IPO review: RBL an interesting transformation to invest

From a base of Rs 4,132 crore in FY12, the bank's loan book has grown to Rs 21,229 crore in FY16

Financials have been the flavour in this season of initial public offerings (IPOs) and that of RBL Bank (RBL) may not be very different. But, apart from the IPO-related clamour, RBL’s offering provides an interesting proposition for investors. The most appealing feature of the Kolhapur-based private bank is its transformation process. Even as it commenced its operations in 1943, its growth and the makeover story was etched in the past six years, led by the takeover of RBL by its current management.

From a base of Rs 4,132 crore in FY12, its loan book has grown to Rs 21,229 crore in FY16 – translating to a compounded annual growth rate (CAGR) of 39 per cent. Deposits have also expanded from Rs 4,739 crore in FY12 to Rs 24,349 crore in FY16. Consequently, net interest income (NII) in FY16 stood at Rs 819 crore (CAGR of 34 per cent), while net profit at Rs 292 crore has clocked a CAGR of 35 per cent. This is despite the bank being largely focused on western and south-western regions of India.

As part of its growth plans, RBL has come out with an offer to raise up to Rs 1,213 crore, which includes an offer for sale of Rs 388 crore.

Business makeover

The prime reason for RBL’s robust growth is the change in its business strategy. While it remains a commercial-lending oriented bank, the proportion of commercial loans to total loans has reduced from 70 per cent in FY13 to 60 per cent in FY16. Acquisition of operations such as business banking, credit cards and mortgage loans portfolio from Royal Bank of Scotland in FY14 has helped chart this transformation. RBL plans to further increase the retail business exposure in the coming years to 40-50 per cent of loan book.

With this change in approach and deployment of robust risk management system, the asset quality has also improved. Gross non-performing assets (NPA) ratio, which stood at 1.12 per cent in FY11, stood at 0.98 per cent in FY16. Net NPA ratio of 0.59 per cent in FY16 is within the industry average (0.5 - 0.6 per cent) and is ahead of peers such as City Union Bank and Federal Bank. While gross NPA ratio is higher than 0.4 per cent in FY13, the industry has seen more pressure on the asset quality front.

Although higher gross NPA ratio is commensurate to the increase in loan book, analysts at HDFC Securities warn that controlling the level of NPAs is extremely critical. “The ability to improve financial parameters depends primarily on the ability to manage operations and react to competitive pressures effectively. If RBL Bank is unable to manage NPAs, it could adversely affect its business, future financial performance, capital base and, hence, the price of the equity shares”, the analysts add in their note.

Key concerns

Relatively low CASA and return ratios are other points of worry. The ratio of low-cost CASA deposits (to total deposits) of RBL stood at 18.6 per cent as on March 31, lower than 20.4 per cent in FY14, and were disappointing compared to 20–23 per cent for peers such as City Union Bank, Karur Vysya Bank and DCB Bank. Interestingly, despite the gross NPA ratio of these peer banks hovering between 1.5 and 2.5 per cent, their return on equity was 13-15 per cent in FY16, more than 11 per cent for RBL. The high cost to income ratio (59 per cent) is also a reason for the same.

It is for these reasons the FY16 price-to-book value of 2.5 times (adjusted for provisions) appears a tad expensive given the issue price. However, given the track record of RBL and its ability to grow its net interest income and assets at a fast clip, valuations soften to 1.8x FY18 price-to-book value. Therefore, sustaining the high growth and asset quality demonstrated in earlier years, and improving its profitability will remain critical for RBL Bank.