Is RBL on Track to Cre­ate Value like In­dusInd and Yes Bank?

In its ‘RBL Vi­sion 2020’, the bank aims to achieve 30-35% CAGR for ad­vances, 3-4% im­prove­ment in CASA and RoA of about 1.5%

The Economic Times - - Companies: Pursuit Of Profit -

ET In­tel­li­gence Group: Con­tin­u­ing its strong per­for­mance of the past three fi­nan­cial years, RBL Bank is com­pet­ing well with some of its big­ger pri­vate sec­tor peers in terms of loan and earn­ings growth, even post list­ing.

The Kol­ha­pur-based small bank, which has seen a turn­around in its for­tune af­ter the new man­age­ment took charge six years ago, has yielded 42% in less than six months and is cur­rently trad­ing at a rich FY18 price-to-book mul­ti­ple of 3.2 times as per Bloomberg es­ti­mates.

In­vestors seem to be ex­pect­ing the bank to mir­ror long-term value cre­ation recorded by some of the smaller pri­vate sec­tor banks, in­clud­ing In­dusInd and Yes Bank, that have yielded six to eight times since they were the cur­rent size of RBL Bank in FY10. Both th­ese banks recorded out­stand­ing growths in their ad­vances, net in­ter­est in­come (NII) and earn­ings over the next six years, clock­ing in com­pounded growth rate any­where be­tween 34% and 46% for th­ese pa­ram­e­ters.

In its busi­ness strat­egy called ‘RBL Vi­sion 2020’, RBL Bank has laid down some im­pres­sive mile­stones it would like to achieve in the pe­riod in­clud­ing 30-35% CAGR for ad­vances, 3% to 4% im­prove­ment in CASA (cur­rent ac­count and sav­ings ac­count) ra­tio, bet­ter op­er­a­tional ef­fi­ciency with cost to in­come ra­tio in the range of 51-52%, and re­turn on as­set of about 1.5%.

The ‘old’ pri­vate bank is al­ready on track to achieve some of th­ese tar­gets with cost to in­come ra­tio and CASA ra­tio stand­ing at 53.3% and 23.2% as of the De­cem­ber quar­ter. While it is re­port­ing a strong loan book growth of more than 40% in the last three quar­ters al­beit on a small base, given the op­por­tu­ni­ties it is chas­ing in its five busi­ness ver­ti­cals across whole­sale and non-whole­sale busi­nesses, it is likely to main­tain a 30%-plus growth tra­jec­tory in the loan book.

Its re­tail busi­ness strat­egy is dif­fer­ent with fo­cus on agri­cul­ture, mi­cro fi­nance, and se­cured small busi­ness loans in­stead of tra­di­tional home or ve­hi­cle fi­nance re­tail prod­ucts. While with this strat­egy it avoids a di­rect com­pe­ti­tion with some of the es­tab­lished pri­vate sec­tor banks, mi­cro fi­nance play­ers and small fi­nance banks are the di­rect com­peti­tors.

Its branch light model — the bank also re­lies on an­a­lyt­ics and tech­nol­ogy to ex­pand through busi­ness cor­re­spon­dents (BC) and cus­tomer ser­vice points (CMPs) — while aug­ments its reach, could af- fect its growth tra­jec­tory in case of an ex­e­cu­tion mis­take.

The bank will also have to main­tain its fo­cus on im­prov­ing its ge­o­graph­i­cal reach with 40% of the cur­rent busi­ness com­ing from the Western re­gion.

De­spite the strong growth tra­jec­tory, while the bank has main­tained strong as­set qual­ity over the last four fi­nan­cial years, in­vestors need to closely watch some of the as­set qual­ity point­ers. There has been a steady in­crease in the gross NPA in the commercial busi­ness seg­ment in FY17 and at 3.29% the GNPA ra­tio re­mains rel­a­tively higher than other seg­ments.

The con­cen­tra­tion to­wards gen­er­ally trou­bled con­struc­tion and real es­tate sec­tors (11% of to­tal ex­po­sure) is also a risk although, as per RBL, th­ese are be­low the in­ter­nally set sec­toral lim­its and thus com­fort­able lev­els. While closet to 30% of its rated ex­po­sure is be­low in­vest­ment grade, the man­age­ment is con­fi­dent of its un­der­writ­ings stan­dards and is sat­is­fied with the credit cost of its whole­sale seg­ment through which it pro­vides work­ing cap­i­tal loans and trade and trans­ac­tion ser­vices to cor­po­rates.

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