RBL Bank’s tale of two costs
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The 39% jump in the stock price of RBL Bank Ltd since 31 August when it got listed on exchanges was justified, at least in part from the performance metrics that the lender put out for the quarter ended September on Wednesday.
With a 34.3% increase in net profit to Rs89.89 crore (after considering the 10% stake purchase in Utkarsh Micro Finance Ltd) on the back of a strong 59.5% growth in net interest income, which is the core income a bank earns, investors have enough reason to cheer.
But the biggest surprise was the decline in the cost-to-income ratio at a time when the bank is in the throes of expansion. The cost-to-income ratio stood at 53.59%, down from 58.6% in the March quarter. This was despite the bank adding four branches and investing heavily in branding and technology during this period.
However, the RBL Bank management has stressed that costs would go up over the next six months as the lender will continue to invest. In a presentation to investors, the bank said that it is targeting bringing down the ratio to about 51-52% over the next four years. This could mean two things. Either the bank’s efficiency scales up or the lender would be going slow and sure-footed on expansion. The latter is more probable given that the management has indicated a compound annual growth rate of 30-35% in advances on a low base.
The bank’s asset quality also held up with gross non-performing assets (NPAs) coming in at 1.1% of its total advances while the net NPA ratio was 0.55%. So should investors rejoice and drive up the stock further?
Before they do so, investors would need to look at another cost. RBL Bank’s credit costs on an annualized basis rose to 89 basis points for the September quarter, from 74 basis points in the preceding three months and 57 basis points a year ago. A basis point is 0.01%. Much of this is arising out of its non-wholesale loans that consist of agriculture loans, retail loans, and lending to micro and small enterprises. Investors would need to comb the source of credit costs and judge the ability of the lender to put a lid on them.
Until then, a price-to-book value multiple of 3.01 of projected FY17 earnings looks a tad dearer than that of its peers.