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    RBL Bank- Clarity on loan book needed

    Jan 1, 1970 12:00 AM 25 min read

     

    • Shares down by around 48% since first quarter result announcement on 19th July 2019.
    • Concerns on asset quality, economic slowdown and insider trading allegations on the Bank have weighed in heavy.
    • Despite this drastic fall in stock price, investors are still unsure if the bearish trend has bottomed out.

    RBL Bank listed on the stock exchange on 31st August 2016 at 275, a premium of 22% over the IPO issue price and had a stellar run till July 2019. 

     

    In July 2019, the bank had declared a healthy set of numbers for Q1FY20 but the stock price crashed owing to management guidance on moderated growth and likely jump in non performing loans going forward. 

     

    The Indian banking system has been going through a bad loan crisis for a few years on account of the weak corporate financial health which has been largely the result of a significant debt-driven expansion during 2009-12, that was followed by adverse business conditions, including an unexpected slowdown in economic growth, higher interest rates and shadow banking crisis. Indian corporates have been deleveraging and large part of the bad debt has already been recognized. 

     

    Recently, global rating agency Moodys had analyzed banks in 13 Asia Pacific countries and cautioned on the Indian Banking segment stating that Indian banks are the most vulnerable because they have lower capital ratios, and their capital can be wiped out if there is a rise in corporate defaults. 

     

     

    Asset Quality and Capital Buffer will be the guideposts for trend reversal

     

    Particulars

    FY 16

    FY 17

    FY 18

    FY19

    Q1 FY20

    Net Worth

    2,960

    4,242

    6,544

    7,336

    7,574

    Deposits

    24,349

    34,588

    43,902

    58,394

    60,811

    Advances (Net)

    21,229

    29,449

    40,268

    54,308

    56,837

    Investments (Net)

    14,436

    13,482

    15,448

    16,840

    16,639

    Net Profit

    292

    446

    635

    867

    267

    NIM %

    3.01

    3.02

    3.48

    4.04

    4.31

    CRAR (%)

    12.9

    13.7

    15.3

    13.5

    12.4

    Gross NPA (%)

    0.98

    1.20

    1.4

    1.38

    1.38

    Net NPA (%)

    0.59

    0.64

    0.78

    0.69

    0.65

    Return on Assets (%)

    0.98

    1.08

    1.21

    1.27

    1.31

    Return on Equity (%)

    11.32

    11.67

    10.95

    12.15

    13.78

    Profitability Growth has been steady and NIM%, ROA%, ROE% have been sequentially registering healthy growth. 

    In Q1FY20, NII registered an annual growth of 48%, Net Profit an annual growth of 41% while the advances & deposits grew by 35%. CASA has also been expanding and registered annual growth of 43%.

    However, in the prevailing economic scenario, management has moderated profitability guidance to 20%. Decline in asset quality and recognition of NPA can halt the steady profitability. 

     

    The twin challenge remain Capital Adequacy Ratio (CRAR) and GNPA.

     

    CRAR

    CRAR had improved to 15.3% in FY18, when the bank had raised INR 1680 Crore via prefential sale of 3.26 Crore shares at INR 515. 

     

    Presently, CRAR is above the stipulated level, however the bank is looking at raising equity of around INR 3500 Crore to strengthen the capital base and continue asset growth.  Progress on capital raising will definitely re-instill investors confidence.

     

    Gross NPA

    Gross NPA even at 1.38% is significantly higher than the levels maintained during FY16. Internal rating distribution also highlights that the  BB+ & below portfolio has jumped from 5.90% in March 2019 to 7% in June 2019. 

    During the first quarter results announcement, management has Indicated that the gross NPA may spike to 2%-2.5% in FY20 and it could incur an additional 35 bps -40 bps credit cost on account of corporate exposures. 

     

     

     

    Asset book profile and quality 

     

     

     

     

     

     

    The outer pie depicts the asset book break-up while the inner pie shows the contribution of each portfolio in the overall loan book as on 30th June 2019. 

     

    The overall loan book is a prudent mix of wholesale (54%) & retail banking(46%). The bank has a strong Credit Card portfolio that constitutes around 10% of the book and generates around 40% of fees. 

     

    In Q1FY20, bulk of the non performing assets were from Retail Assets (45%) and Commercial Banking (31%). 

     

    Commercial banking portfolio with an asset base of only 15% in the total book, had contributed 31% to the Gross NPAs.  The CIB and DB&FI (includes microfinance) book has been relatively robust, though management has indicated that further slippages may come from CIB book. The high delinquencies have been earlier recorded in the Microfinance portfolio in FY18 following the impact of demonitization. RBL has managed the high-yielding microfinance loan and credit card portfolio with limited delinquencies.

     

    In the current scenario Small & Medium Enterprises have been struggling but there has been a respite provided by the Government. Banks to not declare any stressed MSME loan as NPA till March 2020 and look at recasting their debt. Timely resolution of impacted MSME accounts would be able to curtail the non-performing loans in the SME segment. 

     

    The retail loan portfolio also needs to be tracked meticulously as there is a slight uptick in defaults by individuals, given their stagnating incomes and job losses due to poor profitability and bankruptcies at many companies.

     

     

    CIB assets however remains the most susceptible. A sector-wise break-up of asset book:

     

    Industry

    % of Exposure (including Fund based and Non fund based)

    Construction

    5.5%

    Engineering

    4.9%

    NBFC (ex. HFC & DFI)

    4.8%

    Retail/ Distribution

    4.1%

    Pharma

    3.4%

    Real Estate

    3.2%

    Power

    3.0%

    Professional Services

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