 2.6 per cent versus 1.27 per cent overall for RBL in Q3).

From 4.8 per cent a year back, its share in RBL’s total loans has almost doubled to nine per cent as of December 2018 and is seen rising to 15 per cent in the medium term. RBL’s credit cards’ market share has also risen to 3.1 per cent as of November 2018 from 0.6 per cent as of March 2016.

However, there is a flip side too. The expected improvement in the lender’s net interest margin (NIM) due to change in loan mix would get largely offset by rising cost of deposits besides operating expenses and credit cost (bad loan provisioning as a percentage of loan book), say analysts at Equirus, who expect RoA to improve to only 1.3 per cent by FY21. Term deposits contribute to over 60 per cent of RBL’s total borrowings. This poses a risk of rising funding costs given the dismal deposit growth of the banking sector. The bank did not comment as it is in a silent period ahead of results.

The concerns also stem from stiff competition from large players such as ICICI Bank, Axis Bank, among others besides, scepticism on asset quality going ahead, in the credit cards business. However, a provision coverage ratio of 63.2 per cent coupled with Bajaj Finance being a branding partner of RBL in credit cards provides some comfort.

Nonetheless, most of the potential upside seems priced in the stock currently trading at pricey valuation of 3.2 times FY20 estimated book value as against 2.1 times of average Nifty Bank.