RBL BANK LIMITED Aug 16, 2016 Business Overview SMC Ranking (3/5) Issue Highlights Industry Bank Total Issue (Shares) - Offer for sale 16,909,628 Total Issue (Shares) - Fresh Issue 48,888,889 Net Offer to the Public 65,798,517 Issue Size (Rs. Cr.) 1474-1480 Price Band (Rs.) 224-225 Offer Date 19-Aug-16 Close Date 23-Aug-16 Face Value 10 Lot Size 65 Equity Share Issue Composition Book Running Lead Manager Axis Bank Limited, ICICI Securities Ltd, Citi group, Global Markets, India P Ltd, HDFC Bank Ltd IDFC Securities Ltd, IIFL Holdings Ltd Kotak Mahindra Capital Company Ltd Morgan stanley India Company P ltd SBI Capital Markets Ltd. Name of the registrar Link Intime India Private Ltd Shareholding Pattern (%) In shares Offer for sale 16,909,628 Fresh issue 48,888,889 Total Issue for Sale 65,798,517 QIB 32,899,258 NIB 9,869,778 Retail 23,029,481 Particulars Pre-issue Post issue Promoters & promoters group 00.00% 00.00% QIB 34.38% 34.17% NIB 25.77% 25.77% Retail 39.85% 40.78% Total 100.00% 100.00% RBL Bank Limited is one of India's fastest growing private sector banks in the last six years. It offer 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. As of March 31, 2016, it had 197 interconnected branches and 362 interconnected ATMs spread across 16 Indian states and union territories serving approximately 1.90 million customers. As part of growth strategy, it acquired certain Indian businesses of the Royal Bank of Scotland ( RBS ), including RBS's business banking, credit card and mortgage portfolio businesses, in Fiscal 2014. This acquisition has added to existing businesses, enabling us to expand scale of operations and geographic presence. Competitive Strengths Strong shareholder and capital base: A strong capital base is a pre-requisite for growth in the banking industry. As of March 31, 2014, 2015 and 2016, its capital adequacy ratio was, 14.64% (Basel III), 13.13% (Basel III) and 12.94% (Basel III), respectively. As of March 31, 2016, its capital adequacy ratio was 12.94% (of which Tier 1 was 11.10%) and the bank is comfortably met the capital requirements under the Basel III Requirements as per the RBI's new capital adequacy guidelines, which came into effect on April 1, 2013. Financial Strength: The bank has been able to maintain asset quality amidst challenging macro environment. The management of the bank believes that asset quality numbers are within the best in the industry. Its gross NPAs stood at 0.77% and 0.98% as of March 31, 2015 and March 31, 2016, respectively, and net NPAs stood at 0.27% and 0.59% as of March 31, 2015 and March 31, 2016, respectively. RBL restructured loans (defined as standard restructured assets) as a percentage of net advances stood at 0.55% and 0.09% as of March 31, 2015 and March 31, 2016, respectively. Its provision coverage ratio stood at 68.28% and 55.87% as of March 31, 2015 and March 31, 2016, respectively. Its deposits grew from Rs.2,042.15 crore at the end of fiscal 2011 to 24,348.65 crore at the end of fiscal 2016, which represents a CAGR of 70.10% for the past five fiscal years and its advances grew from Rs.1,905.16 crore at the end of fiscal 2011 to Rs. 21,229.0 crore at the end of fiscal 2016, which represents a CAGR of 65.95% for the past five fiscal years. Client focused approach to business resulting in growing brand recognition: RBL has created a customer-centric culture where it look to satisfy each client's complete banking needs by tailoring products and services as required for the client rather than become a product-focused organization. RBL use branches and technological and digital banking capabilities to develop and enhance knowledge of the customer requirements, industry sectors, businesses and local environments. Robust multi-channel distribution system: It offer services and products through a multi-channel distribution network comprised of 197 interconnected branches and 362 interconnected ATMs as of March 31, 2016. Its delivery channels also include internet banking, phone banking and mobile banking. It has developed a cost-effective micropayment and branchless banking solution by establishing points of collection and aggregation at over 32,000 transaction points to cover a larger geographical territory and customer base. RBL believes that extensive presence and variety of distribution channels increases ability to acquire and retain customers and enables to provide better service to existing customers Focus on operational quality and scalability: Increasing use of technology means that more and more customers interface with operational platforms making it increasingly important for to provide quality service across all customer touchpoints branches, ATMs, phone banking, internet banking and email channels. It believes that consistent quality, competitive turnaround times and system reliability are core service differentiators. It is essential that all of these operations run with precision, skill and, in some cases simplicity, to ensure customer satisfaction. 1
Objects of the Issue The public issue comprises a fresh Issue and an offer for sale by the selling shareholders. Information in this section is taken from chittorgarh.com, India's No 1 IPO Investment Portal. 1. The Offer for Sale RBL Bank will not receive any proceeds from the Offer for Sale. 2. The Fresh Issue The proceeds from the fresh issue will be utilised towards the following objects: A. Augment capital base to meet Bank's future capital requirements ; B. Enhance their visibility and brand name among existing and potential customers.; C. General corporate purposes. Strategy Grow and leverage distribution network: RBL expects to continue expanding branch network over the next three years. While branch network was historically concentrated in the states of Maharashtra and Karnataka, RBL has now begun expansion to cover other important Indian states. It also focused expanding its network to cover states with higher per capita income and key economic centers. In rural areas, RBL looks to add branches in locations that complement and leverage agricultural & development banking partners and to build brand in rural communities. In addition, it plans to continue the expansion of branch network and partnership network further to extend the reach of branches through partner operated branches and transaction points. Introduce new products and services: RBL gather, analyze and continually improve knowledge of the customers' needs through the use of various technological initiatives to help analyze customer data and strengthen business intelligence system. It has also developed robust and agile processes to develop and bring new products to market quickly. These processes begin with risk management and include IT, operational and market testing. Pursuing partnerships and strategic initiatives: RBL strategy is to cultivate mutually beneficial partnerships to extend footprint beyond the reach offered by branch network. For instance, to develop AB and DB&FI businesses, it plans to continue entering into strategic partnerships (traditional or digital), including by way of strategic equity investments in partners, to extend reach in rural India where it is able to locate partners with strong local relationships that can benefit from product offering, technology and distribution network. Risk factor Any increase in RBI-mandated provisioning requirements could also affect business: Bank is making efforts to improve collections and to foreclose on existing impaired loans in a timely manner, there cannot be any assurance that it will be successful in efforts or that the overall quality of Bank's loan portfolio will not deteriorate in the future. Its ability to improve financial parameters and results of operations depends primarily upon ability to manage operations and react to competitive pressures effectively. If Bank is unsuccessful in controlling or reducing its impaired loans, any significant increase in impaired loans, or deterioration in the quality of the assets that Bank holds as security, could materially and adversely affect Bank's business, prospects and future financial performance. Its business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected: RBL continue to develop and implement a number of growth initiatives to become more competitive. In the past few years, RBL have rebranded the Bank, expanded products and services portfolio, scaled up core business of financial inclusion, agri-banking and SME verticals, as well as launched new premium banking vertical Insignia Preferred Banking to place HNI customers at the center of exclusivity and recognition. As part of growth strategy, it continue to transition from a traditional corporate-commercial relationship-led local bank to a mid-size bank with a diversified corporate, commercial and retail banking portfolio. Bank has experienced negative cash flows from operating activities: The Bank has experienced negative cash flows from operating activities and investing activities in recent fiscal years. In Fiscal 2014, 2015 and 2016, the Bank used Rs 9,22.03 crore, Rs 2260.51 crore and Rs 4384.20 crore in cash for operating activities, respectively, and Rs 59.36 crore, Rs 58.36 crore and Rs 60.43 crore in cash for investing activities, respectively. Negative cash flows over extended periods, or significant negative cash flows in the short term, could materially impact ability to operate its business and implement growth plans. A prolonged downturn in the real estate market could result in losses and adversely affect profitability: As of March 31, 2016, Its exposure to the real estate sector amounted to Rs 2248.02 crore, representing 7.08% of gross credit portfolio. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. The recent economic slowdown in India has adversely affected real estate market values 2
Peer comparison across India and values may continue to decline Having to provide for or write off bad debts and to engage in litigation for recovery may impact business, cash flows and results of operations: The Bank had provided for an amount of Rs 93.19 crore during the fiscal year ended March 31, 2016 towards provision for NPA, non-performing investments, depreciation on investments, write-off and sacrifice for restructured advances. Bank initiate legal proceedings for recovery of amounts outstanding and conduct recovery drives in each of branches, through compromise settlements and lok adalats. Having to write off any significant amounts of bad debts and to invest significant management time and resources in litigation for recovery may materially impact business, cash flows and results of operations. Require a number of regulatory approvals for operation or growth of business: Require a number of regulatory approvals, licenses, registrations and permissions for operating business, including those at a corporate level as well as at the level of each of branches. Many of these approvals are required to be renewed from time to time. While it is believed that currently have or have applied for all material approvals required for business, or may not receive, all necessary approvals, or be able to obtain renewals of all approvals within the time frames anticipated by bank or may not obtain the same at all, which could adversely affect business. Industry Overview The weakening domestic macroeconomic conditions combined with continuing subdued global growth and its increasing spillover risks posed challenges to the banking sector during the year 2012-13. On the regulatory and supervisory policy front, the envisaged move towards risk-based supervision, initiatives for improved cross-border supervision and cooperation and enhanced oversight of financial conglomerates became important. In the short-term, the stress on banks' asset quality remains a major challenge. The credit quality of banks has deteriorated over the last few years. Gross NPAs increased from 2.4% of gross advances in March 2011 to 4.4% in December 2013, before declining to 4.1% in March 2014. Yet, it increases from 4.1% in March 2014 to 5.4% in September 2014. Net NPAs showed similar trends and increased from 2.2% in March 2014 to 2.5% in September 2014. Banks need to capitalize on these and play a major role in supporting economic activity and meeting the financial needs of all the sections of society. (Sources: RBI's Report on Trend and Progress of Banking in India, 2012-13; RBI's Annual Report, 2013-14; RBI's Financial Stability Report (Including Trend and Progress of Banking in India, 2013-14) Issue No. 10, December 2014) In 2015, Moody's Investors Service has changed its outlook for India's banking system from negative to stable because of the gradual improvement in the operating environment for Indian banks. Further, for the Indian economy and the Indian banking industry, the outlook for growth is improving gradually with a sense of optimism stemming from the Government of India's measures to revitalize industry growth and the RBI's new measures to restructure the domestic banking industry. (Source: RBI's Annual Report, 2014-15). Co_Name PBIDT PAT EPS P/E P/BV BV FV Price Mcap City Union Bank 2565.87 444.69 7.63 16.69 2.50 51.02 1.00 127.35 7617.97 DCB Bank 1340.08 194.52 6.84 16.53 1.85 61.15 10.00 113.05 3218.25 IndusInd Bank 10533.35 2286.45 37.28 31.46 4.04 290.23 10.00 1172.90 69930.95 Kotak Mah. Bank 16491.22 3458.85 21.84 34.90 4.19 181.71 5.00 762.20 139940.45 Yes Bank 12721.53 2529.69 58.02 22.25 3.95 326.75 10.00 1291.00 54379.06 RBL Bank 590.77 296.80 7.78 28.94 2.10 107.11 10.00 225.00 8588.20 Valuation Considering the P/E valuation on the upper end of the price band of Rs. 225, the stock is priced at pre issue P/E of 25.23x on its FY16 EPS of Rs. 8.92. Post issue, the stock is priced at a P/E of 28.94 x on its EPS of Rs. 7.78. Looking at the P/B ratio at Rs. 225 the stock is priced at P/B ratio of 2.51x on the pre issue book value of Rs.89.79 and on the post issue book value of Rs. 107.11the P/B comes out to 2.10x. On the lower end of the price band of Rs.224 the stock is priced at pre issue P/E of 25.12x on its FY16 EPS of Rs. 8.92.Post issue, the stock is priced at a P/E of 28.81x on its EPS of Rs. 7.78. Looking at the P/B ratio at Rs. 224, the stock is priced at P/B ratio of 2.49x on the pre issue book value of Rs. 89.79 and on the post issue book value of Rs. 107.11, the P/B comes out to 2.09x. 3
Outlook The bank has been consisting delivering on improving asset quality, cost efficiency and other income since last 4-5 years. Consistent rise in non-performing assets hit balance sheets of banks but it is maintaining its capital requirements under the Basel III Requirements as per the RBI's new capital adequacy guidelines. Moreover, Its provision coverage ratio is improving as well as restructured loans percentage are reducing year on year basis, which is showing that bank has been able to maintain asset quality. NPA is slightly on the higher side due to RBI's clean up balance sheet action, but management of the bank is confident to reduce that to best in the industry. Thus, investors who have long term aspect could opt for the issue. 4
Annexure Profit & Loss ` in Cr. Particulars 31-Mar-16 31-Mar-15 Total Operating Income 819.21 556.37 Total expenditure 718.98 566.443 Operating Profit 100.23-10.08 OPM% 12.23-1.81 Other Income 490.54 403.41 PBDIT 590.77 393.33 Depreciation 48.36 33.21 PBIT 542.41 360.12 Provisions & cont, 114.407 60.18 PBT 428.01 299.94 Tax 135.521 92.77 PAT 292.49 207.18 adjustment for appropriation -4.317-1.28 296.80 208.45 Balance Sheet Particulars 31/03/2016 31-Mar-15 Non-current assets Fixed assets 176.30 163.41 Non-current investments 14,436.03 9,792.30 Long-term loans and advances 21,229.08 14,449.83 other non current assets 868.75 527.78 Deffered Tax Assets 0.00 0.00 Total Non- Current Assets 36710.17 24933.32 Current assets Cash in hand 136.09 159.42 Balance with RBI 1203.66 1296.26 Money at call and short notice 0.00 199.81 Balance with banks 1110.18 514.84 Short-term loans and advances 0.00 0.00 Other current assets 0.00 0.00 Total current assets 2449.92 2170.33 Total Assets 39160.09 27103.65 ` in Cr. Non-current liabilities Deposits 2779.63 2199.81 saving deposits 1758.21 957.57 Deposits 4537.84 3157.38 Current liabilities term deposits from banks 3089.27 2985.31 term deposits from others 16721.53 10956.57 Borrowings 10536.24 6962.70 other liabilities and provisions 1286.98 812.30 Total current liabilities 31634.02 21716.87 Total 36171.86 24874.25 NET Worth 2988.23 2229.40 Net worth represented by: Share capital 324.72 293.45 Reserves and surplus 2663.51 1935.95 Net Worth 2988.23 2229.40 5
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