# RBL BANK - Is it a Good Long Term Story?

Wanted to do some rough calculations to see how long the bank would last without capital, inputs would be appreciated.

If they go to 1% RoA from next year that is a PAT of ~1000cr

At an average 75% RWA, they can lend PAT / RWA% / 15% tier1 = 700/75%/15% = ~9000cr without consuming capital

On an asset base of 100000cr that is ~9%

If they grow at 15% they would have an RWA of 100000*1.15(growth)*75%(RWA) = ~86500cr

so an tier 1 of 86500 / (12000+1000) = 11%

Assuming 11% is the threshold they the existing capital should last them for just 1 years, assuming no major write offs / provisions are needed

Is this accurate?

On a related note, 12% of the investments are in Money Market /Equities/MF

. Does anyone know that the RWA is on this?

DESPITE ALL TWISTS AND TURNS LONG TERM STORY INTACT?

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Disl: I took a position in RBL bank yesterday.

The current situation with RBL bank is quite interesting. Let us look at facts as they happened chronologically:

Saturday 25th Dec
a) RBI appoints additional director on board.
b) VV Ahuja goes on indefinite leave. Rajeev Ahuja become interim MD/CEO.

Sunday 26th Dec
c) The board issues a presser reiterating their guidance.
d) The board conducts a conf. call attended by Rajeev Ahuja.
Key Points:
No additional info on why VV was removed. Reiterated the Q2 guidance of below 2% net NPA and Q4 exit RoA of 1%, difficulty in MFI book.
Some conjecture that can be made, there were differences between RBI and VV on his succession planning, RBI likely had issues on large variance in credit cost during VV’s tenure.
e) CNBC-TV18 reports RJ and RKD are looking to acquire 10% in the bank.

Monday 27th Dec
f) CNBC-TV18 reports RJ has no interest in the bank before the markets opened.
g) The stocks tanks 25%.
h) RBI issues a clarification about the financial position of the bank.
i) Bajaj fin renews the Credit card arrangement with RBL bank.

What has changed?

a) VV Ahuja is out.
b) RBI has intervened.
c) Bajaj Finance has renewed the partnership.
d) We know that Q3 results are in line with expectations as mentioned in the conf call. The book is more or less kosher because of RBI’s clarification on the fianancial health of the bank

Moving on to VV’s tenure at RBL:
VV Ahuja became MD of the bank in 2010. From then on the bank started to accelarate growth. The entire idea was to continuously raise capital, lend to corporates, focus on MFI, bring in high quality management by incentivising them with ESOPs. The goal was to achieve scale and all the advantages that comes with scale like op. leverage, low cost of borrowing. Corporate lending will keep opex in check and MFI will keep the NIMs high. The bank’s advances grew from 1170 cr in 2010 to 54000 cr in 2019 a 50x growth, this resulted in an optical reduction in NPA’s since the relative balance sheet growth was way higher. The bank raised capital every alternate year and at higher P/B multiples. The end goal was to reach the coveted 1.5% RoA no. The branch addition was kept to minimal to keep a check on opex. In 2019-20 corporate portfolio problems started to emerge and this was also the time when Yes bank and other FIs started failing. Severe stress started emerging in RBL’s corporate books. VV Ahuja to his credit came out in middle of a quarter and accepted issues with their corporate book. What followed was a period of significant provisioning/write offs in the corporate book starting from Sep2019 to Dec2020. Meanwhile the other large retail portfolio of MFI started getting multiple hits due to demonetization followed by Covid Wave 1, Covid Wave 2. By this time VV Ahuja and the rest of the mgmt. at RBL had realized that they were on a slippery slope and had to have more solid business verticles. They started cleaning up their books very fast and started growing the third line of business in Credit Cards and started focusing in home loan portfolio.

In summary VV Ahuja created a sizable balance sheet expanding on the corporate side and MFI and just when everything was going great the bank hit multiple roadblocks.

How does it look now?

The bank’s advances haven’t grown since last 2.5 years, corporate book is down from 33000 to 25000, MFI is limited to 10%, Credit card portfolio is around 20% of the asset book, MFI PF is down from 7000 cr to 5000 cr. Bank has added large no. of retail branches and will continue to do so. The corporate book has low yield and higher rated portfolio has gone up. The retail wholesale mix now is 55:45 and the bank intends to bring it down to 65:35 in favor of retail.
The idea of having MFI at 10% imo is to have a high yielding priority sector portfolio and avoid buying it from third parties and avoid agri loans. Structurally the bank is in a much better shape now IMO. What is also celar from the past conf calls is the bank is also more focused on Housing sector. The housing PF today is 3%.

How is the macro environment now?

A lot of corporate defaults have happened between 2015 to 2020. Some of them were frauds and some of them were geniune defaults. The troubled coporate sector areas a few years back, today are in a much healthier state. One doesn’t see Power/Infra/NBFCs/Metal companies in any sort of distress. The retail distress does exist due to Covid and is a key monitorable.

Is the situation similar to Yes Bank?
I dont think so. The situation is similar to Yes in the manner in which RBI has intervened but otherwise not so much.

The dominoes are not falling in the corporate world. The corporate macro environment today is much better than it was in the case of Yes bank. RBL over a period of last two years has written off significant bad debts from coporates, the book too has shrunk significantly. The corporate book today is much granular for RBL. Micro loans PF has also shrunk with significant write offs and the bank intends to keep it at 10%. Bank is well capitalized. Credit Card PF despite being unsecured is much safer and bank has started growing its coporate book again. The bank did not issue Credit cards in 2 of 3 months last quarter due to Visa localization issues and despite that Bajaj fin continued its relationship. Credit Card customers are mostly salaried. October Credit card data released on RBI site shows significant growth.

The Key risks:
Investment in banks is about trust. Having observed the evolution of the bank I dont see a possibility of frauds involving management (if I am wrong here the entire thesis goes for a toss). RBI clarification on the fianancial health of the bank is another indicator of the asset book. At a personal level my position is less than 5% and if I see more issues with my thesis I will exit the stock.

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Disc: purchased a small % recently @165 and evaluating the position.

@Anant that was a great summary but since you purchased recently so what is the keep monitorable according to you.

In my own opinion, the their high yield portfolio’s credit cards and MFI are not profitable enough to self sustain high growth, if you compare it to a bandhan bank or sbi cards they have 2%+ RoA’s that allow them to grow without external capital. Once the portfolio stabilises these may have a higher RoA profile. Their wholesale book is granular and high quality but is unsustainable at the current yields.

The major monitorable for me is RBL growing its low RWA loans, they’re consuming capital too quickly and with the stock below book they will destroy value if they have to dilute anytime soon. A mix of credit cards, MFI, some corporate, MSME and affordable housing, LAP and gold would be ideal, this would form a well rounded bank, the cyclical risks would be countered be the other parts of the portfolio

@Vivek_Santhosh the time frame for which I will hold RBL is not certain as of now but I have a short to mid term view of how the bank and its financials should look like. My two key assumptions are a benign macro environment and no fraud.

Short term, next 2 quarters: For Q3FY22 and Q4FY22 the expectation is similar to what the bank has informed in Q2FY22 conf. call with credit cost halving and exit RoA of 1%.

Mid term, FY23: Assuming a benign macro environment I expect credit costs to keep coming down in FY23. Credit cost of 560 bps this year (374 bps in H1FY22 and 187 bps in H2FY22 as per guidance) should keep coming down. This alone without assuming any growth should bring FY23 exit RoA to levels of 1.25%+. Other than for last two quarters where the other income has shrunk, 80% of which is core fee has continuously grown from 1900 cr to 2500 cr in last two years and a major component of that is from Credit cards.

I don’t understand what you mean when Bandhan bank/SBI cards RoA being 2%+, except for the last two Covid years the RoAs have been in excess of 4% both of them. The issue is since both these business are unsecured how much do you leverage your BS to arrive at a decent RoE. One of the reasons for getting into housing finance for RBL is to balance out this unsecured/high yielding/high credit cost business with a secured low yielding/low credit cost business (a key reason IMO why Bandhan bought Gruh) IMO.

Very difficult to point out what is key monitorable for me but I always try to look for oddities specifically where I see a disconnect between the reality and how and FI is doing. For example I can’t understand how can a large MFI grow its book at a fast pace when there is significant rural distress or floods/other calamities? I also can’t understand how can a housing finance company/real estate project financers grow their books when the entire real estate sector is in doldrums? Similarly if the corporate India overall is stressed there is no reason to expect corporate books to grow significantly without taking undue risks. This kind of questioning for different verticals and some channel checks instead of believing into management commentary is what I try doing.

One key monitorable though is the exit of Independent directors and KMPs. Any exits from them and I would reduce my position.

I try playing financials as cyclicals instead of thinking of them as long term compounders and I try to time them accordingly.

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This story seems incorrect and makes no sense at all. Why would the RBI take action on a loan that was written off in 2018 nearly 4 years later and not take action against the other banks in the consortium. And why take this kind of action for a 300cr loan on a 50000cr loan book.

Even if it is true

1. The loan was already written off way back in 2018
2. The person who allegedly caused the problem is removed
3. Having an RBI member on the board ensures that they don’t do it again
4. They are shrinking the wholesale book
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Banking is all about trust… and once broken, it will take long time to bring it back. Case in point - Yes Bank. Even after new investors came on board and entire leadership team got changed, bank continue to struggle to gain confidence of depositors and investors. I am not saying RBL’s case is as bad as Yes Bank, but for me, it is “wait and watch”. Burnt my fingers badly in Yes bank so may be its a case of “once bitten twice shy” for me…:-

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My father works in a bank. His comment on this is: “In my experience, unless it is absolutely necessary, RBI never interferes directly with a bank’s operations. Since RBI person is directly appointed on the board, there is definitely something wrong with bank and it’s financials as well operations.”

In my opinion, whether the bank can come back from this or not, whether it will unfold further shady stuff of the bank - is something only time can tell. But as an investor as well as the bank’s customer, one should ideally stay away from such options especially since we have seen how these stories have evolved in the past - Yes Bank, PMC Bank etc.

There won’t be end to the speculative articles, comments, blogs on what actually is happening behind the scenes. Which news/articles are true or fake is anybody’s guess. But from purely investment perspective it seems RBL Bank, it definitely has lost the trust and it only makes sense to preserve one’s capital rather than hanging on the hope for it to recover.

Disc: Never invested or planning to invest.

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Just posting my view here as a RBL bank customer and through some scuttlebutt in the last few days:-

1. Why did I use RBL Bank in the first place?

• This was a 3rd bank account for me, after a leading PSU and a leading private bank. It was used more ‘tactically’ - if I might put it like that. The main uses of this were:-

a. Great interest rates for Savings accounts as well as for FDs for the longest time - I regularly went ahead with FDs at over 8% interest rates and savings rates above 10 L holdings in the bank were at 6.75% at one point of time, which was very lucrative. These guaranteed results from positions not yet invested into the markets were a great replacement for liquid funds/debt funds - which had lower/similar returns - and there was the advantage of no fund management expense here. I used the banks services for this extensively for a few years till March 2020. Once the environment worsened because of COVID, I stopped using these and moved most funds into my main banks/increasing investments in the market - as per whatever fit in the financial plan.

b. Excellent services at least for Insignia customers including very cheap ‘benefits’. Supplementary services offered by the bank were almost free/very cheap for any other services I needed from time to time. They have still maintained this relationship, despite us reducing our exposure to the bank by almost 100% in the last 6 months.

c. Great staff and service experience - everyone at the branch was great and very helpful with everything, so very good experience for my father who would still use it for cash withdrawals etc. Overall our experience with the bank was fantastic.

Now what happened for us:-

a. With COVID, we did not want any exposure to the smaller banks in terms of a banking relationship - we took away most of our relationship in March/April 2020 itself. The bank has still been very good in service after that.

b. Whatever small limited amounts I had left (maybe to maintain an interested relationship as such), I transferred it to my other leading private sector bank this week. Bottom line is, as an investor and a customer, the security of funds is the most important thing. I don’t want to increase my risk by backing the bank through this, even if I may be perfectly happy with everything.

How has my experience been in the past week with the bank:-

a. Again an A+ to the bank for this. The experience, despite taking away all our relationship balances, has been fantastic.

• The branch was fully occupied earlier this week with staff present for everything. Everyone from the branch manager to the front line staff were extremely helpful. Their opinion was that everything is fine and this is precautionary, but I did not base my decision on this, as I believe they would hope rather than know everything is fine and I don’t think the employees would be exposed to any of the stuff happening at the top level.

• The staff usually have had and continued to have a high opinion about their top management. They were disappointed, maybe felt let down. This was really tough for them, and I feel deeply sad for a wide range of employees who work very hard day in and day out, and then have to deal with these unfortunate situations when they might be worried about their own jobs. I do hope, even if only for the employees sake, that whatever the RBI does guarantees their jobs and livelihood. From here on, I would also understand if the RBI had the perspective that the most important thing is the security of small deposit holders who are not as informed and bank employees.

• I needed to speak to customer care for some work related to withdrawals. Everything is still functioning very efficiently and smoothly (atleast the Insignia line), and it was all done in the stipulated time without any hassle.

How could extrapolation of this translate to the banks future:-

• I believe know one can know, even currently, how the future plays out, simply because it is not possible to predict behaviour of the banks customers and if they choose to be sticky through this. I did not see any sense in it, but it would depend on so many factors for different accounts. Like a member mentioned earlier - trust is the key aspect here. That is pretty impossible to judge.

• Even if capital adequacy seems fine currently, it would eventually depend on how things turn out from now. How the RBI and the bank manage this would be critical in the future of the bank. Media management. PR etc will be critical - they cant afford panic at any of their branches

• From a customer standpoint, once the storm blows away, I would be very happy to take my relationship back to them, but only if and when I am very sure all is okay (however much time it takes) and their reward/service levels continue. Even if I extrapolate other people have a similar experience, if they manage to tide over this storm the future might not be bleak. But the question is if they can tide over this?

Disclosure : Not invested, no transactions in the stock in the last 30 days. This is not investment advice and I am not a registered advisor. These are just my personal views encompassing experience as a customer and some scuttlebutt.

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One disadvantage from retail customer point of view is high frequency of frauds with credit cards. RBL has bad name in industry for this, most of the frauds like unauthorized transaction is with RBL credit cards. First google search gave this - More complaints from RBL credit card customers - The Hindu

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While I am tempted to say “I told you so” - similar patters keep repeating in the capital markets. The concept of Margin of Safety - not going by what the crowd is feeling or believing but carefully studying what management is really upto and what the markets and then doing one’s own primary and secondary research and thinking is much beyond everything else.

Since the time I posted this and some more posts on RBL bank, the stock is down 75% in almost 4 years. Even if it recovers from current levels, the probability of someone being a real long term holder in such a stock really diminished after such a negative volatility. Others, if they have a small bet will make small only if the stock recovers and if they have a big bet on long side are really pushing their luck. In short, losses are big and while profits are either small or non-existent even from current levels.

Silly as it may sound but our short thesis on RBL Bank was actually based on the number of investor meetings the top management was doing on an everyday basis and posting information about the same on exchanges. The sources of alpha come from newer and newer innovative ways of studying the firms.

Hope this serves as a lesson for many. Interestingly we wrote extensively on this forum in October 2017 about Yes Bank as well - where we saw similarities but on a more alarming level.

The same problem in RBL which we saw and wrote extensively about in August 2017 are now reappearing in different ways in other set of stocks. While the fall may not be as brutal as Bank stocks which are leveraged nevertheless results would be painful - all these however take 2-4 years to pan out which is very relevant to long term investors.

Best,
Sarvesh Gupta

PS - Author runs Maximal Capital and manages external money. Views are personal.

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As of September 30, 2021, RBL Bank’s capital adequacy ratio, which is an indicator of how much percentage loss a bank can incur on its risky assets before it becomes insolvent, was at 16.33% as against the minimum Basel norm of around 10%.

The bank’s liquidity coverage ratio, which is a measure of how much liquid assets a bank has to cover cash demands over a certain number of days in case of a crisis, was at over 150% as against the regulatory requirement of 100%. The bank has also provisioned for over 76% of its gross NPAs, or it has recognized over three-fourths of its gross NPAs as losses, thus reducing the chances of any future negative earnings surprise.

While RBL Bank’s loan book has doubled since 2017, the size of its bad loans has grown by more than seven times during the same period. The bank has also been expanding its loan book through aggressive lending to retail borrowers. It has particularly focused on extending unsecured credit card loans which are highly prone to default and low recovery rates. In fact, credit card and microfinance loans constituted well over half of the bank’s retail loan book. All this has led to more defaults

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For those who are invested in RBL (like me) the recent history is firmly against us and we need to be far more cautious. Lately there have been multiple media reports which have published source based stories sometime +ve and sometimes -ve. There is little reason to discuss the validity of these stories unless they quote verifiable source or verifiable data. One thing those of us invested should take into account is that -ve stories will further weaken the stock irrespective of what our opinion is. What we should do is to focus on data (and not unverifiable sources whether personal or media) to again and again validate our thesis. Two sets of data that I have looked at are and sound interesting:

a) Credit card issuance data by RBI in Oct. and Nov.
b) Analyze the insider trading disclosures 2015 made at BSE. This data tells us how company employees and KMPs are buying/selling equities.

Credit card data for Oct. and Nov. from RBI:

Very clearly until Nov. there seems to be no issue with CC growth. RBL has added 9% new cards higher than anyone else (could also be due to localization issues with Mastercard where it could not issue card in Jul and Aug). The YoY MShare for RBL continues to be at 5%.

There doesn’t seem to be any aberration in Employee selling data over last few quarters. For that matter employee selling has been the lowest this year. This could also be due to ESOP lapsing due to market price being lesser than issuance price in last two years.

Let us look what KMPs/Directors have done with their stock (KMP names are taken from last four annual reports):

again no major selling by KMPs and VV Ahuja, Rajeev Ahuja and R Gurumurthy (Head of Risk, Compliance) continues to hold significant quantities. VV Ahuja last sold in Q1CY21, Rajeev Ahuja had a pledge invoked in Q1CY20 and R Gurumurthy last sold in Q3CY20.

VV Ahuja sold around excess 25.5 lac shares, Mr. Rajeev Ahuja has added 5.6 lac shares and Mr. Gurumurthy has added around 3.8 lac shares in last 5 years.

RBI link for credit cards: Reserve Bank of India - Bankwise ATM/POS/Card Statistics