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%
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.