RBL Bank may take a breather

Caution after 77% run-up this year

Despite encouraging March quarter (Q4) results, RBL Bank's stock didn't react much to the numbers, rising only half a per cent on Wednesday's trade. Despite strong results that came after market hours on Tuesday, analysts are turning cautious, given the 77 per cent rise in stock price this year, and one-year gain of 160 per cent.

"Though we remain positive on RBL Bank, a large part of the growth story is well captured in current valuations. So, upside can be limited," says a local analyst reviewing his 'buy' recommendation for the stock. Kotak Institutional Equities and Citi turned cautious on the stock early on. 

RBL Bank continued to report leading loan growth of 40 per cent year over year, which helped its net profit grow 55 per cent, but slippages (loans that turn bad) were higher in Q4 at six per cent. There could also be pain in the bank's microfinance book in FY18, as repayment for four per cent of micro-loans are due over 90 days. 

Also, non-performing loan (NPL) ratio at 1.2 per cent of loans in Q4 is among the highest in recent times, and the provisioning for 47 per cent of bad loans for 2016-17 is the lowest in recent years.

The bank has been commanding premium valuation for its clean book and strong growth till now. At 4.4 times the bank's FY18 estimated book value, the stock price is ahead of larger peers IndusInd Bank, HDFC Bank, and Yes Bank. 

"These valuations leave very little room for error. Therefore, if growth is achieved at the cost of loan quality, that could lead to de-rating of the stock," warns the local analyst quoted above. 

Those at Kotak caution that any negative surprise on loan quality or growth could affect fund-raising and hurt rising return ratios. They believe that a slower growth could ease up some concerns.

Riding on the success of the Initial Public Offering (IPO), the bank shouldn't face any major hurdle to raising capital, unless loan quality worsens further. However, given the loan quality, it will be interesting to see how many takers the stock finds at the current high valuation. This could, in turn, affect the bank's fund-raising plan.

Going ahead, investors will also monitor how the bank uses capital, given its relatively weak retail (individual) loan exposure. Also, the bank's deposits are weaker than peers. Seen against a current account-saving account ratio of 35-50 per cent for its peers, RBL Bank's CASA at 22 per cent needs improvement. 

Also, with the loan book continuing to be dominated by corporate and commercial loans (60 per cent of total loans), an improvement in the bank's retail franchise would be appreciated by its investors. These factors, coupled with fund-raising likely by September 2017, could check RBL Bank's stock for a while.