Equal mix between retail and wholesale assets is the future for RBL Bank

Following its listing in August 2016, the RBL Bank stock had seen a good run, doubling in less than a year, thanks to a neat scaling up of the bank’s loan book.
 
But after touching its all-time high of Rs 600 in last May, it has lost ground. In fact, on Tuesday, the stock shed over four per cent (the second time in its history) reacting to its quarterly results, which was otherwise in-line with expectations. The increasing stress from asset quality (which has been fast catching up after the farm loan waivers were announced) hasn’t gone down well with investors. This also explains why the stock has underperformed in the past six months, when its peers have had a home-run.
 
In the December 2017 quarter (Q3), the bank made provisions of Rs 0.8 billion, a jump of 127 per cent year-on-year — the highest provisioning in the last six quarters. Provisioning was high for two reasons. First, after the RBI’s audit on the bank’s asset quality, three accounts slipped as non-performing assets (NPA), one being a bulky account amounting to Rs 5.3 billion. The other being higher stress in its microfinance portfolio, thus dragging the overall gross NPA ratio to 1.6 per cent from 1.1 per cent a year ago. For the first time, after its listing, the net NPA ratio touched the one-per cent-mark. Gross and net NPA ratios were up 20 basis points sequentially in Q3, while provisioning coverage ratio of 38 per cent is also far from impressive.
 
While the bank expects resolution on big-ticket loans by the next quarter, it remains cautious on its agricultural portfolio as farm loan waivers have dampened the repayment discipline of its customers.
 

Yet, what helped the bank in Q3 is a stable loan growth at Rs 369 billion, taking its loans assets higher by 38 per cent. However, looking at RBL Bank’s loan book, nearly 66 per cent have tenure of less than a year and 20 per cent fall in the one-three year category. Analysts say the bank will have to look at longer-tenure loans.
 
“Slightly more-than-comfortable levels on high-yielding assets such as microfinance loans and unsecured loans pose concerns on growth,” caution analysts at Kotak Institutional Equities. Those at Ambit Capital also have a similar view. “The bank lacks a profitable and sizable retail niche,” they add.
 
This is why RBL needs to shore up its retail assets and liability at a faster pace. While the current CASA (current account savings account) ratio of 24 per cent is adequate to support its short-tenure loan assets, shoring up the ratio to 30-35 per cent (as is with larger regional banks) is also critical to secure its profitability.
 
Analysts at Kotak say that despite the recent underperformance, the stock remains richly valued as the lack of strong liability franchise is bigger constraint to assign a higher multiple to the bank’s stock price.