Cautious guidance on NPAs for FY20 disappoints RBL Bank investors

In addition to asset-quality trend, Street will keep an eye on capital

RBL Bank has had little history of disappointing the Street. To that extent, the June quarter (Q1) results, published on Friday, maintained the trend. Yet, the RBL Bank stock saw its highest single-day fall to close the week with a loss of about 14 per cent. 

While the overall results remained positive, the management commentary on future asset quality did not go down well with investors.

The bank has guided that its gross non-performing assets (NPA) ratio could increase to 2.0-2.5 per cent during the course of FY20. 

This is largely on account of a pool of assets totaling 1.75 per cent of its gross advances, which has been identified as a source of potential stress. 

This works to about Rs 1,000 crore of loans that may hurt RBL Bank’s asset quality in the next 3-9 months. 

With this, credit costs, too, may increase by 35-40 basis points (bps) from the earlier guided levels of 125 bps. According to the management, leverage positions of these firms and/or their promoters, tight liquidity constraints, and delay in resolution plans are the three reasons for classifying these loans as stressed. 

“Market conditions on Friday and the overall environment turning risk-averse led to a steep fall in RBL Bank’s share price, though under normal circumstances such forthcoming disclosure would be treated positively by the Street,” says the head of research at a domestic brokerage. 

Further, RBL Bank is among the expensive banking stocks, trading at 3.4 times its FY20 book value, until the recent correction. These valuations echoed its ability to maintain a neat asset quality over years. 

While it did so even in Q1, its continuation in FY20 will be under the scanner. In Q1, the bank’s gross NPA ratio at 1.38 per cent didn’t materially change in a year, while its net NPA ratio at 0.65 per cent shrunk by 10 bps year-on-year (YoY). 

Asset quality aside, the growth trajectory has remained robust, with net interest income and net profit growing 48 per cent and 41 per cent YoY, respectively, in Q1.

With the share of retail loans such as credit cards and loan against property expanding ahead of the 35 per cent average loan growth, net interest margin rose to 4.31 per cent from 4 per cent a year ago. 

The sharp growth, though, has consumed reasonable capital, as tier-1 capital ratio fell to 11.3 per cent from 13.1 per cent a year ago. 

Therefore, along with asset quality trend, investors will also monitor how the bank shores up its capital.