Once bitten, twice shy; twice bitten, never try. Yes Bank may have come a long way from its near-collapse and the dramatic rescue two years ago but investors are still having a hard time reposing faith in published financial metrics of India's private sector banks.
Abrupt leadership changes and board-room churn led by the sector regulator have only added to the skepticism. That in a nutshell explains the quandary RBL Bank finds itself in. The placement of an additional director on the bank’s board by the Reserve Bank of India (RBI) and the abrupt departure of managing director Vishwavir Ahuja on indefinite leave have shaken investors.
The Mumbai-headquartered private lender, in hurried interactions with media and investors on December 26, tried to allay concerns but that does not seem to have worked, as the bank’s stock plummeted a day later.
Indeed analysts are not convinced about the bank’s explanations. “On succession, management could provide limited clarity on the timeline or possible candidates, however, it stated that a formal committee, comprising members of the board, would come up with possible candidates (internal or external) and submit it to RBI,” analysts at Jefferies India Pvt Ltd said in a note.
Those at Motilal Oswal Financial Securities Ltd said the events surrounding the bank’s leadership had cast a shadow over its operating performance in the coming quarters.
This is despite the bank’s interim chief executive officer Rajeev Ahuja reiterating that the bank is on track to improve its metrics.
“Current developments have raised concerns about the bank’s ability to sustain a turnaround in its operating performance, while at the same time raising worries of similar actions by the regulator on other mid-sized banks, where the operating performance has been sub-optimal,” Motilal Oswal Financial Securities’ analysts wrote in a note.
But why hasn’t the bank been able to allay the concerns of investors?
Firstly, the leadership and board room churn triggered by the RBI has given an uncomfortable context to the bank’s weakened operating performance ever since the pandemic.
RBL Bank reported a surge in slippages, much higher than most other peers. Worse, its deposit outflows increased as well though its retail deposit base has strengthened. This is reflected in the rise in its current account and savings account (CASA) deposits share to 35.3 percent as of September from 31 percent a year ago. Notwithstanding this improvement, the bank’s CASA is still lower than comparable peers.
Secondly, its loan book is heavily tilted towards unsecured and high-risk credit cards that form 22 percent of the total book. Further, the share of loans to small businesses is also high. Such loans have been most under pressure during the pandemic.It is clear that the bank needs to fix both sides of the balance sheet to instil confidence but most of all, the bank and the regulator would do well to raise the level of disclosures. After all, sunlight is the best disinfectant.