RBL Bank Q2 FY20 Result Analysis

Why RBL Bank Stock is Falling?

Introduction

In this article, we are going to see RBL Bank Q2 FY20 results update. The stock fell by 20% amid 73% drop in net profit due to deterioration in the asset quality.

RBL Bank Q2 FY20 Result Analysis

Q2 FY2019-20 Results Update

• Net Interest Income increased by 47% YoY and 6% QoQ because of improved Net Interest Margin of 4.35% for Q2 FY20.
• Non-Interest Income growth is 32% YoY mainly because of rise in Fees & Commission Income ie. from other banking operations income. However, it is decreased 8% QoQ.
• Total Income = Net Interest Income + Non-Interest Income
  • For Q2 FY20 Total Income is increased 41% YoY on account of Increase in both the income heads (Net Interest Income + Non-Interest Income). While it is shown a growth of only 1% QoQ negative QoQ growth of Non-Interest Income in Q2 FY20.
• Operating profit in Q2 FY20 is Rs.635 Cr increased by almost 41% YoY and 2.5% QoQ.
• Provisions and contingencies for the quarter Q2 FY20, were Rs.533 Cr with a YoY growth of almost 280% as against Rs.140 Cr for Q2 FY19. The QoQ growth in provisions is also 150%.
  • We can see that there is a sharp rise in provisions as the bank had to set aside money to cover for a rise in non-performing assets (NPAs).
• RBL bank’s Net profit slumped 73% YoY and 80% QoQ is mainly due to steep rise in the NPAs as mentioned above. The asset quality deterioration is a key concern for the bank in Q2 FY20.

RBL Bank Q2 FY20 Balance sheet Summary & Key Ratios

Deterioration in Asset Quality

• Asset quality in Q2 FY20 is highly deteriorated YoY as well as QoQ.
• That is – Gross NPA has jumped sharply to 2.6% in Q2 FY20 from 1.4% in Q2 FY19 and 1.38% in Q1 FY20 due to exposure to the bad loans.
• While, Net NPA has almost doubled to 1.56% in Q2 FY20 from 0.74% in Q2 FY19 and 0.65% in Q1 FY20.
• It clearly indicates how badly the bank’s asset quality is degraded in Q2 FY20.
• In spite of sharp rise in the provisions for bad loans, provision coverage ratio is decreased in Q2 FY20. It shows the overall NPAs which are expected to realise.

CASA Ratio

• In Q2 FY20, CASA deposits are Rs.16,620 Cr, increased by 42% YoY and 6% QoQ. The CASA ratio is consistently improving QoQ as well as YoY. In Q2 FY20, CASA ratio is 26.5% from 24.5% in Q2 FY19 and 25.8% in Q1 FY20.
• Overall deposits are Rs.62,829 Cr, increased by 31% YoY and 3% QoQ. Thus, we can see that CASA growth is driving the total deposit growth of the bank.

Capital Adequacy Ratio (CAR)

• RBL Bank’s total Capital Adequacy Ratio (CAR) was at 12.3% as on September 30, 2019 as per Basel III guidelines. CAR is marginally above the regulatory requirement level given by RBI.
• CAR has degraded to 12.3% in Q2 FY20 from 13.7% in Q2 FY19 and 12.4% in Q1 FY20. The bank needs to improve its CAR in order to be on safer side in current economic scenarios.

Net Interest Margin (NIM)

• Net Interest Margin (NIM) and the asset growth, both drives the Net Interest income of the bank.
• NIM for the quarter Q2 FY20 is 4.35%, which is improved from 4.31% in Q1 FY20 and same as 4.1% in Q2 FY19.
  • It may be mainly on account on higher growth of CASA deposits, particularly current account deposits.
  • It helped bank to have a lower interest expended amount on deposits. Thus, the resultant Net Interest Margin got improved in Q2 FY20.

Cost to Income Ratio

• Cost to income ratio of any bank tells how much cost is incurred to generate operating income of Rs.100 for the bank.
• For Q2 FY20, the Cost to Income Ratio improved to 51.5% from 52.3% in Q1 FY20. While the ratio is stable, same as 51.5% in Q1 FY20.
• As compared to the other private banks, RBL bank is having a higher cost to income ratio. It indicates that there is a high scope for the bank to improve its operational efficiency and thereby overall profitability by coming quarters. In this way, banks’s cost to income ratio will also be improved.

Why RBL Bank Stock is Falling?

• As we have mentioned above, RBL Bank stock fell by 20% amid 73% drop in net profit due to deterioration in the asset quality. The stock hit a 52-week low of Rs.230.55. Lets discuss the reasons behind this fall.
• The bank has made higher provisions of Rs.533 Cr in Q2 FY20, with a sharp rise of 280% YoY and 150% QoQ because of the anticipated impact of the following factors on the bank :
  1. Increased stress in the economy
  2. Deterioration in the credit environment
• As a result, the bank is expecting the total stressed NPAs to be around Rs.1,800 Cr from :
  1. Essel Group
  2. Coffee Day Group
  3. Sintex Industries
• Approximately, Rs.800 Cr of the above accounts have been recognized as NPA in this quarter against which the bank has taken Rs.350 Cr provisions. NPAs from Corporate loans will have a much intense impact on the net profits than NPAs from retail loans.
• Thus, RBL added Rs.1,377 Cr of NPAs during the quarter, more than six times the Rs.225 Cr added in Q1 FY19. As a result, the bank’s gross NPAs as a percentage of its loan book increased to 2.60% from 1.38% in Q1 FY19.
• CEO Vishwavir Ahuja said the bank has taken a conservative view on provisions because of the challenging economic scenario. As a result, bank has decided to take a conservative view and so taken more than a 10% buffer on provisions, as mentioned by CEO.