With base effect catching up, RBL is a capital guzzler among private banks

With the bank growing its assets by over 30-35% quarter after quarter, it is constantly in need of capital

With gains of 13 per cent in 2018, the base effect is perhaps catching up with RBL Bank. Compared to a year-ago performance of 52 per cent gains on the bourses, the stock’s popularity is cooling off a bit.

One of the reasons which could prompt investors to stay on the sidelines is RBL’s pace of capital consumption. Despite the mega fundraising of Rs 1,680 crore in 2017, which took the capital adequacy to 17 per cent, the pace at which the company consumes capital has resulted in its tier 1 capital touching the 12.5-per cent mark in July-September quarter (Q2). With this, it is perhaps the lowest (on this metric) among top private banks, though better than the statutory requirement.

The reason behind the bank’s fast capital consumption is its growth rate. RBL has more than doubled its assets in the past two years. It has also managed to maintain a growth rate of 30–35 per cent quarter after quarter. This is quite commendable, given how rapid growth is a primary challenge for the industry. Yet, not all are convinced. In order words, the strong growth hasn’t helped it win the Street’s faith. For one, microfinance loans and credit card are adding up to becoming important growth areas for the bank. According to Kotak Institutional Equities, nearly 35 per cent of loans are derived from the two products. While the bank is confident of shouldering higher ratio of unsecured loans, analysts state this is at the upper end of the industry average. Analysts at Kotak say it does give discomfort when banks are comfortable to keep increasing their share from this (unsecured) segment of loans.

Therefore, while RBL Bank remains one of the best-positioned mid-sized private banks, it is critical that it builds a more diverse and a stable loan book. For now, trading at three times its 2019-20 book, its steep valuation is compelling brokerages, including Morgan Stanley and Kotak, to turn underweight (sell) on the stock. As money gets dearer, justifying its valuations may be a tall task.