There are perturbing indicators in RBL Bank’s financials, which explain to an extent the concerns of investors and the stock’s recent performance—down over 65 percent in the past three months. Here are some of the red flags:

High Net Interest Margin (NIM) isn’t Aiding a Higher Return Ratio

Typically, any bank making NIM above 4-4.5 percent can only mean two things in a competitive environment: either it is able to raise money real cheap or it is taking on riskier debt. This is especially concerning when its ROA (return on assets—or profits from return yielding assets) is not reflecting a rising trend in NIMs. For RBL Bank, the NIM at 4.93 percent looks very good and why that’s so is something to ponder over. In the last 15 quarters, the bank has seen 80 bps decline in its cost of deposits, while it has seen a 120 bps increase in its yields on advances, thereby seeing a sharp jump in its spreads by 200 bps. Oddly, though, the rising NIM has not been, worryingly, accompanied by an improvement in ROA as illustrated in the chart below. The NIM of the bank in last 15 quarters has increased by 153 bps, while ROA has declined from 0.91 percent in Q2FY17 to 0.52 percent in Q4FY20.

RBL Bank’s NIM vs ROA Movement

High Share of Riskier, Non-Collateral Debt

High NIM is also a function of carrying lower rated or non-collateral loans in the balance sheet like credit cards and personal loans. While these are also well established forms of credit, a high proportion of assets in such debt indicates high credit risk. A comparison of RBL Bank’s exposure with that of another private bank, Federal Bank, brings this point out clearly. While for RBL Bank, non-funded exposure to total exposure has been 18-22 percent. For Federal Bank, it has been in the range of 5.2-6.8 percent.

Higher non-fund exposure means higher capital requirement or higher risk weight assets (on incremental growth) which impacts capital. Take a look at the below table, risk weight assets to advances have been above 110 percent for RBL Bank, while it has declined from 99 percent in Q2FY17 to 83.6 percent for Federal Bank. RBL Bank has been able to bring it down from 129 percent to 116 percent in the same period, however, it has been on the higher side. The non-funded book of RBL Bank has increased by 2.08x between Q2FY17 to Q4FY20.

The higher risk does translate into higher cost. In Q4, the bank has made 100 percent provisions for NPAs in its credit card business. At an overall level, the credit costs have been trending up, having risen from 22 bps in Q2FY17 to 99 bps in Q4FY20, and alongside, the NPAs are rising from just 1.1 percent in Q2FY17 to 3.63 percent in Q4FY20. The deterioration in gross non-performing assets (GNPA) has been on account of elevated slippages. Annualised slippage ratio of the bank has increased from 0.61 percent in Q2FY17 to as high as 9.4 percent in Q2FY20. It remained elevated at 4.9 percent in Q4FY20.

Weaker Return Ratios

Despite being strongly capitalised and having high NIM, the return ratios of the bank has been weaker, especially ROE, versus peers. This could also be because the bank has not leveraged its equity much to grow its balance sheet. The leverage of equity to assets has been at 8.2x for RBL bank vs 12x for Federal Bank. Another reason for weak return ratios has been the rising GNPA, which has impacted earnings due to high provisions. The bank expects higher credit cost for FY21 as well. Therefore, return ratios will continue to remain weak in FY21 with ROE in single digits.

Valuation Not Compelling

The RBL Bank stock currently priced at 0.66x P/BV (stock price divided by book value per share) and Federal Bank’s stock trades at 0.6x P/BV (at end Q3FY20).

COVID-19 Impact

Given the visibly altered external environment following the spread of coronavirus, the management of RBL Bank has guided for credit cost to remain between 340-350 bps for FY21, though with an improvement in provision coverage ratio. The bank has 1/3rd of its book under moratorium, perhaps the second highest after Yes Bank. And that’s an added cause of concern for the street.

First Published:May 9, 2020 4:06 PM IST