Technology

RBL Bank Ltd (RBL), the erstwhile Ratnakar Bank, has emerged as one of the
fastest growing private sector banks in the last six years. Members of the new
Management team, with their experience across multinational and other private
banks, have played an instrumental role in the metamorphosis of the bank .
Focused approach will keep growth momentum on; 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 & mortgage 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 ~Rs3,133cr, is accounted by the high yielding
microfinance segment, which is likely to help in yielding a better ROE, going ahead.
Strong Management team with vast experience: During 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.
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 FY2016, GNPAs at 0.98% and NNPAs at 0.59% are very
much comparable to that of new age private sector banks.
CASA ratio still low, but there lies scope for improvement: The bank has a low
CASA base of 18.6%, 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. Our calculated NIM for the bank at 2.54% also seems to have lot
of scope for improvement, as cost of funds eases going ahead.
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. Number of branches & employees
count has been increased by2x & 3x over FY11-16. 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. 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 Rs225, 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 SUBSRIBE to the issue.

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