Well poised for strong growth - Moneycontrol

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04 APR 2018

RBL BANK

BUY

BANKS & FINANCIAL SERVICES

Target Price: Rs 650

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 650.

CMP Potential Upside

: Rs 477 : 36%

MARKET DATA No. of Shares Free Float Market Cap 52-week High / Low Avg. Daily vol. (6mth) Bloomberg Code Promoters Holding FII / DII

: 420 mn : 100% : Rs 200 bn : Rs 600 / Rs 443 : 1.3 mn shares : RBK IB Equity : 0% : 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 30-35% 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 650 (3.4x FY20E 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 FY20E P/ABV to arrive at TP of Rs 650. At CMP of Rs 477, RBL trades at 2.5x FY20E P/ABV.

Financial summary (Standalone) Y/E March

Key drivers

FY17

FY18E

FY19E

FY20E

(%)

4,460

6,321

8,646

11,600

YoY Loan growth

12

15

21

28

32.0

27.2

36.8

34.2

Book value (Rs)

116

157

175

199

Adj. BV (Rs)

113

151

169

193

40.1

31.5

23.1

17.2

4.2

3.2

2.8

2.5

RoE (%)

12.2

11.6

12.5

14.8

RoA (%)

1.0

1.2

1.3

1.3

Net NPA (%)

0.6

1.0

0.8

0.6

PAT (Rs mn) EPS (Rs) EPS chg (%)

PE (x) P/ABV (x)

Source: Company, Axis Capital, CMP as on 27 Mar 2018 th

Q1’18

Q2’18

Q3’18

40

35

38

3.5

3.7

3.9

51.0

54.2

54.0

1.5

1.4

1.6

NIM Cost-Income ratio GNPA ratio

Price performance 140

BANKEX

RBL Bank

120 100

80 Apr-17

Jul-17

Oct-17

Jan-18

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04 APR 2018

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RBL BANK BANKS & FINANCIAL SERVICES

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 ~50-70 bps. FY20 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

2.0

NNPA

1.5

1.6 1.2

0.9

1.1

1.0

1.1

1.1

(%)

PCR (RHS)

60 1.4

1.6

50

1.2

1.1

40 30

0.8

20

0.4

10

0.0

0

Q2

Q3

Q4

Q1

Q2

FY16

Q3

Q4

Q1

FY17

Q2

Q3

Management highlighted that 75% of the current microfinance portfolio has been disbursed post Jan'17 with low expected credit cost of ~30 bps

FY18

Source: Company, Axis Capital

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 40

37

(bps)

32

35

30 20

18

19

Q4

Q1

26

26

Q2

Q3

16

10

Overall credit cost guidance for FY18 was maintained at 2-2.5%

0 FY16

Q2

Q3 FY17

Q4

Q1

FY18


02

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04 APR 2018


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 50% to RBL's credit card base of ~0.7 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 C&IB 100% 80% 60%

40% 20%

CB

BBB

Agri

DB&FI

14 9 15

14 8 17

15 8 16

14 8 17

15 7 17

14 7 18

14 7 18

13 7 20

14 6 21

13 5 21

24

23

22

21

19

19

19

18

18

18

38

38

39

40

43

43

42

42

41

42

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

0% FY16

FY17

FY18


Credit growth guidance maintained at 30-35% ♦

The bank largely follows a cross-sell model in growing the wholesale book and expects this book to grow by ~30%. 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 40-50% of India’s top 100 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

♦

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 40% of the incremental microfinance business and contributes 35% to the portfolio. More so, it contributes a bulk of the MSME business

Management highlighted that RBL has business relations with 40-50% of India’s top 100 groups in some form or the other

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04 APR 2018

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Exhibit 4: Management guides for 30-35% credit growth in longer run Advances 800 600

(Rs bn)

YoY Growth (RHS)

54

47

54

(%)

47 39

35

400

32 525

30

98

144

FY13

FY14

FY15

40

20

294 64

50

30

397

200 0

683

60

212

10 0

FY16

FY17

FY18E

FY19E

FY20E


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

NIM (RHS)

Yields on advances

Cost of funds

(%)

(%)

12

4.0 3.5

9

3.0 2.5

6 3

4.5

2.8

2.5

2.7

2.7

3.0

3.5

3.5

3.4

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

2.0 1.5


04

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04 APR 2018


Financial summary (Standalone) Profit & loss (Rs mn) Y/E March Interest earned Interest expended Net interest income Non interest income Net income Operating expenses

Key ratios FY17

FY18E

FY19E

FY20E

Y/E March

FY17

FY18E

FY19E

FY20E

37,132

45,554

57,641

73,936

Per share data

(24,918)

(28,076)

(34,963)

(45,611)

12

15

21

28

12,213

17,478

22,678

28,325

BV (Rs.)

116

157

175

199

FDEPS (Rs.)

7,555

10,501

13,744

16,955

Adj. BV (Rs.)

113

151

169

193

19,768

27,979

36,422

45,280

DPS (Rs.)

-

2

2

3

(10,564)

(14,834)

(19,026)

(23,112)

Dividend payout (%)

-

12

12

11

10.4

10.2

10.0

10.0

Staff expenses

(4,461)

(5,713)

(7,201)

(9,137)

Other operating expenses

(6,102)

(9,120)

(11,825)

(13,975)

Yields & Margins (%) Yield on advances

9,204

13,146

17,396

22,168

Cost of deposit

6.7

6.3

6.2

6.2

(2,389)

(3,569)

(4,296)

(4,592)

Net interest margin

3.0

3.5

3.5

3.4

Pre-tax profit

6,815

9,577

13,100

17,576

Asset quality (%)

Tax expense

(2,354)

(3,256)

(4,454)

(5,976)

Gross NPAs

1.2

1.6

1.3

1.1

4,460

6,321

8,646

11,600

Net NPAs

0.6

1.0

0.8

0.6

Extraordinary item

-

-

-

-

Credit cost

Minority interest/Associates

-

-

-

-

Provisioning coverage

4,460

6,321

8,646

11,600

Operating profit Provisions & contingencies

Profit after tax

Adj. PAT

Balance sheet (Rs mn) Y/E March Total assets Cash & Balances with RBI

0.8

0.9

0.9

0.7

46.8

40.0

42.0

45.0

Tier-I

11.4

16.1

14.7

8.6

CAR

13.7

18.6

17.0

10.1

Capital (%)

FY17

FY18E

FY19E

FY20E

486,748

593,421

763,427

971,691

ROA

1.0

1.2

1.3

1.3

ROE

Efficiency (%)

41,936

40,542

46,465

57,486

12.2

11.6

12.5

14.8

Investments

134,817

136,428

167,963

203,469

Cost to income

53

53

52

51

Advances

294,490

397,292

524,855

682,642

CASA

22

24

24

24

Effective tax rate

35

34

34

34

Net interest income

49

43

30

25

Fee income

43

40

31

23

Operating expenses

38

40

28

21

Fixed assets

2,587

2,393

2,137

1,812

Other assets

12,917

16,765

22,007

26,282

486,748

593,420

763,427

971,691

3,752

4,180

4,180

4,180

Preference capital

-

-

-

-

Reserves & surplus

39,594

61,508

68,981

79,114

Profit after tax

52

42

37

34

Networth

43,346

65,688

73,161

83,294

Advances

39

35

32

30

Total liabilities Equity capital

Borrowings Deposits Other liabilities & prov. Source: Company, Axis Capital

Growth (%)

79,798

87,777

94,960

105,781

Deposits

42

21

36

32

345,881

418,998

568,832

752,215

Total assets

24

22

29

27

17,713

20,947

26,465

30,391


Note: Dividend for FY17 will be reflected in FY18 due to change in reporting method as per schedule 3

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04 APR 2018

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Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations). 1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on www.axisbank.com. 2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity. 3. ASL has no material adverse disciplinary history as on the date of publication of this report. 4. I/We, authors (Research team) and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. I/we or my/our relative or ASL or its associates do not have any material conflict of interest. I/we have not served as director, officer or employee in the subject company. Research Team Sr. No

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DEFINITION OF RATINGS Ratings BUY HOLD SELL

Expected absolute returns over 12-18 months More than 10% Between 10% and -10% Less than -10%

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