RBL Bank: Worst may be over, but near-term asset quality pressures seen

Renewed focus on MFI loans and credit cards should put the bank on growth trajectory after six quarters

Once the most sought-after bank stock, RBL Bank, went out of fashion in July 2019, when its financials first indicated asset quality stress. Over the last 18 months, its stock price has fallen by over 70 per cent. With gains of 52 per cent in the last three months, the bad spell appears to have ended, thanks to the re-rating wave that has engulfed the banking stock. That said, it remains a laggard on a longer horizon and with valuations at 1x FY22 estimated book, down over 58 per cent from all-time highs, the bank in its new avatar is interestingly positioned.  

The bank has indicated that in its redefined form, the focus would be on credit cards and microfinance (MFI) segments. Both are high-yield businesses with a return on assets (ROA) potential of 4 per cent. RBL Bank’s overall ROA could see a jump from 0.62 per cent in FY20 to 1.8 per cent by FY23, according to analysts at CLSA.

RBL Bank acquired RBS’s credit card portfolio in 2014. In 6 years, the share of credit cards to its total loans has risen to 18 per cent and RBL’s market share in the segment is at 5 per cent. Partnership with Bajaj Finance, which started in 2017 for the cards business has helped gain scale, improve the average value per transaction and also mitigate asset quality risks as both share it. The card business’s gross non-performing assets ratio at less than a per cent in September quarter (Q2) offers comfort.

The MFI business is also one which gained strength inorganically by the acquisition of Swadhaar FinServ (largest bank correspondent in the MFI sector) in 2017. Contributing to 13 per cent of the total loan book, with an overall market share of 3 per cent, the yield from this portfolio has consistently been 14 – 15 per cent over years. Working through partnerships has helped keep a check on asset quality. RBL Bank’s MFI business draws strength from mature markets such as Maharashtra, Tamil Nadu, Karnataka and Bihar and has less than 10 per cent exposure to West Bengal and Assam (combined).

The other positive is the steadying deposit base after a blip in March 2020. At 31 per cent of low-cost current account – savings account (CASA) deposits are gradually stabilising, though overall deposit growth at 3 per cent trails peers. Analysts at Axis Capital note that the bank’s deposit base is normalising.

Investors should, however, be mindful that the 9.4 per cent of RBL Bank’s loan book under moratorium till Q2 and 37 per cent of book from the corporate loans pose near-term asset quality pressures. Closer to Q3 results, RBL Bank’s stock price may be volatile.