RBL Bank stock lost 40% of its value in 2024, and that had very little to do with the growth in advances and deposits. Instead, it was all about the asset quality issues.
Its business update for the December quarter (Q3FY25), which shows year-on-year growth of 13% and 15% in advances and deposits, respectively, has been met with muted reaction by the Street. Investors are more worried about the slippages in credit card loans and microfinance loans.
As such, the bank’s advances and deposits year-on-year growth was healthy in Q2FY25 at 15% and 20%, with a decent interest spread, i.e. the gap between the yield on advances and cost of deposits. Despite an interest spread of more than 6% in the last nine quarters to Q2FY25, the bank’s return on equity (RoE) has been below 10% in each quarter.
Its yield on advances was in excess of 12%, which is high owing to its focus on high-risk retail loans. Retail loans have been more than 50% of total loans in all quarters and stood at 62% as of September 2024. Within retail, 50% of the loans are credit cards, personal loans and microfinance, all fetching high interest rates with high risk.
The problem is credit cost that appeared to have bottomed out in Q1 at 1.8% has again risen to 3% in Q2, as per Motilal Oswal’s calculations. The bank has guided for it to be 2.6-3% in FY25, with recovery expected from Q4 onward. However, it would largely depend on the bank’s ability to contain incremental slippages that had increased to 5.4% in Q2 from 3.9% in Q1.
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The bank aims to achieve RoE of 14-15% by FY26. However, much will depend on how it manages to alleviate the stress in its retail loan book. While the Q3 business update in terms of advances and deposits appears good, the quarter results are likely to be adversely affected as the management expects slippages and credit cost to be higher QoQ.
It remains to be seen how the credit card business shapes up after Bajaj Finance exited from a co-branded credit card partnership with the bank around a month ago. Valuations suggest many of the negatives have been priced in as the stock trades at just 0.6x adjusted book-value FY26 estimates of Motilal Oswal. Further trimming of earnings estimates is the biggest risk for RBL stock now.
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