CMP: INR540 TP: INR650 (+20%) BUY

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1 27 April QFY18 Results Update Sector: Financials Banks RBL Bank BSE SENSEX S&P CNX 34,970 10,692 Bloomberg RBL IN Equity Shares (m) M.Cap.(INRb)/(USDb) 226.6/ Week Range (INR) 600 / 443 1, 6, 12 Rel. Per (%) 7/-3/-20 Avg. Val, INR m Free float (%) Financials & Valuations (INR b) Y/E March E 2020E NII OP NP NIM (%) EPS (INR) BV/Sh. (INR) ABV/Sh. (INR) RoE (%) RoA (%) Valuations P/E(X) P/BV (X) P/ABV (X) Div. Yield (%) CMP: INR540 TP: INR650 (+20%) BUY Strong operating performance; asset quality improves sequentially RBL's 4QFY18 PAT rose 8%/37% QoQ/YoY to INR1.78b (in-line). NII grew 42% YoY to INR5b, led by 37% YoY advances growth and 48bp YoY NIM expansion to 3.98%. Opex growth trailed income growth sequentially (CI ratio of 52.8% v/s 54% in 3Q), leading to PPoP growth of 15%/36% QoQ/YoY. Key positives were: a) loan growth of 9% QoQ and 37% YoY, b) fee income growth of 32% YoY, driven by 167% YoY growth in distribution/cc fees and c) reported NIM expansion of 9bp QoQ to 3.98%, with improvement in spreads. Asset quality improved, with absolute GNPA declining 2% QoQ (1.4% of loans, -16bp QoQ). Sequential improvement in asset quality was due to controlled slippages (INR1.15b, 1.6% annualized) and upgrade of an INR525m agri account, which had slipped in 3Q. NNPA declined 12.7% QoQ to INR3.1b (0.78%, -19bp QoQ), as the bank provided aggressively to shore up reported PCR by 503bp QoQ to 57.53%. Loan growth was led by non-wholesale book growth of 42.4% YoY, increasing the share of non-wholesale to 41.0% from 39.4% a year ago. Strong CASA growth of 40% YoY (ahead of deposit growth of 27% YoY) led to CASA ratio improvement of 230bp YoY to 24.3%. Other highlights: a) Micro-banking impaired book decreased from 5.7% to 4.07%. b) Asset quality in agri book deteriorated further, with GNPA rising to 4.15% from 2.89%. c) Cards portfolio grew to 0.8m. Valuation view: With a diverse product portfolio, no legacy issues, highly capable management and a low market share, we expect RBL to report industry leading loan CAGR of ~35% over FY We expect stable/improving margins due to changing loan mix toward high-yielding loans, a sharp fall in cost of bulk deposits, and an improvement in the CD ratio. Strong balance sheet growth is expected to drive operating leverage. We maintain Buy with a TP of INR650 based on 3.4x Mar 20E ABV. Research Analyst: Nitin Aggarwal (Nitin.Aggarwal@MotilalOswal.com); Anirvan Sarkar (Anirvan.Sarkar@MotilalOswal.com); Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Parth Gutka (Parth.Gutka@motilaloswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: Quarterly performance v/s estimates largely in line with estimates Y/E March 4QFY18A 4QFY18E Var. (%) Comments Net Interest Income 5,005 5,226-4 % Change (YoY) Other Income 3,120 2, Net Income 8,124 7,939 2 Operating Expenses 4,293 4,172 3 Retail expansion leading to opex growth Operating Profit 3,831 3,767 2 % Change (YoY) Other Provisions 1,129 1, The bank shored up PCR to 57.5% Profit before Tax 2,702 2,757-2 Tax Provisions Net Profit 1,781 1,819-2 % Change (YoY) Source: MOSL Robust loan growth of 37% YoY was led by retail growth of 42% YoY Robust loan growth; retail loan share increases YoY Loan growth of 37% YoY was led by retail (+42% YoY), taking the retail book share to 41% from 39% a year ago. Retail book share increased from 39.5% in 3QFY18 to 41% in 4QFY18 Retail growth was driven by BBB, with 13.7% sequential growth (+66% YoY), and DB&FI (+38% YoY), led largely by 76% YoY growth in MSME; management has indicated that while asset quality challenges in agri continue, micro-banking saw an improvement in asset quality. Corporate loans grew 33% YoY (+6.4% QoQ), led by higher working capital financing in large corporate lending. CB segment grew 12% QoQ and 35% YoY. Exhibit 2: Share of retail business inches up to 41% Wholesale business Retail Business Exhibit 3: Strong growth across segments (%) C&IB CB BBB Agri DB & FI QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Strong CASA deposit inflows continued; CASA ratio increased to 24.3% v/s 24% in 3QFY18 Margins improve 48bp YoY to ~4% due to changing loan mix and lower cost of funds The bank reported 9bp QoQ improvement in margins to ~4% (+48bp YoY). YoY improvement in NIMs were led by a) reduction in cost of funds to 6.2% (down 50bp YoY) and c) healthy CASA accretion (+232bp YoY) CASA deposits increased 39% YoY (+16% QoQ), led by robust 39% increase in SA deposits (+2% QoQ). CASA ratio increased 232bp YoY to 24.3% v/s 22% in 4QFY18. Yield on loans declined 30bp YoY (+10bp QoQ) to 10.5%. Bank increased its MCLR by 30bp during the quarter. 27 April

3 Exhibit 4: NIMs improved 9bp QoQ to ~4% NIMs (%) QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Exhibit 5: CoF increased 18bp QoQ (-50bp YoY) YOF (%) COF (%) YOL (%) COD (%) QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Asset quality improved led by controlled slippages and upgrade of an agri account Asset quality remains strong GNPAs declined ~2% QoQ in absolute terms, as slippages were controlled at 1.6% (INR1.15b), while upgrades were healthy at INR560m, led by an INR525m upgrade of an account that slipped in 3Q. In % terms, GNPA declined to 1.4% from 1.54% in 3Q. Commercial banking witnessed deterioration in asset quality, with an increase in GNPA to 1.67% (+11bp QoQ). For commercial banking, GNPA % would be 2.23% for FY18 if we add the wholesale agricultural piece. The stress in the agri portfolio (farm loan waiver related) spiked as the segment reported GNPA of 4.15% compared to 2.89% in 3QFY18. Provision coverage ratio increased 503bp QoQ to 57.6% v/s 52.5% in the previous quarter. Exhibit 6: QoQ decline in GNPA led by C&IB (1 account) and DB&FI segments 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 GNPA 2,527 2,746 2,847 3,573 4,578 4,872 5,799 5,667 C&IB ,038 1,030 1,028 1, CB 1,589 1,592 1,604 1,394 1,438 1,236 1,057 1,264 BBB ,037 1,108 1,130 Agri DB&FI ,012 1,307 1,635 1,628 Exhibit 7: GNPA (%) increased the most for agri Source: Company, MOSL 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 GNPA % C&IB CB BBB Agri DB&FI April

4 4QFY18 conference call highlights P/L related Bank will need to reach 3m cards to attain 30%-40% RoE in cards business. Breakup of retail book: LAP 50%, cards- 25%, BB and personal - 18%, WC, loan against FD - 10%. Retail deposits (Retail TD + CASA) forms 52% of total deposits. Asset quality related Micro-banking GNPA has decreased to 4.07% in 4QFY18 from 5.71% in 3QFY18. Microfinance book absolute GNPA at INR1.52b (5.17% of the advances). Bank has provided for 174bp credit cost toward micro banking portfolio in FY18. Bank has provided for 30% of impaired micro-banking portfolio, the balance provision will be made in FY19. 90% of micro-banking book has been originated post demon, with PAR 90 < 30bp. Bank has done one ARC sale during the quarter. Only marginal impact on asset quality from RBI s revised stressed asset guidelines. Business updates The bank has reached a total card portfolio of 8L cards and bank ranks among top 5 card issuers in the country. The bank will not raise equity in the next 7-8 quarters. The bank s agreement with STFC entails providing a payments and network ecosystem for STFC. Typically, cards business breaks even in 18 months. The bank has 2.6m MFI customers Guidance The bank guided for 13.5% RoE by exit quarter of FY19. Credit cost excluding DB & FI expected to decline in FY19. Retail business has broken even in FY18. Management would like to maintain the cards book in the range of 7% - 8% of the loan book. Valuation and view Post management change in FY10, RBL has turned around the corners in key operating parameters. Bank reported loan CAGR of 56% over FY10-18, earnings CAGR of 55%, RoA improved to 1.1% v/s 0.2% in FY11 and the bank stays wellcapitalized with Tier I ratio of 13.6%. RBL has adopted a unique business model whereby a) the bank has adopted a linkages based approach to agricultural lending, b) has used large corporate accounts as an entry strategy to gain access to their supply chain ecosystem, and c) has strategically acquired business banking clients in the emerging sectors (primary bankers to gain lion s share of their wallet). 27 April

5 RBL s business transformation has coincided with significant investments in human capital (senior management), service offering (product suite), customer acquisition (including inorganic portfolios), technology and brand building (branch expansion and re-branding). With significant capacity already in place, RBL is now primed to sweat its investments and benefit from improving operating efficiencies. We expect gradual improvement in CI ratio to result from digital initiatives. We expect strong benefits to accrue to RBL from its partnership with Bajaj Finance in co-branded credit cards. The bank has already booked around 250,000 cards since the launch in 4QFY17. RBL aims to be amongst the top 5 credit card payers in the next 3 years and strives to achieve 2m+ cards over the next 5 years. We expect RBL to leverage on BAFs vast customer base (~12m; 60% don t have credit cards), strong distribution scale, excellent risk and analytics infrastructure. This would enable fast paced credit card customer acquisition at lower operating costs and lower credit costs (as these are tested customers of BAF). We strongly believe RBL has a potential to generate significant returns in the next three years led by (1) pedigreed leadership team, which is driving highquality loan growth (CAGR of 36% over FY17-20E), (2) niche business model, (3) improvement in core income, driving down cost-to-income (C/I) ratio. We expect robust FY17-20 PAT CAGR of 40%, with RoA improving to 1.3%. Maintain Buy with a TP of INR650 based on 3.4x Mar 20E ABV. Exhibit 8: We largely maintain our FY19/FY20 PAT estimates INRb Old Estimates Revised Estimates Change (%) FY19 FY20 FY19 FY20 FY19 FY20 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Loans Deposits Margins (%) Credit Cost (%) RoA (%) RoE (%) April

6 Exhibit 9: DUPONT Analysis - Return ratios to go up driven by strong core operating profitability Y/E MARCH FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Interest Income Interest Expense Net Interest Income Fee income Trading and others Non Interest income Total Income Operating Expenses Employee cost Others Operating Profit Core Operating Profit Provisions NPA Others PBT Tax RoA RoE April

7 Financials and Valuations Income Statement (INRm) Y/E March E 2020E Interest Income 8,793 13,516 19,531 27,443 37,132 45,076 59,024 77,148 Interest Expense 6,218 10,100 13,967 19,251 24,918 27,413 36,038 46,958 Net Interest Income 2,575 3,416 5,564 8,192 12,213 17,663 22,985 30,190 Growth (%) Non Interest Income 1,264 2,610 4,034 4,905 7,555 10,682 14,527 18,159 Total Income 3,840 6,026 9,598 13,097 19,768 28,345 37,513 48,349 Growth (%) Operating Expenses 2,244 4,239 5,997 7,673 10,564 15,034 19,555 24,744 Pre Provision Profits 1,596 1,787 3,601 5,424 9,204 13,311 17,958 23,605 Growth (%) Core PPP 1,318 1,334 2,880 4,818 7,965 11,490 15,958 21,805 Growth (%) Provisions (excl tax) ,144 2,389 3,645 4,112 5,105 PBT 1,370 1,325 2,999 4,280 6,815 9,666 13,846 18,500 Tax ,355 2,354 3,315 4,569 6,105 Tax Rate (%) PAT ,072 2,925 4,460 6,351 9,277 12,395 Growth (%) Balance Sheet Y/E March E 2020E Equity Share Capital 2,529 2,720 2,935 3,247 3,752 4,197 4,197 4,197 Reserves & Surplus 13,538 17,427 19,370 26,645 38,791 62,643 68,071 78,291 Net Worth 16,067 20,148 22,304 29,892 42,543 66,840 72,268 82,488 Deposits 83, , , , , , , ,119 Growth (%) of which CASA Dep 16,444 23,697 31,574 45,378 76, , , ,891 Growth (%) Borrowings 27,373 38,955 69, ,362 79,798 92, , ,172 Other Liabilities & Prov. 2,787 6,892 8,123 12,870 18,526 20,031 26,065 33,932 Total Liabilities 129, , , , , , ,339 1,065,711 Cash & Balances with RBI 2,908 9,807 14,557 13,397 29,479 25,893 29,772 42,328 Balances with Banks & money at Call & Short Notice 3,977 2,115 7,147 11,102 12,457 16,951 14,260 18,986 Investments 55,160 64,770 97, , , , , ,444 Growth (%) Loans 63,762 98, , , , , , ,881 Growth (%) Fixed Assets 943 1,343 1,644 1,773 2,587 3,340 4,387 5,287 Other Assets 2,883 5,595 5,278 8,688 12,917 15,170 33,935 42,785 Total Assets 129, , , , , , ,339 1,065,711 Asset Quality GNPA (INR m) ,112 2,081 3,569 5,669 7,225 9,090 NNPA (INR m) ,244 1,899 3,126 3,514 4,070 GNPA Ratio NNPA Ratio Slippage Ratio Credit Cost PCR (Excl Tech. write off) E: MOSL Estimates Source: Company, MOSL 27 April

8 Financials and Valuations Financial Ratios Y/E March E 2020E Yield and Cost Ratios (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Investments Avg. Cost-Int. Bear. Liab Avg. Cost of Deposits Interest Spread Net Interest Margin Capitalisatin Ratios (%) CAR Tier I Tier II Business & Efficiency Ratios (%) Loans/Deposit Ratio CASA Ratio Cost/Assets Cost/Total Income Cost/Core Income Int. Expense/Int.Income Fee Income/Net Income Non Int. Inc./Net Income Empl. Cost/Total Expense Investment/Deposit Ratio Profitability & Valuation Ratios RoE RoA RoRWA Book Value (INR) Growth (%) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) Growth (%) Price-Earnings (x) Dividend Per Share (INR) Dividend Yield (%) E: MOSL Estimates 27 April

9 N O T E S 27 April

10 Explanation of Investment Rating Investment Rating Expected return (over 12-month) BUY >=15% SELL < - 10% NEUTRAL > - 10 % to 15% UNDER REVIEW Rating may undergo a change NOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation *In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend. Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations). RBL Bank Motilal Oswal Securities Ltd. (MOSL) is a SEBI Registered Research Analyst having registration no. 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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai ; Tel No.: ; Correspondence Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai Tel No: Compliance Officer: Neeraj Agarwal, Id: na@motilaloswal.com, Contact No.: Registration details of group entities.: MOSL: SEBI Registration: INZ (BSE/NSE/MCX/NCDEX); CDSL: IN-DP ; NSDL: IN-DP-NSDL ; Research Analyst: INH AMFI: ARN Investment Adviser: INA IRDA Corporate Agent-CA0541. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP ) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP ) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products 27 April