FY21 will test RBL Bank on many fronts, investors advised caution

While high NIMs put the bank's pricing power in good light, some reversal is expected in FY21 due to surplus liquidity, change in mix and a likely rise in bad loans

The RBL Bank stock slipped 7.4 per cent to Rs 119.35 on Friday, even as the lender reported an in-line performance for the March quarter (Q4). Net interest income grew 38 per cent, while net interest margin (NIM) rose 4.9 per cent.

Concerns over sustainability of this performance and, more importantly, the likely pressure on asset quality were the reasons behind the Street’s reaction. While the high NIM puts the bank’s pricing power in good light, some reversal is expected in FY21 on account of surplus liquidity, change in mix, and the likely rise in bad loans. Loan growth of 7 per cent in Q4 was the bank’s weakest ever. 

Though it could be attributed to the shrinking corporate book (down 16 per cent year-on-year), what will not comfort investors is RBL’s dependence on its credit card portfolio, which almost doubled YoY, even in Q4.

Analysts at HDFC Securities say slippages (loans turning bad) will remain elevated, given the exposure to unsecured loans such as credit cards and micro loans (29.2 per cent of RBL’s book).

 

 

What could also be a pain point is the share of low-rated corporate accounts (20.7 per cent of corporate book). 

Therefore, while the slippage ratio moderated by 60 basis points (bps) sequentially to 1.19 per cent, how far this trend sustains needs to be seen in the context of likely pressure from new pockets, such as retail unsecured loans.  

One also needs to keep an eye out for loans under the moratorium. At an overall level, RBL has offered the moratorium to 30 per cent of its customers in value, which includes 24 per cent of credit cards outstanding.

It has also made additional provisioning of Rs 110 crore for special mention accounts, as mandated by the regulator. 

Therefore, the gross non-performing asset ratio, which peaked to 3.62 per cent in Q4, may not ease anytime soon.

Therefore, not much could be attributed to the bad loan provisions falling to Rs 614 crore, from Rs 638 crore in Q3.  

Among a few positives is that capital adequacy stands at 16.45 per cent. The management also highlighted that it had gained the lost business from government deposits. However, with the management guiding for lower growth, faster accretion in deposits might eat into profitability.

Consequently, RBL may be in for a litmus test in FY21. Investors may be better off waiting and not be lured by valuations of 0.7x its FY21 estimated book.