RBL Bank's Christmas Fiasco Tells us Why Transparency is Paramount

The market remained unconvinced of the bank's arguments and the scrip saw a deep fall on the first half of Monday.

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RBL Bank plunged by a painful 25% on Monday, December 27, as panic led to investors exiting the stock in droves. This exodus led to the steepest intraday declines that the bank has registered in its track record till now.

The crisis sprung on scores of unsuspecting investors after news broke over the weekend that the Reserve Bank of India (RBI) had appointed an additional director on the private bank’s board while the bank’s CEO Vishwavir Ahuja was away on “medical leave”. 

Switching into the damage control mode, the interim executive director Rajiv Ahuja and a few board members convened and addressed an analyst meeting on Sunday evening in order to assure depositors and investors about the bank’s future prospects, and hopefully arrest a precipitous fall in the share price.

In its press release, the bank maintained that the exit of the CEO and the simultaneous appointment of Yogesh K. Dayal as the additional director “are not in any manner a reflection on the fundamentals of the bank.”

“The business momentum and financial performance trajectory have been improving since the second quarter of this financial year as we have recovered from the effects of the pandemic. We have absorbed the challenges on our asset quality which were largely due to the pandemic. The financial position of RBL Bank remains robust. Capital adequacy was 16.3% and will be in a similar range this quarter. Liquidity Coverage ratios have been well above regulatory requirements – it was 155% for the September quarter. On asset quality, our slippages peaked in Q2 and will be improving this quarter and next as we had guided previously. The NPA position of the bank will also be on an improving trend. We want to point out here that we have been upfront and transparent on any challenges that we have faced in our various business segments in the past,” the bank said. 

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However, the market, evidently, remained unconvinced of the arguments and the scrip saw a deep fall on the first half of Monday.

Some much-needed relief came in for the bank after the RBI stepped in on Monday afternoon and assured the market players that the bank is “well-capitalised and the financial position of the bank remains satisfactory”. The central bank has said that the appointment of Dayal as a director has been undertaken under section 36AB of the Banking Regulation Act when the RBI is of the opinion “that the board needs closer support in regulatory/supervisory matters”.

The bank’s stock however still ended 18% down, finishing at Rs 141.60.

‘In its press release, the bank maintained that the exit of the CEO and the simultaneous appointment of Yogesh K. Dayal as the additional director “are not in any manner a reflection on the fundamentals of the bank”.’ Photo: PTI/File

Earlier, over the weekend, the All India Bank Employees’ Association in a letter to the Union finance minister Nirmala Sitharaman had cautioned her “that everything is not okay with the bank” 

“It is observed that the total advances of this Bank have doubled during the last few years. From about Rs 29,000 crores advances in 2017, It has crossed Rs 58,000 at present. There are also reports that the Bank has been overindulging retail credit, micro-financing and credit cards and consequently burnt its finger resulting in weakening the financials of the Bank. In the background of the problems encountered by private Banks like Yes Bank and Lakshmi Vilas Bank last year, we urge upon to immediately intervene in the matter in the Interest of Depositors of this private sector bank and consider necessary steps including a merger of this bank with a public sector bank.”

How has the bank been performing?

A report released by ICICI Securities downgraded the bank to sell with a revised target price of Rs 130 from its earlier rating of hold at Rs 181. 

“RBI’s similar action (appointment of additional director) at other banks in the past has hinted at compliance or asset quality or governance or business risk issues. A repercussion of this move on various stakeholders (including depositors, employees, etc) and consequent derailment of confidence and disruption would be key monitorable going forward. With anticipated elevated stress and muted growth, we were of the view that a modest RoA/RoE profile will cap valuations. This incremental adverse development will further weigh interim pressure and can drag valuations,” the report stated.

The bank has been on a rough road as far as slippages and credit costs are concerned. On an annualised basis, the slippage ratio (calculated as fresh accretion of NPAs during the year/Total standard assets at the beginning of the year*100) has rather dramatically slipped from 1.93% in FY18 to 6.19% in FY20 before recovering marginally to 5.43% in FY21. For the first half of FY22, the slippage ratio seems to be at a foreboding 8.73%.

The same deterioration is visible in the case of credit costs as well, which were a tolerable 0.96% in FY18 but spiraled to 3.39% in FY20 and 4.10% in FY21. For the first half of FY22, the credit costs look quite elevated at 7.48%. 

There has also been a substantial spike in Gross Non-Performing Assets as far as micro-banking and agricultural retail loan books are concerned. The GNPAs in micro-banking loans leapt from 3.62% in Q4FY21 to a worrying 9.62% in the next quarter and to a dangerous 16.37% in the latest quarter. GNPAs in retail Agri loans stand ominously at 12.27% in the latest quarter.