4 APR 218 Visit Note BUY Target Price: Rs 65 Well poised for strong growth We met with the senior management of RBL and came back confident on its outlook and execution capabilities. Growth rates to remain healthy with benefits flowing from multi-channel distribution network. NIM to remain intact with granular retail franchise. Some near-term challenges persists like asset quality pain in farm loan book and credit costs linked to demon-impacted MFI loans, which will ease over next few quarters. We expect RBL to scale up materially without any significant teething issues while achieving best in class performance across major parameters. RBL is transitioning from being a wholesale-focused regional player to an agile technology-leader with a diversified portfolio, focus on strategic niche customer segments, and pan-india aspirations. Retain BUY with a TP of Rs 65. CMP : Rs 477 Potential Upside : 36% MARKET DATA No. of Shares : 42 mn Free Float : 1% Market Cap : Rs 2 bn 52-week High / Low : Rs 6 / Rs 443 Avg. Daily vol. (6mth) : 1.3 mn shares Bloomberg Code : RBK IB Equity Promoters Holding : % FII / DII : 38% / 12% Key highlights Credit cost guidance remains intact at 2-2.5% for FY18. GNPAs in the financial inclusion business is expected to be brought down to ~1% (5.2% in Q3FY18) after the accelerated provisions and write-offs in FY19 Loan growth is expected to remain strong at -35% going forward. Credit card business is expected to gain strong traction and will be a high ROA generating business Given the benefit from reduction in cost of funds and gradual change in loan mix in favour of retail, NIM is expected to be maintained ~3.9% Maintain BUY with TP of Rs 65 (3.4x FY2E ABV; upside 36% from CMP): RBL will command a premium to peers given (1) loan growth 3-4x of industry for foreseeable future, (2) ample scope of improving its low cost deposits and fee income, (3) negligible legacy issues, and (4) value accretion from significant rise in retail assets (tie-up with Bajaj Finance/new gen/e-comm players). We value RBL at 3.4x FY2E P/ABV to arrive at TP of Rs 65. At CMP of Rs 477, RBL trades at 2.5x FY2E P/ABV. Financial summary (Standalone) Y/E March FY17 FY18E FY19E FY2E PAT (Rs mn) 4,46 6,321 8,646 11,6 EPS (Rs) 12 15 21 28 EPS chg 32. 27.2 36.8 34.2 Book value (Rs) 116 157 175 199 Adj. BV (Rs) 113 151 169 193 PE (x) 4.1 31.5 23.1 17.2 P/ABV (x) 4.2 3.2 2.8 2.5 RoE 12.2 11.6 12.5 14.8 RoA 1. 1.2 1.3 1.3 Net NPA.6 1..8.6 Key drivers Q1 18 Q2 18 Q3 18 YoY Loan growth 4 35 38 NIM 3.5 3.7 3.9 Cost-Income ratio 51. 54.2 54. GNPA ratio 1.5 1.4 1.6 Price performance 14 12 1 BANKEX RBL Bank, CMP as on 27th Mar 218 8 Apr-17 Jul-17 Oct-17 Jan-18 1
Concerns over asset quality of microfinance business abating GNPA ratio in the financial inclusion business seemed to have peaked (5.2% in Q3FY18). RBL has already provided for 35% of the pain portfolio and the balance will be provided for in FY19. Post the accelerated provisioning and write-offs, GNPAs in this business is expected be brought down to ~1% by FY19 end Normalized credit cost in the microfinance business is ~5-7 bps. FY2 onwards the management aims to strengthen this portfolio by creating additional buffers for any unexpected events in the future RBL is not disbursing new microfinance loans in problematic areas but collection process is continuing with a recovery rate of ~25% Exhibit 1: Trend in asset quality GNPA NNPA PCR (RHS) 2. 1.6 1.5 1.4 1.6 1.2 1.2 1.1.9 1. 1.1 1.1 1.1.8.4. Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY16 FY17 FY18 6 5 4 2 1 Management highlighted that 75% of the current microfinance portfolio has been disbursed post Jan'17 with low expected credit cost of ~ bps Overall credit costs guidance maintained at 2-2.5% GNPA ratio in the credit card business stood ~1.1% in Q3FY18 and is better than industry average of 1.5-1.8%. Management highlighted that asset quality of this business is getting better with improving origination quality and credit tested customers of BAF linked credit cards RBL's internally generated agri book stands at Rs 19 bn and has remained stagnant over past two years given the monsoon and political disturbances surrounding the sector. Some challenges may be visible in this book in near term Management is recalibrating its strategy about growing the agri book by doing selective product lending, but will remain watchful over next six months Exhibit 2: Trend in credit cost 4 (bps) 37 32 35 2 1 18 19 16 26 26 Overall credit cost guidance for FY18 was maintained at 2-2.5% Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY16 FY17 FY18 2
Credit card business gaining strong traction Post the launch of co-branded credit card with Bajaj Finance (BAF), RBL is witnessing strong traction in this portfolio. BAF contributes nearly 5% to RBL's credit card base of ~.7 mn cards RBL aims to add nearly 1 mn cards in FY19 and intends to be the 3rd/4th largest card issuer in the country over the next 4-5 years ROA in this business is ~1%. Credit card is an upfront heavy investment business but over the next 3-4 years, this business is expected to generate ROA of 4-5% RBL cross sell like "loan on phone" to a credit card customer will lead to fee income for BAF and should increase substantially as volumes increase Management aims to ramp up BAF-linked credit card business significantly over the next few years and believes it will be a high ROE generating business given that it has limited sourcing costs, provided to existing credit tested customers and completely digital Exhibit 3: RBL has a diversified loan book 1% 8% 6% 4% 2% % C&IB CB BBB Agri DB&FI 14 14 15 14 15 14 14 13 14 13 9 8 8 8 7 7 7 7 6 5 15 17 16 17 17 18 18 2 21 21 24 23 22 21 19 19 19 18 18 18 38 38 39 4 43 43 42 42 41 42 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY16 FY17 FY18 Credit growth guidance maintained at -35% The bank largely follows a cross-sell model in growing the wholesale book and expects this book to grow by ~%. A large part of the growth is driven by the fact that public sector banks have vacated the space and pricing pressure is gradually easing off Management highlighted that RBL has business relations with 4-5% of India s top 1 groups in some form or the other. The bank has stayed away from generic infra loans and largely focused on shorter tenure like 2-3 years rather than 15 year loans in the infra space Management highlighted that RBL has business relations with 4-5% of India s top 1 groups in some form or the other The management highlighted that they are witnessing early signs of private sector capex picking up. Also, they are expecting refinancing opportunities in the next 12-18 months related to resolutions of large stressed accounts The bank has tie-ups with 8 business correspondents for the microfinance and MSME business. Its subsidiary, Swadhaar FinServe originates 4% of the incremental microfinance business and contributes 35% to the portfolio. More so, it contributes a bulk of the MSME business 3
Exhibit 4: Management guides for -35% credit growth in longer run Advances YoY Growth (RHS) 8 (Rs bn) 54 47 47 54 6 39 683 35 32 525 4 397 2 294 212 64 98 144 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E 6 5 4 2 1 NIM expected to stay intact Cost of funds has come down for RBL over the past few quarters given reduction in market rates, progressive reduction in deposit rates as well as improvement in CASA ratio (24% in Q3FY18) This in part has aided NIM which has been consistently improving over the past few quarters. Management is hopeful of maintaining NIM at ~3.9% Exhibit 5: Margin (calc) to remain largely resilient at current level 15 12 9 6 3 NIM (RHS) Yields on advances Cost of funds 2.8 2.5 2.7 2.7 3. 3.5 3.5 3.4 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E 4.5 4. 3.5 3. 2.5 2. 1.5 4
Financial summary (Standalone) Profit & loss (Rs mn) Y/E March FY17 FY18E FY19E FY2E Interest earned 37,132 45,554 57,641 73,936 Interest expended (24,918) (28,76) (34,963) (45,611) Net interest income 12,213 17,478 22,678 28,325 Non interest income 7,555 1,51 13,744 16,955 Net income 19,768 27,979 36,422 45,28 Operating expenses (1,564) (14,834) (19,26) (23,112) Staff expenses (4,461) (5,713) (7,21) (9,137) Other operating expenses (6,12) (9,12) (11,825) (13,975) Operating profit 9,24 13,146 17,396 22,168 Provisions & contingencies (2,389) (3,569) (4,296) (4,592) Pre-tax profit 6,815 9,577 13,1 17,576 Tax expense (2,354) (3,256) (4,454) (5,976) Profit after tax 4,46 6,321 8,646 11,6 Extraordinary item - - - - Minority interest/associates - - - - Adj. PAT 4,46 6,321 8,646 11,6 Balance sheet (Rs mn) Y/E March FY17 FY18E FY19E FY2E Total assets 486,748 593,421 763,427 971,691 Cash & Balances with RBI 41,936 4,542 46,465 57,486 Investments 134,817 136,428 167,963 23,469 Advances 294,49 397,292 524,855 682,642 Fixed assets 2,587 2,393 2,137 1,812 Other assets 12,917 16,765 22,7 26,282 Total liabilities 486,748 593,42 763,427 971,691 Equity capital 3,752 4,18 4,18 4,18 Preference capital - - - - Reserves & surplus 39,594 61,58 68,981 79,114 Networth 43,346 65,688 73,161 83,294 Borrowings 79,798 87,777 94,96 15,781 Deposits 345,881 418,998 568,832 752,215 Other liabilities & prov. 17,713 2,947 26,465,391 Key ratios Y/E March FY17 FY18E FY19E FY2E Per share data FDEPS (Rs.) 12 15 21 28 BV (Rs.) 116 157 175 199 Adj. BV (Rs.) 113 151 169 193 DPS (Rs.) - 2 2 3 Dividend payout - 12 12 11 Yields & Margins Yield on advances 1.4 1.2 1. 1. Cost of deposit 6.7 6.3 6.2 6.2 Net interest margin 3. 3.5 3.5 3.4 Asset quality Gross NPAs 1.2 1.6 1.3 1.1 Net NPAs.6 1..8.6 Credit cost.8.9.9.7 Provisioning coverage 46.8 4. 42. 45. Capital Tier-I 11.4 16.1 14.7 8.6 CAR 13.7 18.6 17. 1.1 Efficiency ROA 1. 1.2 1.3 1.3 ROE 12.2 11.6 12.5 14.8 Cost to income 53 53 52 51 CASA 22 24 24 24 Effective tax rate 35 34 34 34 Growth Net interest income 49 43 25 Fee income 43 4 31 23 Operating expenses 38 4 28 21 Profit after tax 52 42 37 34 Advances 39 35 32 Deposits 42 21 36 32 Total assets 24 22 29 27 Note: Dividend for FY17 will be reflected in FY18 due to change in reporting method as per schedule 3 5
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