If one wants to study the latest troubles that banks face, RBL Bank would be a good place to start. The private lender’s stock has been hammered over the past ten days, with a value erosion of 31%. Investor angst became evident right after the bank’s management, two weeks ago, indicated that its asset quality could be under pressure in the coming quarters.
That and the fact that growth may be subdued made investors not so optimistic about the otherwise strong first quarter metrics the lender released on 19 July.
RBL Bank reported a 41% jump in its net profit for April-June, driven by a healthy 48% growth in core income. The lender also reported steady gross bad loan ratio for the June quarter but an increase in slippages.
But there were many pain points in the bank’s balance sheet that investors had to take note of. The latest being the lender’s exposure to Coffee Day Enterprise whose founder V.G. Siddhartha disappeared on Monday only to be found dead early on Wednesday. The company’s stock took a beating, pulling down, along with it, those of lenders having exposure to it.
RBL Bank has clarified that loans to the beleaguered firm are standard and it continues to monitor the situation. But investors are not willing to give up on caution.
Adding to the pain is the fact that non-bank finance companies (NBFCs) are among the top three exposures of RBL Bank which bother investors given the liquidity and growth problems in the sector.
What is more, RBL Bank has guided for a potential corporate slippage of ₹1,000 crore in the coming quarters.
In short, even if the lender continues to report high double-digit growth, the increase in potential stress is a dampener. What buttressed its valuations was the fact that the lender managed to grow at a fast pace while keeping asset quality intact.
With this in question now, the stock is likely to remain under pressure. Even after a sharp 12% fall over the last three trading sessions, the stock trades at a multiple of twice its estimated book value for FY21. This is on par with that of a large lender with stronger franchise like Axis Bank.
No wonder, analysts believe, in light of the outlook given by management, valuations appear expensive.
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