IPO NOTE GEOJIT BNP PARIBAS Research RETAIL EQUITY RESEARCH RBL Bank Ltd Sensex : 28,123 Nifty : 8,673 Subscribe Price Range : Rs224-225 18 th August 2016 Riding high on growth momentum RBL Bank Ltd (RBL) is India s one of the fastest growing banks providing a comprehensive range of banking products and services to a wide network of clients. During FY12-16, the bank s total income, deposits and advances grew at a CAGR of 57.0%, 50.6% and 50.5% respectively. During FY14, it acquired select businesses of the Royal Bank of Scotland ( RBS ), mainly business banking, credit card and mortgage portfolio businesses. RBL has been decentralizing its operations (historically concentrated in south western Maharashtra and northern Karnataka) by opening new branches in key cities like Kolkata, Delhi, Mumbai, Chennai and Bangalore. As of FY16, it had a network of 197 branches and 362 ATMs spread across 16 Indian states and union territories serving ~1.90 million customers. Besides, the bank has always maintained a strong capital base with a healthy capital adequacy ratio (CAR) (Basel III CAR of 12.9% as of FY16). The bank has successfully maintained a vigorous asset quality on the back of robust risk management practices. As a result, Gross and Net NPA ratios of the bank stood at 1.0% and 0.6%, respectively for FY16. Given the robust growth trajectory coupled with increasing proportion of retail business, strong asset quality and well experienced senior management, we are positive on the bank. At the upper price band, the stock is available at 2.2x FY16 Adj P/B post issue which is lower than its closest peer like City Union Bank. Hence, we believe that valuation is reasonable and we recommend SUBSCRIBE to the issue, with a medium-to-long term perspective. Purpose of IPO The bank will utilise the fresh issue proceeds (Rs833cr) towards augmenting its Tier-I capital base to meet business growth while complying with Basel III norms and other RBI guidelines. Key Risks... Unexpected deterioration in asset quality Any moderation in business growth Concentration risk as the bank has ~48% of total branches in Maharashtra Peer Valuations Issue Details Date of Opening 19 th Aug 2016 Date of Closing 23 rd Aug 2016 Total no. of Shares offered (cr) 5.4 Post Issue No. of shares (cr) 37.0 Price Band Rs224 225 Face Value Bid Lot Listing Lead Managers Registrar Issue size (at upper price) Rs10 Multiples of 65 shares BSE & NSE Kotak Mahindra, Axis Capital, Citigroup Global, Morgan Stanley, HDFC Bank, ICICI Securities, IDFC Securities, IIFL Holdings, SBI Capital Link Intime Rs cr Fresh Issue 832.5 Offer For Sale 380.5 Net Issue 1,213.0 Shareholding (%) Pre Issue Post Issue Promoters - - Others 100 100 Total 100 100 Issue structure Allocation % Size Rs cr (at upper band) Retail 35 424.5 Non Institutional 15 181.9 QIB 50 606.5 Total 100 1,213.0 Y.E March (Rs cr) FY14 FY15 FY16 Net Interest Income 342 556 819 NIM (%) 2.4 2.7 2.7 Pre Pro Profit 179 360 542 Net Profit 93 207 292 P/ABV 3.1 3.0 2.2 ROE (%) 5.4 9.6 11.3 ROA (%) 0.7 1.0 1.0 Bank (FY16) NII (Rs.cr) PAT (Rs.cr) EPS (Rs.) ROA (%) ROE (%) BV (Rs.) ABV (Rs.) P/E* P/BV* P/ABV* RBL 819 292 9.4 1.0 11.3 106 102 27.8 2.1 2.2 Lakshmi Vilas 645 180 10.1 0.7 10.9 98 85 14.4 1.5 1.7 City Union 981 445 7.3 1.5 15.6 51 46 18.4 2.6 2.9 Source: GBNPP Research, Bloomberg; Note: Valuations of RBL are based on upper end of the price band; Adjusted for IPO dilution; * Closing price as on Aug 18, 2016
No. of branches No. of branches Company Description Incorporated in 1943, as a small, regional bank in Maharashtra with two branches in Kolhapur and Sangli, RBL Bank Limited (formerly Ratnakar Bank) is one of the fastest growing private sector banks in India. It provides a wide range of customized banking products and services to large corporations, SMEs, agricultural customers, retail customers and low income customers. 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. Area-wise distribution of branches Geographic breakdown of branches & ATMs as at 31 March, 2016 70 60 50 40 30 20 10 0 62 64 64 57 42 43 45 45 38 30 31 31 2014 2015 2016 Metro Urban Semi-Urban Rural Source: RHP, Geojit BNP Paribas Research Peer comparison of branch network Location No. of branches No. of ATMs Maharashtra (excl. Mumbai) 72 171 Karnataka 23 27 Mumbai 22 25 Gujarat 14 12 Madhya Pradesh 13 13 Tamil Nadu 12 11 Goa 8 29 New Delhi 8 37 Rajasthan 7 8 Andhra Pradesh & Telangana 5 8 600 500 460 400 300 197 198 200 100 0 RBL Bank DCB Bank Lakshmi Vilas Branches Source: RHP, Geojit BNP Paribas Research 525 City Union Haryana 4 9 West Bengal 4 2 Uttar Pradesh 3 6 Dadra & Nagar Haveli (UT) 1 2 Diu & Daman (UT) 1 1 Jammu & Kashmir 0 1 Total 197 362 Strong business growth RBL Bank s business grew at a strong pace of 51% CAGR over FY12-16, primarily driven by Corporate and Institutional banking business. Advances and Deposits stood at Rs21,229cr and Rs24,349cr, respectively as of FY16. The 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. One of the core tenets assimilated within each of this business segments is to cross-sell the products and solutions of entire Bank. The following table sets forth the composition of the loan assets by business: Rs Cr FY12-16 % of total net advances Business Segment FY13 FY14 FY15 FY16 CAGR (%) FY13 FY14 FY15 FY16 C&IB 2,759 3,580 5,232 8,186 43.7 43.3 36.4 36.2 38.6 CB 1,994 2,683 3,442 4,513 31.3 31.3 27.3 23.8 21.3 BBB 689 1,631 2,361 3,641 74.2 10.8 16.6 16.3 17.2 AB 212 625 1,335 1,756 102.2 3.3 6.4 9.2 8.3 DB&FI 722 1,317 2,079 3,133 63.1 11.3 13.4 14.4 14.8 Total Net Advances 6,376 9,835 14,450 21,229 49.3 100.0 100.0 100.0 100.0 Source: RHP, Geojit BNP Paribas Research
Increasing share of other income RBL Bank has focused on increasing the share of non-interest income across its client segments. As a result, the share of its non-interest income increased from 26.4% of its net total income in FY12 to 37.4% in FY16. The bank expects the share of other income to increase further through higher share of fee revenues form innovative services such as mobile remittances, prepaid cards, forex cards and other business banking services. Improving profitability RBL bank s total income and PAT has grown at a whopping CAGR of 45% and 46% over the last 4 years, respectively on account of stable NIM coupled with increasing share of non-interest income in the total net income. The bank s profitability came under pressure in FY14 after the bank acquired Indian banking business of the Royal Bank of Scotland. However, the bank improved its performance remarkably post acquisition. The bank has improved its NIM (as per our computation) to 2.7% in FY16 from 2.4% in FY14. The return ratios of the bank have also improved steadily with RoE of 11.3% and RoA of 1.0% in FY16 from RoE of 5.4% and RoA of 0.7% in FY14. Stable asset quality RBL bank has invested in technology platforms to identify and monitor its risks. Besides, the bank is largely into working capital financing and has small exposure to stressed sectors. As a result of its focus on effective risk management, it has been able to maintain its asset quality amidst challenging macro environment. RBL s Gross non-performing assets (NPAs) stood at 0.8% and 1.0% as of FY15 and FY16, respectively whereas its Net NPAs stood at 0.3% and 0.6% as of FY15 and FY16, respectively. Its standard restructured loans as a percentage of net advances stood at 0.6% and 0.1% as of FY15 and FY16, respectively. Robust multi-channel distribution system While RBL s network was historically concentrated in Maharashtra, it has now expanded it in terms of both numbers as well as geographical reach. Now the bank offers its services and products through a multi-channel distribution network comprising of 197 interconnected branches and 362 interconnected ATMs (as of March 31, 2016). Its delivery channel also includes online as well as digital banking. Further, it has developed a cost-effective micro-payment 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 s extensive presence along-with variety of distribution channels increases its ability to acquire and retain customers. It also enables the bank to provide better services to its existing customers. Strong partnerships expanding its reach in rural markets RBL is entering into strategic partnerships and investing in companies that aid in extending its reach in rural & semi-urban India and unbanked parts of urban & metro India. Moreover, it recently acquired a minority stake in Swadhaar FinServe Pvt. Ltd., a business correspondent engaged in offering products and services to inadequately served sections of businesses, households and enterprises, for a consideration of ~Rs21cr. Further, the bank is considering a purchase of a minority stake in Utkarsh Micro Finance Private Limited, an applicant for a small finance bank license. Outlook on Indian banking industry remains bright Over the last few years, slowdown in industrial growth led to tepid growth in loans and advances. Further, the banks have shown risk aversion attitude in the light of rising bad loans and governance related issues. However, of late several policy initiatives were undertaken to handle these challenges. As a result, the outlook for the Indian banking industry is improving gradually with the government s measures to revitalize industry growth. S&P estimates that credit growth in Indian banking sector to improve to 11-13% in FY17 from average 10% growth in last two years. Similarly, Moody s Investors Service has changed its outlook for India s banking system from negative to stable in FY16 because of the gradual improvement in the operating environment for Indian banks. Well experienced top management RBL Bank has highly experienced senior management team. Mr. Vishwavir Ahuja is the Managing Director & CEO of RBL Bank. He holds a post-graduate diploma in management from the Indian Institute of Management, Ahmedabad. Mr. Ahuja has about 35 years of experience in the banking and financial services sector. Previously Mr. Ahuja was the managing director and country executive officer of Bank of America for the Indian sub-continent. Mr. Narayan Ramachandran is a non-executive, non-independent Director and the part-time Chairman of the Bank. He holds a management degree from the University of Michigan and is a certified financial analyst. He has wide experience in the field of finance and banking and until February, 2010, he was the country head and chief executive officer of Morgan Stanley India. Prior to that, he was the co-head of the emerging markets division of Morgan Stanley Investment Management.
Financials (Standalone) Profit & Loss Account Y.E March (Rs cr) FY13A FY14A FY15A FY16A Interest Income 879 1,352 1,953 2,744 Interest Expense 622 1,010 1,397 1,925 Net Interest Income 258 342 556 819 % Change 37.9 32.6 62.9 47.2 Non-Interest Income 126 261 403 491 Net Income 384 603 960 1,310 Operating Expenses 224 424 600 767 Total Income 1,006 1,613 2,356 3,235 Total Expenditure 846 1,434 1,996 2,692 Pre Provisioning Profit 160 179 360 542 % Change 40.1 12.0 101.5 50.6 Provisions 23 46 60 114 Profit Before Tax 137 133 300 428 Tax 44 40 93 136 Tax Rate (%) 32.2 30.1 30.9 31.7 Net Profit 93 93 207 292 % Change 42.6 (0.2) 123.6 41.2 No. of Shares (cr.) 25.3 27.2 29.3 32.5 EPS (Rs.) 4.2 3.6 7.0 9.4 % Change 38.5 (13.4) 93.9 34.7 Balance Sheet Y.E March (Rs cr) FY13A FY14A FY15A FY16A Liabilities Capital 253 272 293 325 Reserves & Surplus 1,353 1,742 1,936 2,664 Deposits 8,341 11,599 17,099 24,349 Borrowings 2,737 3,896 6,963 10,536 Other Liabilities & Provisions 279 689 812 1,287 Total Liabilities 12,962 18,197 27,104 39,160 Assets Cash & Balances 689 1,192 2,170 2,450 Investments 5,516 6,477 9,792 14,436 Advances 6,376 9,835 14,450 21,229 Fixed Assets 93 133 163 176 Other Assets 288 559 528 869 Total Assets 12,962 18,197 27,104 39,160 Key Ratios Y.E March FY13A FY14A FY15A FY16A Per share data (Rs.) EPS 4.2 3.6 7.0 9.4 DPS 0.6 0.9 1.2 1.5 BV 63.5 74.0 76.0 92.0 ABV 63.2 72.9 74.7 88.2 Spreads (%) Yield on Advances 11.7 11.4 11.6 10.9 Yield on Investments 6.5 6.9 6.4 6.2 Yield on Funds 9.0 9.0 8.9 8.5 Cost of Funds 7.3 7.6 7.1 6.5 Capital (%) CAR 17.1 14.6 13.1 12.9 Tier I 16.8 14.3 12.7 11.1 Tier II 0.3 0.3 0.4 1.8 Asset (%) GNPA 0.4 0.8 0.8 1.0 NNPA 0.1 0.3 0.3 0.6 PCR 0.0 65.7 68.3 55.9 Management (%) Credit/ Deposit (%) 76.4 84.8 84.5 87.2 Cost/ Income 58.4 70.3 62.5 58.6 CASA 19.7 20.4 18.5 18.6 Earnings (%) NIM 2.8 2.4 2.7 2.7 ROE 7.3 5.4 9.6 11.3 ROA 1.1 0.7 1.0 1.0 Valuations* (x) P/E 54.0 62.3 32.1 27.8 P/BV 3.5 3.0 3.0 2.1 P/ABV 3.6 3.1 3.0 2.2 * FY16 adjusted for IPO dilution
Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is 10% or more. Buy - Upside is 15% or more. Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%. Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Geojit BNP Paribas Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit BNP Paribas's research desk have reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers I, Kaushal Patel, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit BNP Paribas Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion. REGULATORY DISCLOSURES: Dion is engaged in the business of developing software solutions for the global financial services industry across the entire transaction lifecycle and inter-alia provides research and information services essential for business intelligence to global companies and financial institutions. Dion is listed on BSE Limited (BSE) and is also registered under the SEBI (Research Analyst) Regulations, 2014 (SEBI Regulations) as a Research Analyst vide Registration No. INH100002771. Dion s activities were neither suspended nor has it defaulted with requirements under the Listing Agreement and / or SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with the BSE in the last five years. Dion has not been debarred from doing business by BSE / SEBI or any other authority. In the context of the SEBI Regulations, we affirm that we are a SEBI registered Research Analyst and in the course of our business, we issue research reports /research analysis etc that are prepared by our Research Analysts. We also affirm and undertake that no disciplinary action has been taken against us or our Analysts in connection with our business activities. In compliance with the above mentioned SEBI Regulations, the following additional disclosures are also provided which may be considered by the reader before making an investment decision: 1. Disclosures regarding Ownership
Dion confirms that: (i) (ii) Dion/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein at the time of publication of this report. It/its associates have no actual / beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. Further, the Research Analyst confirms that: (i) (ii) He, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject company at the time of publication of this report. He, his associates and his relatives have no actual/beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this repo 2. Disclosures regarding Compensation: During the past 12 months, Dion or its Associates: (a) Have not managed or co-managed public offering of securities for the subject company (b) Have not received any compensation for investment banking or merchant banking or brokerage services from the subject company (c) Have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject. (d) Have not received any compensation or other benefits from the subject company or third party in connection with this report. 3. Disclosure regarding the Research Analyst s connection with the subject company: It is affirmed that I, Kaushal Patel employed as Research Analyst by Dion and engaged in the preparation of this report have not served as an officer, director or employee of the subject company 4. Disclosure regarding Market Making activity: Neither Dion /its Research Analysts have engaged in market making activities for the subject company. Copyright in this report vests exclusively with Dion. Geojit BNP Paribas, 34/659-P, Civil Lane Road, Padivattom, Kochi 682024. Research Entity SEBI Registration Number: INH200000345 Toll Free Number: 1800-425-5501 / 1800-103-5501, Paid Number: 91 0484 3911777, Email id: customercare@geojit.com