RBL Bank

Robust growth in the last few years

The bank has recorded strong 51% CAGR growth in advances and 46% CAGR in Net profit over the last four years

CM RATING

47/100

RBL Bank, erstwhile Ratnakar Bank, has a history of 73 years. It offers a comprehensive range of banking products and services customized to cater to the needs of large corporations, small and medium enterprises (SMEs), agricultural customers, retail customers and development banking & financial inclusion (low income) customers. The bank has been expanding its presence across India through a growing network of branches and ATMs and upgrading traditional delivery channels with modern technology-enabled channels like phone banking, internet banking and mobile banking.

The bank is professionally managed and has no identifiable promoter. Narayan Ramachandran is a non-executive, non-independent director and the part-time chairman of the bank. Vishwavir Ahuja is the managing director & CEO, while Rajeev Ahuja is the head – strategy, retail, transaction banking and financial inclusion.

As of March 31, 2016, the bank had 197 interconnected branches and 362 interconnected ATMs spread across 16 Indian states and union territories serving approximately 1.90 million customers. Though the bank has a 73-year operating history, it has transformed itself in the past six years from a traditional bank into a ‘new age' bank. Its transformation commenced in 2010 during the difficult economic period following the global financial crisis as well as the economic slowdown that followed in India.

As part of growth strategy, the bank had acquired certain Indian businesses of the Royal Bank of Scotland. These included business banking, credit card and mortgage portfolio businesses in FY2014. This acquisition added to existing businesses, enabling to expand scale of operations and geographic presence.

The bank has expanded distribution network across India through a growing network of branches and ATMs. During FY2015 and FY2016, the bank added 25 new branches across various states including in the key cities of Kolkata, Delhi, Mumbai, Chennai and Bangalore. It has digital banking channels including mobile banking, internet banking and phone banking/IVR. The bank has developed micro-payment and branchless banking solutions as well as a business correspondent network to expand customer reach beyond the traditional branch service area.

The bank has a healthy capital base, a pre-requisite for growth in the banking industry, with capital adequacy ratio of 12.94% under Basel III with Tier I capital ratio at 11.10%. The bank intends to maintain a robust capital base to support continuous business growth within a strong risk management framework.

Business segments consist of corporate and institutional banking (C&IB), commercial banking (CB), branch and business banking (BBB), agribusiness banking (AB), development banking and financial inclusion (DB&FI) and treasury and financial markets operations. The wholesale segment (C&IB and CB) accounts of 60% of the loan book at end March 2016 down from 75% end March 2013. The bank proposes to reduce wholesale-retail loan mix from 60-40 to 50-50 in the medium term.

To develop the AB and DB&FI businesses, RBL is entering into partnerships to extend their reach in rural and semi-urban India and unbanked parts of urban and metro India. The bank has entered into exclusive partnership agreements with select business correspondents in relation to these businesses to originate client business, spanning loans, savings accounts and insurance. The bank selects partners with strong local relationships.

As of March 2016, the bank's exposure to the industries exceeding 5% of the total gross credit exposure (as per Basel III disclosure) are infrastructure 7.42%, traders 6.55%, food processing 6.21%, construction 5.93% and chemical, NBFC (MFI) 5.06% and chemical products 6.94%. The aggregate loans advanced to 20 single largest borrowers amounted to Rs 4635.29 crore or 14% of total advances at end March 2016.

The Offer and the Objects

The bank is coming out with an IPO to collect around Rs 1211 crore at the lower price band of Rs 224 per share (face value Rs 10 per share) and Rs 1213 crore at the upper band of Rs 225 per share, consisting of a fresh issue of equity shares (3.70-3.72 crore share) aggregating to Rs 832.5 crore and offer for sale of 1.69 crore equity shares.

The offer for sale includes sale of equity share of up to 9,505,558 equity shares by Beacon India Private Equity Fund, up to 3,525,000 equity shares by GPE (India) and up to 3,879,070 equity shares by others.

The issue is to be made through a book building process and will open on 19 August 2016 and will close on 23 August 2016.

Given that RBL is a fast growing bank, it needs to maintain a comfortable capital position. The bank proposes to utilize the proceeds of the fresh issue to augment Tier-I capital base to meet bank's future capital requirements which are expected to arise out of growth in the bank's assets, primarily the bank's loans/advances and investment portfolio, and to ensure compliance with Basel III and other RBI guidelines. The bank also believes that the listing of equity shares will enhance the bank's visibility and brand name among existing and potential customers.

Business Strategy

The bank's strategy is to leverage its strengths and guiding principles to continuously adapt and lead within a dynamic and competitive landscape. In particular, bank intends to focus on the following differentiating strategies adapting them to the specific needs and requirements of its customers:

• Become a bank of choice by building relationships through trust and respect of customers
• Continue to increase Casa base
• Increase the share of AB and DB&FI businesses and scale up the BBB businesses
• Grow and leverage distribution network
• Increase contribution of non-interest income
• Introduce new products and services
• Continue to focus on improving and maintaining cost efficiency
• Pursuing partnerships and strategic initiatives

Strengths

The bank has recorded strong 51% CAGR growth in advances for last four years from Rs 4132.27 crore at the end of FY2012 to Rs 21229.08 crore at the end of FY2016. Deposits also moved up at 51% CAGR from Rs 4739.33 crore at the end of FY2012 to Rs 24348.65 crore at the end of FY2016. On the revenue front, the total income of the bank has expanded at sturdy 57% CAGR growth from Rs 532.22 crore in FY2012 to Rs 3234.85 crore in FY2016. The other income even increased at a faster CAGR pace of 64% from Rs 67.13 crore in FY2012 to Rs 490.54 crore in FY2016. Net profit after tax increased from Rs 65.1 crore in FY2012 to Rs 292.49 crore in FY2016, representing healthy a CAGR of 46% for the past four years.

The bank has maintained asset quality amidst challenging macro environment. Gross NPAs stood at 0.98%. Net NPAs were at 0.59% at end March 2016. Standard restructured assets as a percentage of net advances stood at 0.09% as of March 2016.

The net interest margin (NIM) of the bank was comparatively healthy at 2.96% in FY2016.

Weaknesses

The Casa ratio declined from 20.43% end March 2014 to 18.46% as of March 2015, and remained below the 20% mark at 18.64% as of March 2016. The top 20 depositors constituted 22.88% of the total deposits as compared to 27.32% at end March 2015 and 23.82% at end March 2014.

As of March 2016, the bank had 197 branches, of which 94 branches were located in Maharashtra in the western region of India and 23 branches were located in Karnataka in south-western India.

The Indian and global banking industry is highly competitive and bank will have to compete effectively to grow and achieve strategic objectives. Moreover, the RBI seeks to foster greater competition, promote financial inclusion and support inclusive economic growth by increasing the number of banks. In this respect, the RBI has liberalized its licensing regulations and intends to issue licenses on an on-going basis. In 2014, the RBI granted licenses to two applicants to set up new full scale universal banks. In 2015, the RBI granted "in-principle" approval to 10 applicants for a small finance bank license and 11 applicants for a payment bank license.

Mergers among banks may result in enhanced competitive strengths in pricing and delivery channels for merged entities. The bank may face greater competition from larger banks, which may have greater resources as a result of such consolidation. Further liberalization of the Indian financial sector could lead to a greater presence or new entries of Indian and foreign banks.

As of June 2016, 49.34% of paid-up share capital of the bank was held by non-residents. Under the terms of the consolidated FDI policy, if the shareholding of non-residents in a bank rises beyond 50% of paid-up share capital, any downstream investment made by the bank will be treated as ‘indirect foreign investment' and will be subject to certain conditions, including adherence to the respective foreign investment caps and prior approval requirements prescribed for different sectors.

Valuation

RBL Bank's EPS for FY2016 on post-issue equity works out to Rs 7.91. At the price band of Rs 224 to Rs 225, P/E works out to 28.3 to 28.4 times.

The book value of RBL Bank is Rs 90.03. Post-issue, the book value works out to Rs 103.49 at the issue price of 224 and Rs 103.53 at the issue price of Rs 225. P/BV works out to 2.17 times and P/Adj BV is at 2.30 times.

Among the comparable banks, City Union Bank is trading at P/BV (on FY 2016 BV) of 2.51 and P/Adj BV of 2.83, South Indian Bank trading at P/BV of 0.78 and of P/Adj BV of 1.19, and DCB Bank trading at P/BV of 1.85 and P/Adj BV of 1.97, Federal Bank is trading at P/BV of 1.35 and P/Adj BV of 1.56 and Karur Vysya Bank is trading at P/BV of 1.29 and P/Adj BV of 1.40.

At the price band of 224-225, RBL Bank is offered at a P/E of 28.3. Among the comparable banks, City Union Bank trades at P/E (on FY 2016 EPS) of 17.2, South Indian Bank at 8.7, and DCB Bank at 16.6, Federal Bank at 23.0 and Karur Vysya Bank at 10.4.