Apr 4, 2018 - We value RBL at 3.4x FY20E P/ABV to arrive at TP of Rs 650. ... Source: Company, Axis Capital, CMP as on 2
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04 APR 2018
RBL BANK
BUY
BANKS & FINANCIAL SERVICES
Target Price: Rs 650
Well poised for strong growth We met with the senior management of RBL and came back confident on its outlook and execution capabilities. Growth rates to remain healthy with benefits flowing from multi-channel distribution network. NIM to remain intact with granular retail franchise. Some near-term challenges persists like asset quality pain in farm loan book and credit costs linked to demon-impacted MFI loans, which will ease over next few quarters. We expect RBL to scale up materially without any significant teething issues while achieving best in class performance across major parameters. RBL is transitioning from being a wholesale-focused regional player to an agile technology-leader with a diversified portfolio, focus on strategic niche customer segments, and pan-India aspirations. Retain BUY with a TP of Rs 650.
CMP Potential Upside
: Rs 477 : 36%
MARKET DATA No. of Shares Free Float Market Cap 52-week High / Low Avg. Daily vol. (6mth) Bloomberg Code Promoters Holding FII / DII
: 420 mn : 100% : Rs 200 bn : Rs 600 / Rs 443 : 1.3 mn shares : RBK IB Equity : 0% : 38% / 12%
Key highlights ♦ ♦ ♦
Credit cost guidance remains intact at 2-2.5% for FY18. GNPAs in the financial inclusion business is expected to be brought down to ~1% (5.2% in Q3FY18) after the accelerated provisions and write-offs in FY19 Loan growth is expected to remain strong at 30-35% going forward. Credit card business is expected to gain strong traction and will be a high ROA generating business Given the benefit from reduction in cost of funds and gradual change in loan mix in favour of retail, NIM is expected to be maintained ~3.9%
Maintain BUY with TP of Rs 650 (3.4x FY20E ABV; upside 36% from CMP): RBL will command a premium to peers given (1) loan growth 3-4x of industry for foreseeable future, (2) ample scope of improving its low cost deposits and fee income, (3) negligible legacy issues, and (4) value accretion from significant rise in retail assets (tie-up with Bajaj Finance/new gen/e-comm players). We value RBL at 3.4x FY20E P/ABV to arrive at TP of Rs 650. At CMP of Rs 477, RBL trades at 2.5x FY20E P/ABV.
Financial summary (Standalone) Y/E March
Key drivers
FY17
FY18E
FY19E
FY20E
(%)
4,460
6,321
8,646
11,600
YoY Loan growth
12
15
21
28
32.0
27.2
36.8
34.2
Book value (Rs)
116
157
175
199
Adj. BV (Rs)
113
151
169
193
40.1
31.5
23.1
17.2
4.2
3.2
2.8
2.5
RoE (%)
12.2
11.6
12.5
14.8
RoA (%)
1.0
1.2
1.3
1.3
Net NPA (%)
0.6
1.0
0.8
0.6
PAT (Rs mn) EPS (Rs) EPS chg (%)
PE (x) P/ABV (x)
Source: Company, Axis Capital, CMP as on 27 Mar 2018 th
Q1’18
Q2’18
Q3’18
40
35
38
3.5
3.7
3.9
51.0
54.2
54.0
1.5
1.4
1.6
NIM Cost-Income ratio GNPA ratio
Price performance 140
BANKEX
RBL Bank
120 100
80 Apr-17
Jul-17
Oct-17
Jan-18
01
04 APR 2018
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RBL BANK BANKS & FINANCIAL SERVICES
Concerns over asset quality of microfinance business abating ♦
♦
♦
GNPA ratio in the financial inclusion business seemed to have peaked (5.2% in Q3FY18). RBL has already provided for 35% of the pain portfolio and the balance will be provided for in FY19. Post the accelerated provisioning and write-offs, GNPAs in this business is expected be brought down to ~1% by FY19 end Normalized credit cost in the microfinance business is ~50-70 bps. FY20 onwards the management aims to strengthen this portfolio by creating additional buffers for any unexpected events in the future RBL is not disbursing new microfinance loans in problematic areas but collection process is continuing with a recovery rate of ~25%
Exhibit 1: Trend in asset quality (%)
GNPA
2.0
NNPA
1.5
1.6 1.2
0.9
1.1
1.0
1.1
1.1
(%)
PCR (RHS)
60 1.4
1.6
50
1.2
1.1
40 30
0.8
20
0.4
10
0.0
0
Q2
Q3
Q4
Q1
Q2
FY16
Q3
Q4
Q1
FY17
Q2
Q3
Management highlighted that 75% of the current microfinance portfolio has been disbursed post Jan'17 with low expected credit cost of ~30 bps
FY18
Source: Company, Axis Capital
Overall credit costs guidance maintained at 2-2.5% ♦
♦
GNPA ratio in the credit card business stood ~1.1% in Q3FY18 and is better than industry average of 1.5-1.8%. Management highlighted that asset quality of this business is getting better with improving origination quality and credit tested customers of BAF linked credit cards RBL's internally generated agri book stands at Rs 19 bn and has remained stagnant over past two years given the monsoon and political disturbances surrounding the sector. Some challenges may be visible in this book in near term
Management is recalibrating its strategy about growing the agri book by doing selective product lending, but will remain watchful over next six months
Exhibit 2: Trend in credit cost 40
37
(bps)
32
35
30 20
18
19
Q4
Q1
26
26
Q2
Q3
16
10
Overall credit cost guidance for FY18 was maintained at 2-2.5%
0 FY16
Q2
Q3 FY17
Q4
Q1
FY18
Source: Company, Axis Capital
02
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04 APR 2018
RBL BANK BANKS & FINANCIAL SERVICES
Credit card business gaining strong traction ♦
Post the launch of co-branded credit card with Bajaj Finance (BAF), RBL is witnessing strong traction in this portfolio. BAF contributes nearly 50% to RBL's credit card base of ~0.7 mn cards
♦
RBL aims to add nearly 1 mn cards in FY19 and intends to be the 3rd/4th largest card issuer in the country over the next 4-5 years
♦
ROA in this business is ~1%. Credit card is an upfront heavy investment business but over the next 3-4 years, this business is expected to generate ROA of 4-5%
♦
RBL cross sell like "loan on phone" to a credit card customer will lead to fee income for BAF and should increase substantially as volumes increase
♦
Management aims to ramp up BAF-linked credit card business significantly over the next few years and believes it will be a high ROE generating business given that it has limited sourcing costs, provided to existing credit tested customers and completely digital
Exhibit 3: RBL has a diversified loan book C&IB 100% 80% 60%
40% 20%
CB
BBB
Agri
DB&FI
14 9 15
14 8 17
15 8 16
14 8 17
15 7 17
14 7 18
14 7 18
13 7 20
14 6 21
13 5 21
24
23
22
21
19
19
19
18
18
18
38
38
39
40
43
43
42
42
41
42
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
0% FY16
FY17
FY18
Source: Company, Axis Capital
Credit growth guidance maintained at 30-35% ♦
The bank largely follows a cross-sell model in growing the wholesale book and expects this book to grow by ~30%. A large part of the growth is driven by the fact that public sector banks have vacated the space and pricing pressure is gradually easing off
♦
Management highlighted that RBL has business relations with 40-50% of India’s top 100 groups in some form or the other. The bank has stayed away from generic infra loans and largely focused on shorter tenure like 2-3 years rather than 15 year loans in the infra space
♦
The management highlighted that they are witnessing early signs of private sector capex picking up. Also, they are expecting refinancing opportunities in the next 12-18 months related to resolutions of large stressed accounts
♦
The bank has tie-ups with 8 business correspondents for the microfinance and MSME business. Its subsidiary, Swadhaar FinServe originates 40% of the incremental microfinance business and contributes 35% to the portfolio. More so, it contributes a bulk of the MSME business
Management highlighted that RBL has business relations with 40-50% of India’s top 100 groups in some form or the other
03
04 APR 2018
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RBL BANK BANKS & FINANCIAL SERVICES
Exhibit 4: Management guides for 30-35% credit growth in longer run Advances 800 600
(Rs bn)
YoY Growth (RHS)
54
47
54
(%)
47 39
35
400
32 525
30
98
144
FY13
FY14
FY15
40
20
294 64
50
30
397
200 0
683
60
212
10 0
FY16
FY17
FY18E
FY19E
FY20E
Source: Company, Axis Capital
NIM expected to stay intact ♦
Cost of funds has come down for RBL over the past few quarters given reduction in market rates, progressive reduction in deposit rates as well as improvement in CASA ratio (24% in Q3FY18)
♦
This in part has aided NIM which has been consistently improving over the past few quarters. Management is hopeful of maintaining NIM at ~3.9%
Exhibit 5: Margin (calc) to remain largely resilient at current level 15
NIM (RHS)
Yields on advances
Cost of funds
(%)
(%)
12
4.0 3.5
9
3.0 2.5
6 3
4.5
2.8
2.5
2.7
2.7
3.0
3.5
3.5
3.4
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
2.0 1.5
Source: Company, Axis Capital
04
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04 APR 2018
RBL BANK BANKS & FINANCIAL SERVICES
Financial summary (Standalone) Profit & loss (Rs mn) Y/E March Interest earned Interest expended Net interest income Non interest income Net income Operating expenses
Key ratios FY17
FY18E
FY19E
FY20E
Y/E March
FY17
FY18E
FY19E
FY20E
37,132
45,554
57,641
73,936
Per share data
(24,918)
(28,076)
(34,963)
(45,611)
12
15
21
28
12,213
17,478
22,678
28,325
BV (Rs.)
116
157
175
199
FDEPS (Rs.)
7,555
10,501
13,744
16,955
Adj. BV (Rs.)
113
151
169
193
19,768
27,979
36,422
45,280
DPS (Rs.)
-
2
2
3
(10,564)
(14,834)
(19,026)
(23,112)
Dividend payout (%)
-
12
12
11
10.4
10.2
10.0
10.0
Staff expenses
(4,461)
(5,713)
(7,201)
(9,137)
Other operating expenses
(6,102)
(9,120)
(11,825)
(13,975)
Yields & Margins (%) Yield on advances
9,204
13,146
17,396
22,168
Cost of deposit
6.7
6.3
6.2
6.2
(2,389)
(3,569)
(4,296)
(4,592)
Net interest margin
3.0
3.5
3.5
3.4
Pre-tax profit
6,815
9,577
13,100
17,576
Asset quality (%)
Tax expense
(2,354)
(3,256)
(4,454)
(5,976)
Gross NPAs
1.2
1.6
1.3
1.1
4,460
6,321
8,646
11,600
Net NPAs
0.6
1.0
0.8
0.6
Extraordinary item
-
-
-
-
Credit cost
Minority interest/Associates
-
-
-
-
Provisioning coverage
4,460
6,321
8,646
11,600
Operating profit Provisions & contingencies
Profit after tax
Adj. PAT
Balance sheet (Rs mn) Y/E March Total assets Cash & Balances with RBI
0.8
0.9
0.9
0.7
46.8
40.0
42.0
45.0
Tier-I
11.4
16.1
14.7
8.6
CAR
13.7
18.6
17.0
10.1
Capital (%)
FY17
FY18E
FY19E
FY20E
486,748
593,421
763,427
971,691
ROA
1.0
1.2
1.3
1.3
ROE
Efficiency (%)
41,936
40,542
46,465
57,486
12.2
11.6
12.5
14.8
Investments
134,817
136,428
167,963
203,469
Cost to income
53
53
52
51
Advances
294,490
397,292
524,855
682,642
CASA
22
24
24
24
Effective tax rate
35
34
34
34
Net interest income
49
43
30
25
Fee income
43
40
31
23
Operating expenses
38
40
28
21
Fixed assets
2,587
2,393
2,137
1,812
Other assets
12,917
16,765
22,007
26,282
486,748
593,420
763,427
971,691
3,752
4,180
4,180
4,180
Preference capital
-
-
-
-
Reserves & surplus
39,594
61,508
68,981
79,114
Profit after tax
52
42
37
34
Networth
43,346
65,688
73,161
83,294
Advances
39
35
32
30
Total liabilities Equity capital
Borrowings Deposits Other liabilities & prov. Source: Company, Axis Capital
Growth (%)
79,798
87,777
94,960
105,781
Deposits
42
21
36
32
345,881
418,998
568,832
752,215
Total assets
24
22
29
27
17,713
20,947
26,465
30,391
Source: Company, Axis Capital
Note: Dividend for FY17 will be reflected in FY18 due to change in reporting method as per schedule 3
05
04 APR 2018
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RBL BANK BANKS & FINANCIAL SERVICES
Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations). 1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on www.axisbank.com. 2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity. 3. ASL has no material adverse disciplinary history as on the date of publication of this report. 4. I/We, authors (Research team) and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. I/we or my/our relative or ASL or its associates do not have any material conflict of interest. I/we have not served as director, officer or employee in the subject company. Research Team Sr. No
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[email protected]
Research Analyst
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Research Associate
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06
04 APR 2018
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RBL BANK BANKS & FINANCIAL SERVICES
DEFINITION OF RATINGS Ratings BUY HOLD SELL
Expected absolute returns over 12-18 months More than 10% Between 10% and -10% Less than -10%
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Copyright in this document vests with Axis Securities Limited. Axis Securities Limited, SEBI Single Reg. No.- NSE, BSE & MSEI – INZ000161633, ARN No. 64610, CDSL-IN-DP-CDSL-693-2013, SEBI-Research Analyst Reg. No. INH 000000297, SEBI Portfolio Manager Reg. No.- INP000000654, Main/Dealing off.- Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No. – 18002100808, Reg. off.- Axis House, 8th Floor, Wadia International Centre, Pandurang Budhkar Marg, Worli, Mumbai – 400 025.Compliance Officer: Anand Shaha, E-Mail ID:
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