Investing article
Price follows market narratives. The narrative on RBL Bank is that it has lots of underwriting cockroaches that are yet to come out. I don't think the same.
What this note covers
A dated snapshot of the thesis, the valuation context around it, and the specific signals worth tracking next.
Status
Owned
Date written
August 31, 2022
Price at writing
₹124
Current price
₹316.05
CAGR since writing
+29.5%
Own it
Yes
Exited
No
On 13th June 2022, RBL Bank announced the appointment of a new CEO – R Subramaniakumar. The announcement was met with a significant decline in the stock price of RBL Bank. He is a veteran public sector banker. This was the last straw in a series of moves by the bank, which led the public to believe that there is something fundamentally wrong with the bank.
Rewind a year before this, and the then CEO, Vishwavir Ahuja, was not given a three-year extension to his tenure by the RBI. RBI also appointed a member to the board of the bank. And Vishwavir Ahuja quit abruptly before his tenure ended. RBL Bank fails to get a CEO from the private sector bankers. All of this led investors to believe that something fishy was going on at the bank. All this while, the bank was recovering from its covid woes. NPAs had risen considerably over the past 2 years. The return on assets (ROA) was lower than the industry average, and the company had to make extensive provisions for the bad loans.
I think the bank, fundamentally, is not in as bad a state as is the general perception. The NPAs have been declining since September 2021 quarter. They have already written off most of the bad debts, and therefore going forward, I expect provisioning to be very low compared to the past 3-4 quarters. The previous CEO, Vishwavir Ahuja, owns a lot of shares, and so does the interim CEO, who is an executive director on the board. I see this as a good sign because if there were cockroaches in their system, they would have sold their shares already.
My thesis is this – At best, the bank is an above-average bank, which should, in my opinion, be valued at around 2 - 2.5 Price to Book. At worst, it is a below-average private sector bank which should be valued around 1-1.5 P/B. I am not saying it is the next HDFC or ICICI, but it is also not the next Yes Bank. It should be nowhere near 0.4 - 0.6 P/B that it is given.
The primary contrarian thinking is the fact that there are no cockroaches in their loans and that there is no fraudulent underwriting of loans. Which I think is the case. Once its profits and NPAs stabilise, the market should realise the same and rerate it to the appropriate valuation multiple. Alongside the rerating, its book value will also increase at, let’s say, a conservative 8-10% per annum. Its ROA will increase due to lower provisioning as stated earlier that most of the provisioning has been done for the bad loans. Also the new CEO is considered to be an expert in retail loans, and is expected to increase their loan portfolio. Therefore, I believe that the market capitalization of the bank should double, conservatively speaking.
As of writing this article, the market cap is around 7000 Cr. The book value is around 12.5k Cr. The book value will reach around 14k Cr by the end of the financial year and I also expect the valuation multiple to reach around 1 P/B. I don’t know when that will happen, but it will happen. The whole thesis lays on the foundation that the bank will not go bankrupt. The most optimistic scenario will be that the book value reaches around 20k Cr in the next 2-4 years and the valuation multiple reaches 2.5. This would make this a potential 7 bagger in the next 4 years (or less).