RBL Bank shares plunged 13% in Monday's intra-day trading, hitting a 52-week low of ₹179.45 on the BSE, following weaker-than-expected Q2 FY25 results. The private sector lender reported a 24% year-on-year decline in net profit, which fell to ₹223 crore for the quarter ended September 2024, primarily due to rising expenses.
The drop highlights investor concerns about the bank's financial performance, reflecting broader implications for those involved in share market investment.
Profit decline amid rising expenses
The bank’s net profit was significantly affected by higher growth in expenses, which overshadowed a 9% year-on-year rise in Net Interest Income (NII). NII increased to ₹1,615 crore from ₹1,475 crore a year ago. However, interest reversals due to slippages and reduced disbursements in the microfinance segment weighed down the overall financial performance.
The Net Interest Margin (NIM) also experienced a downturn, slipping to 5.04% in Q2 FY25 from 5.54% in the same period last year and 5.67% in the June quarter. This decline is attributed to fresh slippages amounting to ₹1,030 crore, largely driven by setbacks in the microfinance and credit card segments.
Rising slippages and asset quality concerns
Asset quality deterioration was evident, as Gross Non-performing Assets (GNPA) rose by 19 basis points quarter-on-quarter to 2.88%, while Net Non-performing Assets (NNPA) climbed 5 basis points to 0.79%. The Provision Coverage Ratio (PCR) decreased by 15 basis points to 73%, indicating a potential risk in the bank’s ability to absorb future losses.
The increase in slippages, especially within unsecured segments like credit cards and microfinance, has raised red flags. RBL Bank's large unsecured portfolio, constituting 55% of its retail book and 41% of its overall loan book, remains a vulnerability. These segments are susceptible to economic downturns, making it crucial for the bank to manage slippages to sustain asset quality and profitability.
Loan growth and deposit trends
While the bank's loan growth remains modest, management expects an uptick in the coming quarters. The current deposit growth has been robust, with the Current and Savings Account (CASA) ratio improving sequentially, leading to a credit-deposit ratio of 86.6%. However, concerns about higher credit costs are likely to persist, with management projecting an increase in both slippages and credit costs in Q3 compared to Q2.
Motilal Oswal Financial Services has responded to RBL Bank’s weak Q2 performance by cutting its Earnings Per Share (EPS) estimates by 20% for FY25 and 4% for FY26. The brokerage has also reiterated a 'Neutral' rating on the stock, setting a target price of ₹220 based on 0.8 times FY26 estimated adjusted book value.
Outlook and future challenges
RBL Bank’s profitability remains under pressure, primarily due to its high cost-to-income ratio and elevated credit costs. Although the bank has made progress in improving asset quality since the peak of the COVID-19 pandemic, its reliance on the unsecured loan segment continues to pose a risk. The bank's ability to enhance profitability through better management of its cost-to-income ratio and a shift towards secured lending will be critical.
For investors considering share market investment, RBL Bank’s performance serves as a reminder of the inherent risks within the banking sector. The bank's future trajectory will largely depend on its success in controlling slippages and credit costs while sustaining growth in secured lending.
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