At one point of time RBL was my largest position over 25%+ in my portfolio. These were bought before IPO and post IPO in a year or so it generated huge wealth for me. My understanding at that point of time was this:
a) The bank emerged from the shadows of Ratnakar bank and it was growing at a breathtaking pace, V Ahuja and the team that he had were doing a fabulous job on growth/risk management/asset quality and digital infra.
b) The NPAs had all but vanished.
c) There were marquee investors who had invested in the bank including IFC, Faering Capital and a lot of others who participated in multiple dilutions before bank got listed.
d) Mr V Ahuja had put his entire capital and energy in the bank.
As I read more I realized my lack of understanding of how financial institutions should work and how they do. One of the most defining books I read and also presented in VP Annual meet was ‘A blueprint for better banking’ by Niels Kroner. In this book Niels Kroner describes about ‘Svenska Handelsbanken’ a Swedish bank and how it approaches banking. You can look for it here:
Neils Kroner also described the ‘The Seven Deadly Sins of Banking’ in that book as follows:
- Imprudent asset-liability mismatches on the balance sheet
- Supporting asset-liability mismatches by clients
- Lending to “Can’t Pay, Won’t Pay” types (for extra basis points)
- Reaching for growth in unfamiliar areas
- Engaging in off-balance sheet lending
- Getting sucked into virtuous/vicious cycle dynamics (growth is an outcome of credit which is an outcome of growth until it isn’t)
- Relying on the rear-view mirror
Anyone who wants to have a better understanding of banking should go through Neils Kroner’s book. In my mind the above sins would play along with the following
- When a bank/financial grows faster than the underlying segment one really needs to be cautious.
- Growth/Degrowth in financials is an outcome and shouldn’t be made a target.
- Own your underwriting. Dont buy loans from the market and don’t lend to lenders. This will avoid any system wide liquidity hazard.
The above ideas made me re-think my investments in financials and RBL. I slowly exited my position in RBL (and felt like a fool for sometime) and also could avoid the growth toppers and growth guides like Yes/DHFL/IndiaBulls/Reliance Cap/Reliance Home/PNB HFC/ and a whole lot. I did dabble into a fast growing mcap but exited quite early.
How do I see RBL now: RBL’s business model has some fundamental flaws and these flaws were all hidden by the stupendous growth fueled by continuous capital raise. Most people believed the story and paid a premium for the growth. A few things that got ignored and were pointed out by @rupeshtatiya and other folks over time:
a) NIMs to RoA: With NIMs of 4.3% the bank still only manages around 1.2% RoA. This implies that bank is operations heavy. One could really question if the bank made any money from its lending and with the current provisions it could very well be they have lost some.
b) The ESOP strategy: Also the amount of ESOPs issued is mind boggling. One look at FY19 AR the bank allotted nearly 70 lac ESOPs at Rs 143. The bank also had 3.05 crores of ESOPs at an exercisable price of 438.
c) The branch strategy: Corporate lending is easy. Retail branch opening is tough, expensive and costs a lot in the initial years. I am very certain the decision to open fewer branches was a clear outcome of Vision 2020 with 15% RoE and other matrix.
d) The bank has significant exposure to MFI segment. Direct MFI lending can have NIMs in excess of 8%. Despite this the RoA remained sub par.
e) A question that was asked in the conf. call and was brushed under the carpet was the book size when these bad loans appeared. Assuming that these loans appeared around 2/3 years back when these loans by themselves would have been 30% to 50% of bank’s net worth.
f) Finally, RBL bank had a halo: a halo of being a different corporate bank with proper risk management, conservative and prudent underwriting and a great team. The halo is now lost. In some of the documents from MCA or other sources the kind of loans that the bank gave were pointed out. The sintex loan is telling, the loan was closed but the real question is why was it given? I know the answer: for a few basis points more.
Disclosure: No investment in RBL. Have investments in other fianncials.