RBL Bank Rating: Sell- RBI move clouds outlook for the firm

Such actions in past have hinted at biz issues; will weigh on stock until clarity emerges; downgraded to ‘Sell’ with TP cut to Rs 130

We, therefore, downgrade it to Sell with revised TP of Rs 130 (earlier: Rs 181).
We, therefore, downgrade it to Sell with revised TP of Rs 130 (earlier: Rs 181).

Uncertainty looms at RBL Bank with the RBI’s appointment of Additional Director on bank’s Board and the Board accepting Vishwavir Ahuja’s (MD & CEO’s) leave for six months. More so, after management highlighted that these developments are not in any manner a reflection on business fundamentals or strategy of the bank. It reiterated its guidance of 1% exit RoA by Q4FY22. RBI’s similar action at other banks in the past has hinted at compliance or asset quality or governance or business risk issues. Repercussion of this move on various stakeholders (including depositors, employees, etc) and consequent derailment of confidence and disruption would be a key monitorable going forward.

RBL’s Q2FY22 performance lagged peers on most operating metrics: Slippages of 8.6%, GNPAs up 40bps to 5.4%, credit cost at 4.6%, restructuring at 3.35%, NIMs off 30bps to 4.06%, growth just flat QoQ/YoY. We need to closely monitor if strategy and performance are clearly as per the guidance. With anticipated elevated stress and muted growth, we were of the view that modest RoA/RoE profile will cap valuations. This incremental adverse development will further weigh interim pressure and can drag valuations to as low as 0.55x FY23e book. We, therefore, downgrade it to Sell with revised TP of Rs 130 (earlier: Rs 181).

RBI appointed Additional Director on the Board; MD & CEO steps down: RBI has appointed Yogesh K Dayal (Chief General Manager, RBI) as an Additional Director on RBL Bank Board with effect from 24th Dec, ’21 for a period of two years. At the same time, RBL Bank Board has accepted the request of Vishwavir Ahuja to proceed on leave. RBI had earlier approved the appointment of Vishwavir Ahuja as the MD & CEO for one year with effect from 30th Jun, ’21 and his existing term was ending on 30th Jun,’22, which is still six months away. Hence, the development comes as a complete surprise, and in the interim will weigh on the stock until clarity emerges.

Rajeev Ahuja takes over interim charge: In the meanwhile, Rajeev Ahuja (currently the Executive Director) has been appointed as the interim MD & CEO with immediate effect, subject to regulatory and other approvals. Management highlighted that elevation of an existing member to the interim MD & CEO role should be read as regulator validation on the strategy and smooth functioning of the bank as well as the strength of the overall franchise.

RBI’s similar action at other banks has hinted at business issues: Given the circumstances under which RBI initiates such an action of appointing an Additional Director on the Board in the past, there will be clarity required not only on management succession, but fundamental performance and strategy of the bank as well as there can be something more than the mere succession issue. RBI has previously appointed additional directors on the boards of YES Bank (Mar’20), J&K Bank (Jul’19), Dhanlakshmi (Sep’20), Ujjivan Small Finance Bank (Nov’21), Lakshmi Vikas Bank.

Management’s rationale for what triggered RBI’s action: Management highlighted that these developments are not in any manner a reflection on business fundamentals or strategy of the bank. Business momentum and financial performance trajectory have been improving since the second quarter of this financial year as it recovered from the pandemic. It has absorbed substantial challenges on asset quality front which were largely due to the pandemic and is confident of getting net NPA below 2% by FY22 end or even before that.

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