IPO Note | Financial Services
August 17, 2016
RBL Bank Limited
SUBSCRIBE
Issue Open: August 19, 2016
Strong Management at the helm of affairs
Issue Close: August 23, 2016
RBL Bank Ltd (RBL) has emerged as one of the fastest growing private sector
banks in the last six years post its new Management team having taken charge.
Issue Details
Face Value: `10
Focused approach to support growth momentum: RBL has been largely focusing
on catering to the funding and working capital needs of large as well as
Present Eq. Paid up Capital: `324.7cr
mid-sized corporates. It has also bought the credit card & mortgage business of
Fresh Issue*: 3.7 cr Shares amounting to `832.5crs
The Royal Bank of Scotland (RBS) and has been expanding the same along with
Offer for sale: 1.69 cr Shares amounting to `382crs
other new retail products which now account for 17% of its total advances. Further,
15% of the bank’s book, ie ~`3,133cr, is accounted by the high yielding
Post Eq. Paid up Capital: `361.7crs
microfinance segment, which is likely to help in yielding a better ROE, going ahead.
Market Lot: 65 Shares
Strong Management team with vast experience: In 2010, the new Management
Fresh Issue (amount): `832.5cr
team took over charge led by MD & CEO Mr Vishwavir Ahuja, who previously
served as MD & Country CEO of Bank of America for the Indian subcontinent.
Price Band: `224-225
Under his vision and leadership, the bank has transformed itself from being a
Post-issue implied mkt. cap `8139cr*
traditional bank to a new age bank competing with other private sector banks.
Note:*Upper price band
Growth without a compromise in asset quality: While the new Management has
been aggressive in expanding the loan book, it also put in place an efficient risk
management system which has led to GNPAs being contained below 1% in the
Book Building
last four years. For FY2016, GNPAs at 0.98% and NNPAs at 0.59% are very
QIBs
50%
much comparable to that of new age private sector banks.
Non-Institutional
15%
CASA ratio still low, but there lies scope for improvement: The bank has a low
Retail
35%
CASA base of 18.6%, but it’s been growing at a CAGR of ~45%. We believe as
business matures, RBL will be able to scale up its CASA. Our calculated NIM for
the bank at 2.54% also seems to have a lot of scope for improvement as the cost
of funds eases going ahead.
Enough scope for a decline in cost/income ratio: RBL has invested heavily in
technology, branch expansions and manpower; hence the cost to income ratio
has been high at 58% for FY16. With growth in business, we expect the bank to
avail to economies of scale, which in turn would add to the bottom-line. ROA of
0.9% and ROE of 11.4% seems suboptimal and leaves scope for improvement.
Outlook Valuation: At the upper end of the price band, ie `225, the stock is
offered at 2.4x its pre-IPO BV, while on post IPO BV it’s offered at 2.1x. We
believe the issue is attractively priced taking into account the valuations at which
other mid-sized private sector banks are currently trading. To add to it, given the
growth prospects of the bank, we recommend a SUBSCRIBE to the issue.
Key Financials
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
NII
187
258
342
556
819
% chg
96.3
37.9
32.6
62.9
47.2
Net profit
66
92
93
207
296
% chg
433
41
0
124
43
NIM (%)
3.66
2.62
2.26
2.53
2.54
Book Value (`)
53.2
63.5
69.3
76.0
92.1
P/BV (x)
-
-
-
-
2.4
Siddharth Purohit
RoA (%)
1.3
0.9
0.6
0.9
0.9
+91 22 39357800 Ext: 6872
RoE (%)
5.9
6.7
5.3
10.1
11.4
[email protected]
Source: Company, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band
Please refer to important disclosures at the end of this report
1
RBL bank | IPO Note
Company background
RBL has a long history in India, with the bank being in operations since 1943 when
it was incorporated as a small, regional bank in Maharashtra with two branches, ie
in Kolhapur and Sangli. Though the bank has been in existence for the last 73
years, it has transformed itself from a traditional bank to a new age bank only in
the last six years. While its presence is majorly restricted to the western part of India
with ~50% of its branches being in Maharashtra (including Mumbai), it has
gradually started diversifying its presence across other geographies. As of
31st March, 2016 the bank had a network of 197 branches and 362 ATMs and
had a customer base of 1.9mn.
Exhibit 1: Latest Portfolio Mix (%)
8%
15%
39%
17%
21%
Large Corporates
SME Retail MFIs Agribusiness
Source: Company, Angel Research
Key Management Personnel
Mr Vishwavir Ahuja-Managing Director & CEO- Mr Ahuja is a well recognized
personality in the Indian banking arena. Before taking over the reins of RBL, he
was previously the MD & Country Executive Officer of Bank of America for the
Indian subcontinent operations. He along with other management personnel has
been the prime driving force that has spurred the aggressive growth of RBL.
Mr Rajeev Ahuja -Head of Strategy, Retail, Transaction Banking and Financial
Inclusion- Mr Ahuja was previously associated with Citibank India, Bank of
America, India, and Bankers Trust Company.
Mr Naresh Karia -Chief Financial Officer- Mr Karia has previously served as the
Country Controller of Citibank N.A, India.
August 17, 2016
2
RBL bank | IPO Note
Issue details
The company is raising `832.5cr through fresh issue of equity shares in the price
band of `224-225. The fresh issue will constitute 10% of the post-issue paid-up
equity share capital of the company assuming the issue is subscribed at the upper
end of the price band.
Along with the fresh issue of equity shares, there is also an Offer for Sale (OFS) of
1.69cr equity shares from the existing shareholders.
The top 10 shareholders of the bank are as follows:
Exhibit 2: Top10 Shareholders
Name of the Shareholder
Shareholding %
CDC Group PLC
4.8
Asian Development Bank
4.3
International Finance Corporation
3.8
Norwest Venture Partners X FII-Mauritius
3.8
Fearing Capital India Evolving Fund
3.6
Galileo Investments Ltd
3.6
Cartica Capital 2 Ltd
3.4
GPE
3.1
UTI Investment Advisory Services Ltd A/C
3.1
Asia Capital Financial Opportunities Pte
3.0
Total
36.5
Source: Company, Angel Research
Objects of the offer
To augment the bank’s tier-I capital base to meet its future capital
requirements due to expected growth of the bank’s assets.
The listing will also enhance the visibility and brand name of the bank among
existing and potential customers of the bank.
August 17, 2016
3
RBL bank | IPO Note
Investment rationale
Growth momentum likely to continue on focused approach of the new
Management: RBL has been largely focusing on catering to the funding and
working capital needs of large as well as mid-sized corporates. It has also bought
the credit card business of The Royal Bank of Scotland (RBS) and has been
expanding the same along with other new retail products which now account for
17% of its total advances. Further, 15% of the bank’s book, ie ~`3,133cr, is
accounted by the high yielding microfinance segment, which is likely to help in
yielding a better ROE, going ahead.
Exhibit 3: Strong growth in loan book
25,000
20,000
15,000
10,000
5,000
0
FY12
FY13
FY14
FY15
FY16
Source: Company, Angel Research
Exhibit 4: Deposit growth has also been strong
30,000
25,000
20,000
15,000
10,000
5,000
-
FY12
FY13
FY14
FY15
FY16
Source: Company, Angel Research
Strong Management team with vast experience: In 2010, the new Management
team took over charge led by MD & CEO Mr Vishwavir Ahuja, who previously
served as MD & Country CEO of Bank of America for the Indian subcontinent.
Under his vision and leadership, the bank adopted a new approach and
transformed itself from being a traditional bank to a new age bank competing with
other private sector banks.
August 17, 2016
4
RBL bank | IPO Note
CASA ratio still low, but there lies scope for improvement: The bank has a low
CASA base of ~18%, but it’s been growing at a CAGR of ~45%. It has been
observed in the banking industry, particularly with many private sector banks, that
the CASA ratio tends to improve as the business matures. We expect RBL to be
able to scale up its CASA going forward, albeit at a slower pace than other private
banks.
Exhibit 5: CASA ratio should pick up
22.0
21.5
21.5
21.0
20.5
20.0
20.4
19.5
19.7
19.0
18.5
18.6
18.5
18.0
17.5
17.0
16.5
FY12
FY13
FY14
FY15
FY16
Source: Company, Angel Research
Growth without a compromise in asset quality: While the new Management has
been aggressive in expanding the loan book, it also put in place an efficient risk
management system which has led to GNPAs being contained below 1% in the last
four years. For FY16 end the GNPAs stood at 0.98% while NNPAs was at
0.59%.As the bank has been expanding the loan book by meeting the working
capital needs of the corporate, along with retail, we don’t expect material
deterioration in the asset quality. The bank has so far abstained from lending to
the long gestation infra projects and hence, if the strategy is maintained we feel
the bank will not face any asset quality issue.
Exhibit 6: GNPAs and NNPAs trend
1.20
0.98
1.00
0.80
0.79
0.77
0.80
0.59
0.60
0.40
0.40
0.31
0.27
0.20
0.20
0.11
-
FY12
FY13
FY14
FY15
FY16
NPA (%)
GNPA (%)
Source: Company, Angel Research
August 17, 2016
5
RBL bank | IPO Note
Enough scope for a decline in cost/income ratio: The new Management has
inducted fresh talent from other private sector banks and has also invested heavily
in technology, along with branch expansions. The number of branches has been
doubled from 100 to 201 in the past five years, while the number of employees
has also been increased by 3x over the same period. This has resulted in the cost
to income ratio rising to 70% by FY2014 from 55% in FY2012; for FY2016, it
stood at 58%. With growth in business, we expect the bank to avail to economies
of scale and this should unearth enough scope for improvement in the cost
structure, which in turn would add to the bottom-line.
Exhibit 7: Cost/Income Ratio likely to come down:
75.0
70.3
70.0
65.0
62.5
59.2
60.0
58.3
54.8
55.0
50.0
FY12
FY13
FY14
FY15
FY16
Source: Company, Angel Research
Exhibit 8: Cost to Asset Ratio
3.1
2.9
2.9
2.7
2.5
2.3
2.2
2.3
2.1
1.9
1.9
1.8
1.7
1.5
FY12
FY13
FY14
FY15
FY16
Source: Company, Angel Research
August 17, 2016
6
RBL bank | IPO Note
Scope for improvement in ROE & ROA profile: With the advent of the new
Management, the bank has experienced aggressive growth in its balance sheet as
well as earnings. However, large scale investments in branches and manpower
have dampened the ROA and ROE. ROA has remained below 1% for the last four
years while ROE has also lagged business and earnings growth due to front
loading of investments.
Exhibit 9: ROE & ROA
12.0
11.4
10.1
10.0
8.0
6.7
5.9
6.0
5.3
4.0
2.0
1.3
0.9
0.9
0.9
0.6
-
FY12
FY13
FY14
FY15
FY16
ROA (%)
ROE (%)
Source: Company, Angel Research
Potential for improvement in NIM
The bank has reported a strong 44.7% CAGR in its NII over FY2012-16. The yield
on advances for the bank at 10.95% is relatively better compared to other small
and mid-sized private banks, partly due to its aggressive expansion in the retail
and microfinance segments. However, the bank’s low CASA base has been one of
the reasons for the higher cost of deposits and hence its NIM has been lower than
its peers. Nevertheless, the intention and the ability of the bank to gradually bring
down the overall funding cost comforts us, which we feel should start adding to the
NIM over the next few quarters.
Exhibit 10: NII growth backed by diversified loan book
Exhibit 11: NIM should improve going ahead
900
100.0
3.8
3.7
96.3
800
90.0
3.6
700
80.0
3.4
70.0
600
62.9
3.2
60.0
500
50.0
3.0
400
47.
2
40.0
2.8
37.9
2.6
300
32.6
2.5
2.5
30.0
2.6
200
20.0
2.4
2.3
100
10.0
187
258
342
556
819
0
-
2.2
FY12
FY13
FY14
FY15
FY16
2.0
NII (` cr)
Growth (%)
FY12
FY13
FY14
FY15
FY16
Source: Company, Angel Research
Source: Company, Angel Research
August 17, 2016
7
RBL bank | IPO Note
IPO will enable improved Capital Adequacy
The bank’s Capital Adequacy has come down from 17.1% in FY2013 to 12.9% in
FY2016, with the new Management aggressively growing the balance sheet. To
maintain a similar growth rate on a higher base, the bank would need higher
capital. We believe, the current fund raising via the IPO should meet the bank’s
capital requirement in the near term.
Exhibit 12: Capital Adequacy (%)
35.0
30.0
23.2
25.0
0.4
17.1
20.0
14.6
0.3
13.1
12.9
15.0
0.3
0.4
1.8
22.8
10.0
16.8
14.3
12.7
5.0
11.1
-
FY12
FY13
FY14
FY15
FY16
TIER1
TIER2
Source: Company, Angel Research
Aggressive branch expansion in last six years
During the last five years, the new Management has nearly doubled its branch
network from 100 to 197. However, nearly half of the bank’s total branches are
still located in Maharashtra alone. The bank is gradually increasing its footprint in
other states, but we feel it would be prudent to focus immediate expansion in the
home state, ie Maharashtra and in neighboring states like Karnataka and Gujarat.
Exhibit 13: Geographical Mix of Branches (%)
21%
37%
6%
7%
7%
11%
12%
Maharastra (ex-Mumbai)
Mumbai Karnataka
Gujarat
MP Tamil Nadu
Rest of India
Source: Company, Angel Research
August 17, 2016
8
RBL bank | IPO Note
Exhibit 14: Branches State Wise
Location
Number Of Branches
Maharastra (ex-Mumbai)
72
Mumbai
22
Karnataka
23
Gujarat
14
MP
13
Tamil Nadu
12
New Delhi
8
Goa
8
Rest of India
25
Source: MFIN
Valuation
Outlook & Valuation: At the upper end of the price band, ie `225, the stock is
offered at 2.4x its pre-IPO BV of `92, while on post IPO BV of `106 it’s offered at
2.1x. We believe the issue is attractively priced taking into account the valuations
at which other mid-sized private sector banks are currently trading. To add to it,
given the growth prospects of the bank, we recommend a SUBSRIBE to the issue.
August 17, 2016
9
RBL bank | IPO Note
Comparative tables
Within the listed space, we believe RBL can be compared to old generation private
sector banks as well as the new generation small and mid-sized private banks
considering the aggressive growth path that it has embarked upon in the past few
years. We believe RBL will be able to attract valuations in between the old
generation and new generation small private banks.
Exhibit 15: Comparative Performance Balance sheet
(` Cr)
Loan
Deposits
C/ D Ratio
Retail Loans%
CASA%
RBL
21,229
24,349
87.2
17.0
19.0
KVB
39,471
50,079
78.8
15.0
23.3
Federal Bank
58,090
79,172
73.4
29.8
32.5
IndusInd
88,419
93,000
95.1
41.0
35.2
Yes bank
98,210
111,720
87.9
10.8
28.1
Kotak bank
118,665
138,643
85.6
44.3
38.0
Source: Company, Angel Research
Exhibit 16: Comparative - Asset Quality & Capital Adequacy
GNPAs%
NNPAs% PCR%
CAR%
Tier I%
RBL
0.98
0.59
55.9
12.9
11.1
KVB
1.30
0.55
82.5
12.2
11.3
Federal Bank
2.84
1.65
72.0
13.9
13.4
IndusInd
0.90
0.40
58.6
15.5
14.9
Yes bank
0.76
0.29
62.0
16.5
10.7
Kotak bank
2.40
1.10
63.7
16.3
15.3
Source: Company, Angel Research
Exhibit 17: Comparative - Valuations
P/Adj BV
ROE% ROA% NIM%
Div Yield%
RBL Bank
2.6
11.4
0.9
2.5
0.4
Karur Vysya Bank
1.4
12.4
1.0
3.4
2.9
Federal Bank
1.6
6.0
0.6
3.1
3.4
IndusInd Bank
4.2
16.8
1.9
3.9
0.3
Yes Bank
4.1
19.9
1.7
3.4
0.7
Kotak Mahindra Bank
6.6
8.7
1.2
4.3
0.1
Source: Company, Angel Research
Risks
The stupendous growth of the bank in the recent past has been achieved on the
back of the new Management team led by Mr Vishavir Ahuja. Following the
strategy laid out by the new Management is crucial for the bank to stay perched on
the growth path. An exit of any key management personnel can hamper the
bank’s future growth. It needs a mention that the key Management executives have
been incentivized with ESOPs and hence the risk of them exiting is low, at least in
the near term.
August 17, 2016
10
RBL bank | IPO Note
Income statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
NII
187
258
342
556
819
- YoY Growth (%)
96.3
37.9
32.6
62.9
47.2
Other Income
67
126
261
403
491
- YoY Growth (%)
261.3
88.3
106.4
54.6
21.6
Operating Income
254
384
603
960
1310
- YoY Growth (%)
123.3
51.2
56.9
59.3
36.5
Operating Expenses
139
227
424
600
763
- YoY Growth (%)
47.2
63.4
86.5
41.5
27.3
Pre - Provision Profit
115
157
179
360
546
- YoY Growth (%)
496.5
36.5
14.0
101.5
51.7
Prov. & Cont.
19
23
46
60
114
- YoY Growth (%)
6120.0
21.2
104.2
30.3
90.1
Profit Before Tax
96
134
133
300
432
- YoY Growth (%)
407.5
39.4
-1.2
126.3
44.0
Prov. for Taxation
30
42
40
93
136
- as a % of PBT
359.1
36.7
-4.2
132.8
46.1
PAT
66
92
93
207
296
- YoY Growth (%)
433
41
0
124
43
Balance sheet
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
Share Capital
215
253
282
293
325
Reserve & Surplus
928
1,354
1,613
1,937
2,665
Net Worth
1,143
1,607
1,895
2,230
2,989
Deposits
4,739
8,341
11,599
17,099
24,349
- Growth (%)
132.1
76.0
39.1
47.4
42.4
Borrowings
1,199
2,737
3,896
6,963
10,536
Other Liab.& Prov.
124
279
689
812
1,287
Total Liabilities
7,205
12,963
18,198
27,105
39,161
Cash and Bal with RBI
263
291
981
1,456
1,340
Bal With Banks
323
398
212
715
1,110
Investments
2,334
5,571
6,518
9,792
14,436
Advances
4,132
6,376
9,835
14,450
21,229
- Growth (%)
116.9
54.3
54.2
46.9
46.9
Fixed Assets
59
94
134
164
177
Other Assets
94
233
518
528
869
Total Assets
7,205
12,963
18,198
27,105
39,161
August 17, 2016
11
RBL bank | IPO Note
Ratio analysis
Y/E March
FY2012
FY2013
FY2014
FY2015
FY2016
Profitability ratios (%)
NIMs
3.7
2.6
2.3
2.5
2.5
RoA
1.3
0.9
0.6
0.9
0.9
RoE
5.9
6.7
5.3
10.0
11.4
Asset Quality (%)
Gross NPAs
0.8
0.4
0.8
0.8
1.0
Net NPAs
0.2
0.1
0.3
0.3
0.6
Per Share Data (`)
EPS
3.1
3.7
3.3
7.1
9.1
BV
53.2
63.5
69.3
76.0
92.1
Adj BVPS
52.8
63.3
66.1
74.7
88.2
Valuation Ratios
PER (x)
-
-
-
-
24.6
P/BVPS (x)
2.4
P/ABVPS (x)
-
-
-
-
2.6
Dividend Yield (%)
-
-
-
-
0.4
DuPont Analysis
Net Interest Income
3.6
2.6
2.2
2.5
2.5
Non Interest Income
1.3
1.3
1.7
1.8
1.5
Total Revenues
4.9
3.8
3.9
4.2
4.0
Operating Cost
2.7
2.3
2.7
2.6
2.3
PPP
2.2
1.6
1.1
1.6
1.6
Total Provisions
0.4
0.2
0.3
0.3
0.3
PreTax Profit
1.8
1.3
0.9
1.3
1.3
Tax
0.6
0.4
0.3
0.4
0.4
ROA
1.3
0.9
0.6
0.9
0.9
Leverage
4.7
7.3
8.9
11.0
12.7
RoE (%)
5.9
6.7
5.3
10.0
11.4
August 17, 2016
12
RBL bank | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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August 17, 2016
13