RBL Bank- IPO Analysis

About the Issue

A private player, RBL Bank (Old Name- Ratnakar Bank) is going to perform on IPO stage from August 19- August 23 ,2016. The bank aims to raise Rs 1213 crore through mix of fresh issue and offer for sale by shareholders  with face value of Rs 10. The price band of the issue is Rs 224-225. The Kolhapur-based lender has made a pre-IPO placement of 2.5 crore equity shares to few investors at a price of Rs 195 per share, and has raised Rs 488 crore.

Purpose of the IPO

Scheduled Commercial Bank, RBL, aims to raise funds for Tier-I equity capital base, and fulfil the incremental capital needs under the Basel-III norms as well as Reserve Bank of India's norms, through its IPO. Bank is issuing 3.7 crore equity shares through fresh issue to raise Rs 832.5 crore. While bank is raising Rs 378.5 crore through offer for sale (OFS) by sale of 1.69 crore shares by existing shareholders.

Industry Outlook

The Indian banking system is in a restructuring phase. The financial and economic conditions in the country are stable and better than other countries in the world. The Indian banking industry is on a path of modernisation with new trends like payment and small finance banks. Schemes like Pradhan Mantri Jan Dhan Yojana, government’s initiatives on financial inclusion and rising disposable income will be positive for garnering deposits. Now in India, scheduled commercial banks can grant non-fund based facilities including Partial Credit Enhancement (PEC), to those customers, who do not avail any fund based facility from any bank in India. 

Heightened spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further push to growth. All these factors suggest that India’s banking sector is poised for robust growth as the banks will infuse capital to fuel the economic engine.

Company Outlook

Kolhapur based RBL bank (Ratnakar bank) was established in 1943. Till 2010, RBL remained a regional bank with focus on Maharashtra region; but after new management came into force, they made quantum jump in growth. Bank currently has 197 branches and 362 ATMs with presence across metro, urban and rural areas. As a new strategy, bank has ventured into micro finance lending. Bank offers relatively higher annual interest rates of 8.24% on fixed deposits and focuses on underbanked sections of the market from where it generates more revenue.

Company deposits have grown at a CAGR of 42 per cent over FY13-16 while net advances have expanded by a CAGR of 49.3 per cent over FY13-16. Company is also outperforming in terms of overall revenue. Company's net total income expanded to Rs 1309.7 crore in FY16 at a CAGR of 50 per cent over FY13-16. This rise in income was led by growth across segments -Branch and Business Banking (BBB); Agribusiness banking (AB); and Development Banking and Financial Inclusion (DB&FI), translating into loan book growth of 40% in FY2016, up from 25% in FY2013.

We can see NPAs within reasonable limits, as compared to other banks in the industry, owing to strong loan book and better asset quality. RBL’s gross and net NPAs stand at 0.98 per cent and 0.59 per cent respectively. As part of growth strategy, bank has acquired certain Indian businesses of the Royal Bank of Scotland (“RBS”), including the RBS’s business banking, credit card and mortgage portfolio businesses, in fiscal 2014, which gives a leverage of RBS’s existing business.
 
Management

After 2010, new management looked hungry for growth under the leadership of Vishwavir Ahuja. Vishwavir is a veteran in banking and has earlier headed Bank of America’s India operations. In the last six years, he has put together a team of experienced bankers (like Narayan Ramchandran, Palepu Sudhir Rao, Rajeev Ahuja), all of whom have rich experience in handling India’s leading banking institutions. Overall, the  management's approach is very professional. During this period, net profit of the company has risen from Rs 12.33 crore in 2011 to Rs 292.48 crore in FY16 with a  CAGR of 88 per cent over last five years. vs degrowth of 27% CAGR over FY06 to FY11.

Finance Performance

Bank has maintained its net NPA under 1 per cent at 0.59 in FY16. Deposits and advances both have grown at CAGR of 51 per cent over last four years. Company has maintained CASA ratio and NIM growth in the range of 18.6 and 3 per cent in Fy16. NII of the bank has risen by 47 per cent to Rs 819.2 crore in FY16 on a YoY basis. Net profit also shot up by 41 per cent to Rs 292.5 crore in FY16 on a YoY basis. With higher operational efficiency, cost/income ratio improved to 58.6 per cent in FY16 vs 70 per cent in FY14.

Peer Comparison and Valuation Outlook

RBL Bank with EPS of 9.8, looks attractive at PE of 23.9x as compared to IndusInd Bank (29.1x) and Kotak Mahindra Bank (40.4x). A better ratio to consider is P/b for banks as it gives idea of capital buffer the company is trading on. Bank is also placed well on this parameter with P/B of 2.4x as compared to its peers: Yes Bank (3.6x), IndusInd Bank (4x) and Kotak Mahindra Bank (4.2x). Low level of NPAs, safer CAGR ratio, consistent growth in total income, proportional balance of deposits and advances, makes it an eye catcher. So one can go and subscribe this IPO on August 19,2016.