RBL Bank

44 Pages·2016·2.64 MB·English

Initiating Coverage | 10 November 2016
Sector: Financials
RBL Bank
Improving
return profile
Strong growth
Investment phase
A unique model - on a fast lane
Sohail Halai ([email protected]); [phone]
Alpesh Mehta ([email protected]); [phone]
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
RBL Bank
Contents
A unique model – on a fast lane ............................................................................ 3
Story in charts ...................................................................................................... 5
Pedigreed leadership; pristine governance ............................................................ 8
On the highway to accelerated earnings growth .................................................. 14
Corporate and Institutional Banking .................................................................... 16
Commercial Banking (CB) .................................................................................... 18
Branch and Business Banking (BBB)..................................................................... 19
Development Banking and Financial Inclusion (DB&FI) ........................................ 21
Agribusiness Banking (AB) .................................................................................. 22
Poised for operating leverage benefits ................................................................ 23
Financial performance ........................................................................................ 27
Initiating with Buy .............................................................................................. 34
Key risks ............................................................................................................. 37
Bull & Bear case ................................................................................................. 38
Financials and valuations .................................................................................... 39
10 November 2016 2
Initiating Coverage | Sector: FinancialRsB -L B Baannkks
RBL Bank
BSE Sensex S&P CNX CMP: INR376 TP: INR450 (20%) Buy
27,253 8,432
A unique model – on a fast lane
RoA improvement of 40bp, EPS CAGR of 40%+ over FY16-19E
Stock Info
Bloomberg RBL IN
 RBL has been in existence since past 73 years; the bank underwent the
Equity Shares (m) 361.7
transformation as new management took control in FY10. RBL has turned around
52-Week Range (INR) 274/405
the corners in key operating parameters (loan CAGR of 62% over FY10-16,
M.Cap. (INR b) 134.9
earnings CAGR of 58% FY10-16, RoA of 0.9% v/s 0.2% in FY11 and Tier I of 12.5%).
M.Cap. (USD b) 2.1
 RBL has adopted a unique business model whereby a) the bank has adopted a
Financial Snapshot (INR b) linkages based approach to agricultural lending, b) has used large corporate
Y/E March 2016 2017E 2018E accounts as an entry strategy to gain access to their supply chain ecosystem, and
NII 8.2 12.5 16.3
c) has strategically acquired business banking clients in the emerging sectors
OP 5.4 9.0 12.2
(primary bankers to gain lion’s share of their wallet).
NP 2.9 4.5 6.5
 We strongly believe RBL has a potential to generate significant returns in the
NIM (%) 2.7 3.0 3.1
next three years led by (1) pedigreed leadership team, which is driving high-
EPS (INR) 9.0 12.5 18.1
quality loan growth (CAGR of 37% over FY16-19E), (2) niche business model, (3)
EPS Gr. (%) 27.6 38.4 45.1
improvement in core income, driving down cost-to-income (C/I) ratio by ~7%,
BV/Sh. (INR) 92.0 114.4 129.0
RoE (%) 11.2 12.6 14.9  We expect robust PAT CAGR of 45%, with RoA improving by ~40bp and RoE by
RoA (%) 0.9 1.0 1.2 670bp. Steady asset quality, structural change in balance sheet and Strong
P/E(X) 42.2 30.5 21.0 improvement in profitability to continue to drive re-rating. We initiate with a Buy
P/BV (X) 4.1 3.3 2.9 and a TP of Rs450 (3x FY19 BV).
P/ABV (X) 4.2 3.3 3.0
Div. Yield (%) 0.4 0.5 0.8
A Unique business model
RBL has created a niche for itself in the agri-lending space whereby it caters to
Shareholding pattern (%)
Sep-16 the entire supply chain in this segment (following a needs based approach –
tractor, irrigation loans, warehousing facilities). We believe the bank has
Promoter -
Public 100 cracked the right business model in a difficult (yet rewarding) segment
Others - evidenced by agri NPAs of just 0.6% (as against banking system NPAs of >5%).
RBL is treating the acquisition of large corporate as the means to gain access to
RBL Bank their vendor base and high quality salaried accounts. Moreover, the bank
A unique model – on a fast lane realizes the importance of early stage acquisition of high quality SMEs. This will
not only benefit them in terms of higher margins, but also enable the bank to
piggyback on the success and growth of these emerging corporates (increasing
business and fee income over the entire lifecycle)
Well poised for accelerated, high-quality growth
Having initially focused on overhauling risk management architecture (toward
high quality) and identified its niche growth engines, RBL is now poised to
accelerate its loan growth (FY16-19E CAGR of ~37% compared to system
average of +12-13%). Given that the bank is well capitalized post its recent IPO
(CET1 of 12.5%), we expect RBL’s market share to double over next five years,
[phone] but will still remain less than 1%.
Sohail Halai
[email protected]
Please click here for Video Link
10 November 2016 3
RBL Bank
Core income acceleration Primed for operating leverage benefits
and operating efficiency RBL’s business transformation has coincided with significant investments in human
should drive ROAs up by capital (senior management), service offering (product suite), customer acquisition
40bp
(including inorganic portfolios), technology and brand building (branch expansion
and re-branding). All these capacity-building measures have reflected in C/I ratio,
which rocketed by ~16% during the investment phase (59% in FY16). With significant
capacity already in place, RBL is now primed to sweat its investments and benefit
from improving operating efficiencies. Led by sharp improvement in core income
growth, we expect C/I ratio of ~51% by FY19, as against 59% currently.
Sharp improvement in return ratios; PAT CAGR of ~45%
We expect core income (as % of assets) to improve ~90bp over next three years, led
by a) margin improvement of +60bp and b) rising share of fee income. While ageing
of branches will drive operating efficiency, continued expansion will keep cost to
assets at ~2.5%. We expect asset quality to remain stable; however, on a prudent
basis, we factor in a 10bp rise in credit cost to 0.55%. Overall higher share of core
income should drive RoA improvement of ~40bp to 1.3%, and strong growth (in turn
higher leverage) is likely to push RoE higher by 670bp to 18%. Considering the strong
growth and investment phase, current capitalization may not be sufficient for more
than two years. Thus, another round of capital infusion is possible in FY19, which,
however, is not factored in our estimates. Overall, we expect PAT CAGR of ~45%
over next three years, highest for our coverage universe.
Governance transformation led by pedigreed management team
With the hiring of a pedigreed leadership team in 2010, RBL undertook a massive
makeover exercise, encompassing: (a) governance transformation (a highly
independent and professional Board), (b) revamped risk management framework
and (c) a new “fresh start” brand identity. Top management is adequately
incentivized with outstanding ESOPs at 9.4% of the capital base, and ~67% of its
employees are covered under the ESOP plan.
Initiate with Buy; valuing the bank at 3x FY19E BV
We value RBL based on the residual income (RI) model and build in 40%+ EPS CAGR
over FY16-19. We factor in average 16% growth in the explicit period (FY19-36) and
terminal growth rate of 5%. We also factor in cost of equity of 13.6%, with RF of
7.25%, beta of 1.3x and risk premium of 5.0%. At our target price of INR450, the
stock would trade at 3x of FY19E BV of INR149 and 18x of FY19E EPS. We believe
RBL deserves significant premium compared to peers, considering its strong growth,
improvement in profitability and pristine asset quality.
Key risks
a)Relatively unseasoned loan book.
b)Heightened dependence on wholesale deposits during high-growth phase.
10 November 2016 4
RBL Bank
Story in charts
Exhibit 1: Loan book to grow at 34% CAGR until FY21 Exhibit 2: Deposits to keep pace with loan growth
932
Loans (INR b) 34 Deposits (INR b) 35 1,102
717
842
551
638
408 58
62 303 464
23 212 15 337
144 243
98 171
4 5 5 6 8 12 19 41 64 8 9 9 11 13 16 20 47 83 116
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E
Source: MOSL, Company Source: MOSL, Company
denotes phase-1 CAGR denotes phase-2 CAGR denotes phase-1 CAGR denotes phase-2 CAGR
denotes phase-3 CAGR denotes phase-3 CAGR
Exhibit 3: Book value CAGR of 18% over FY10-16 Exhibit 4: EPS growth has picked up since FY14
BV/Sh (INR) 209 EPS (INR)
18 36 42.0
175
149 32.1
129 25
8 18 92 114 - 30 18
63 74 76 7 9 12
23 19 28 31 33 34 50 53 0 0 2 3 2 0 3 4 3
-5
5 6 7 8 9 0 1 2 3 4 5 6 E E E E E 5 6 7 8 9 0 1 2 3 4 5 6 E E E E E
0 0 0 0 0 1 1 1 1 1 1 1 7 8 9 0 1 0 0 0 0 0 1 1 1 1 1 1 1 7 8 9 0 1
Y Y Y Y Y Y Y Y Y Y Y Y 1 1 1 2 2 Y Y Y Y Y Y Y Y Y Y Y Y 1 1 1 2 2
F F F F F F F F F F F F Y Y Y Y Y F F F F F F F F F F F F Y Y Y Y Y
F F F F F F F F F F
Source: MOSL, Company Source: MOSL, Company
denotes phase-1 CAGR denotes phase-2 CAGR denotes phase-1 CAGR denotes phase-2 CAGR
denotes phase-3 CAGR denotes phase-3 CAGR
Exhibit 5: Loan book mix (%) – FY16 Exhibit 6: Deposit mix (%) – FY16
Development Current
banking & 10
Financial
Inclusion Corporate and Savings
Agri 15 Institutional 10
Banking
Banking
8
39
Branch and
Term
Business
Commercial 80
Banking
Banking
17
21
Source: MOSL, Company Source: MOSL, Company
10 November 2016 5
RBL Bank
Story in charts
Exhibit 7: GNPAs at less than 1% in last five years Exhibit 8: Average slippage ratio ~1% in last five years
Gross NPA (%) Slippage Ratio (%)
10.3
1.9
7.6
6.8 1.4 1.3
6.0 1.1 1.2
1.1 1.0 1.0 1.0 1.0
0.7 0.8
2.1 2.3
1.1 0.8 0.4 0.8 0.8 1.0 1.1 1.4 1.6 0.4 0.5
5 6 7 8 9 0 1 2 3 4 5 6 E E E 6 7 8 9 0 1 2 3 4 5 6 E E E
0 0 0 0 0 1 1 1 1 1 1 1 7 8 9 0 0 0 0 1 1 1 1 1 1 1 7 8 9
Y Y Y Y Y Y Y Y Y Y Y Y 1 1 1 Y Y Y Y Y Y Y Y Y Y Y 1 1 1
F F F F F F F F F F F F Y Y Y F F F F F F F F F F F Y Y Y
F F F F F F
Source: MOSL, Company Source: MOSL, Company
Exhibit 9: Provisioning coverage expected to rise Exhibit 10: Operating efficiencies to drive C/I lower
PCR (%)
84 Cost to Income (%)
78
73 75 73 72 92
67 68 68 65 65 67 83
59 61 61 70 64 47 54 55 58 70 62 59 54 53 51 51 50
49 42
40
5 6 7 8 9 0 1 2 3 4 5 6 E E E E E 5 6 7 8 9 0 1 2 3 4 5 6 E E E E E
0 0 0 0 0 1 1 1 1 1 1 1 7 8 9 0 1 0 0 0 0 0 1 1 1 1 1 1 1 7 8 9 0 1
Y Y Y Y Y Y Y Y Y Y Y Y 1 1 1 2 2 Y Y Y Y Y Y Y Y Y Y Y Y 1 1 1 2 2
F F F F F F F F F F F F Y Y Y Y Y F F F F F F F F F F F F Y Y Y Y Y
F F F F F F F F F F
Source: MOSL, Company Source: MOSL, Company
Exhibit 11: Fees to assets at lower end of private banks Exhibit 12: Core income and strong growth to drive ROEs
0.7 0.7 NFeoen I-nfu1c.no2 mb aes aesd a1a .s%0 a o %f a osfs1 et.ot4st al exp1o.s5ure 1.3 15.7 0.7 1.1 22.4 25.8 1.3 17.9 1.1 -1.11.2 0.1 2.4 3 6.5 1.3 Ro9.2 1.9 A (5.5 1.0 %)0.8 0.2 5.8 1.2 6.8 0.9 R5.1 0.6 oE9.8 0.9 (%11.2 0.9 ) 12.6 1.0 14.9 1.2 17.9 1.3 19.8 1.3 21.9 1.3
0.
1
4 4 7 18 16 20 19 9.
1
-
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17E FY19E FY21E
Source: MOSL, Company Source: MOSL, Company
10 November 2016 6
RBL Bank
Story in charts
Exhibit 13: Low stress sector exposure for RBL in comparison Exhibit 14: High CA:SA – focus on transaction accounts; to
to other banks indicative of selective lending leverage relationships for savings account
Funded Stressed exposures as a multiple of networth 420
1.96 m) ICICIB AXSB
R320
N HDFCB
1.40 1.36 1.29 h (I YES
1.11 anc220 KMB
0.90 0.90 Br
/
A120 IIB
0.60 S RBL
20
YES AXSB CUB CICIB DCB FB RBL DFCB 100 150 200 250
I H CA/Branch (INRm)
Stressed sectors include Iron & Steel, Construction, Textiles, Cement Size of the bubble denotes the ratio of CA balances to SA balances
and Infrastructure (including Power) Source: MOSL, Company
Source: MOSL, Company **
Exhibit 15: Low cash intensity among RBL’s clients – function Exhibit 16: Average inward NEFT ticket size highest for RBL
of initial phase of strong growth among peers – impact of e-commerce firms?
5,507
278
4,292
155 157
134
112 118
85 94
3,104 3,115 59 63 69
2,941
2,441
SBI CUB FB CICIB AXSB DFCB DCB KMB IIB YES RBL
ICICIB HDFCB KMB AXSB RBL IIB I H
Source: MOSL, RBI Data pertains to the period April’16 to July’16
Source: MOSL, RBI
Exhibit 17: Fee income to assets directly proportional to Exhibit 18: With 40%+ expected EPS CAGR, RBL is
non-funded exposure; RBL favorably placed attractively valued at 2.5x FY19E BV
3.8
2.5
n HDFCB
tio IIB IIB
s a proporets (%) 12..50 AXSB RBL YES 8E P/BV 23..31 YES RBL
as 1 AXSB
come of as1.0 FB DCHBD FCB ICICIB FY1.6 DCB FB
n ICICIB
ee i 0.5 0.8
F
5 15 25 35 5% 15% 25% 35% 45%
Non funded/total exposure (%) FY16-19E EPS CAGR
Size of the bubble denotes FY16 net worth Size of the bubble denotes market capitalization
Source: MOSL, Company Source: MOSL, Company
**: (1) Data obtained from latest quarterly disclosures (2) In cases where iron & steel figure not given, exposure assumed to be 75% of total metal exposure
10 November 2016 7
RBL Bank
Pedigreed leadership; pristine governance
Governance transformation precursor to business transformation
 With the hiring of a pedigreed leadership team in 2010, RBL undertook a massive
makeover exercise, encompassing: (a) governance transformation (a highly
independent and professional board), (b) revamped risk management framework and
(c)a new “fresh start” brand identity.
 Top management is adequately incentivized with outstanding ESOPs at 9.4% of the
capital base, and ~67% of its employees are covered under the ESOP plan.
After suffering from a decade-long phase of muted loan growth, a cooperative
banking mindset, directed lending and erratic asset quality performance, RBL (in its
earlier avatar as Ratnakar Bank Limited) embarked on a massive transformation
exercise in 2010. Central to this governance transformation exercise was the
induction of a professional and independent Board of Directors.
Anatomy of governance transformation at RBL
Source: Company, MOSL
This was followed by other integral elements that were gradually put in place by
FY12, including the induction of a pedigreed leadership team, strengthening of risk
(regulatory) capital, and a complete overhaul of the risk management framework.
10 November 2016 8
RBL Bank
Governance transformation at play – key elements
 Revised risk  Experienced middle Human
management management Capital
architecture
Regulatory  Strengthened  Marquee
Capital risk capital investors
 High-growth  Uncontested Business
engines niche "blue Focus
oceans"
Source: Company, MOSL
Pedigreed leadership team
Since 2010, when it embarked on the transformation exercise, RBL has strengthened
Aggressive hiring of quality
talent at senior/middle its leadership team with the induction of experienced and like-minded individuals
management levels across key roles. Most of RBL’s senior leaders (Exhibit 19) have prior experience with
new generation private banks and foreign banks and share an alma mater.
Challenges and flexibility of building a new bank and strong incentive structure have
been the key reasons for getting the strong talent pool, in our view. Over past few
years, we have seen very low attrition at the senior management level.
10 November 2016 9
RBL Bank
Exhibit 19: Pedigreed leadership team driving turnaround at RBL
Appointment Pedigree/
Name Current role Qualification
at RBL Prior positions
 MD and Country Executive Officer
Mr. Vishwavir Ahuja,
Managing Director & CEO June 2010 of Bank of America for the Indian  PGDM (IIM-A)
56
sub-continent
Additional Director- Executive &
Mr. Rajeev Ahuja*, Head- Strategy, Retail,  Citibank India, Bank of America,
June 2010  PGDM (IIM-A)
52 Transaction Banking India
and Financial Inclusion
Head - Corporate and  Royal Bank of Scotland N.V. and
Mr. Brijesh Mehra,
Institutional Banking and June 2016 Grindlays Bank Public Limited  PGDM (IIM-A)
52
Transaction Banking Company
Mr. Andrew Gracias,  B.COM (Mumbai
Head - Financial Markets June 2012  Bank of America and UBS
43 University), C.A.
 Citibank’s commercial banking
Mr. Sandeep division, MD of investment
Head - Commercial Banking April 2013  PGDM (MDI Gurgaon)
Thapliyal**, 46 banking in Religare Capital
Market Limited
 B.Tech (Civil Engineering),
Mr. Manoj Rawat, 46 Head - Agri Business July 2012  NABARD, Fullerton India MEng., degree in business
administration
 B.COM (Mumbai
November  BFSI Director in Citigroup, University), associate
Mr. Naresh Karia, 41 Chief Financial Officer
2010 International Bestfoods Limited member of the ICAI and
the ICSI
 B.COM (Delhi University),
Mr. R. Gurumurthy,  Standard Chartered Bank, Bank of
Head - Risk & Governance July 2011 certified associate of the
53 America, Credit Lyonnais and SBI
Indian Institute of Bankers
 VP (Acquisitions and  M.A (Economics) (Mumbai
Ms. Shanta Vallury, Head - Human resources, September
Partnerships) at American Express University), MMM from
49 2010
Bank Limited JBIMS
Chief of Staff and Head- Change
Mr. Bhavtaran Singh  ABN Amro Bank and Arete  B.COM from SRCC, New
Management and Service June 2014
Uberai, 58 Financial Partners, Singapore Delhi, CA
Delivery
*Nominated for Additional Director; ** Resigned from RBL to join Avendus Capital just prior to the IPO
Source: Company, MOSL Research
Exhibit 20: Changing profile of employees at RBL – contributing to elevated cost structure
Officers Clerks Sub-Staff
Only ~15% of employees
100%
are linked to IBA structure
now 75%
50%
89% 92%
82%
71%
25% 52%
34% 36% 40% 35%
0%
7 8 9 0 1 2 3 4 5
0 0 0 1 1 1 1 1 1
Y Y Y Y Y Y Y Y Y
F F F F F F F F F
Source: RBI, MOSL
10 November 2016 10