RBL Bank Ltd - Initiating Coverage - High growth but mature valuation

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Ravi
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Joined: Tue Dec 27, 2016 3:49 pm
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RBL Bank Ltd - Initiating Coverage - High growth but mature valuation

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CMP: Rs355

High growth but mature valuation

RBL Bank Ltd (RBL) is currently the fastest growing mid-sized private sector bank with one of the best in class asset qualities and improving ratios. RBL has witnessed substantial growth over FY11-16 – advances CAGR of 65%, business CAGR of 63%, net interest income (NII) and PAT CAGR of 54% and 88%, respectively. RBL, on the back of its unique growth strategy combining organic as well as inorganic expansion, is expected to perform better than other banks in future. Going ahead, we expect RBL’s business to witness 34% CAGR over FY16-19E to Rs1,08,966 crore. With favourable asset-liability management and focus on healthy asset quality, the return ratios are expected to improve to 17.3% RoE and 1.1% RoA by FY19E. In recent times, post demonization of high value currency, while banking space is likely to face slowdown in lending activities, the same is expected to start improving from FY18. As economic activities pick up pace, private sector banks are likely to benefit first considering their higher adequate capital adequacy ratios, availability of funds and healthy asset quality.

Recommendation: At CMP, the stock trades at 2.9x its FY18E and 2.5x its FY19E ABV. While RBL has been able to growth at a fast pace, it’s FY18E NIMs at 2.8% and RoA of 1.0% are lower vs. peers like City Union Bank (NIM 3.6% & RoA 1.6%) and Yes Bank (NIM 3.7% & RoA 2%) which are trading at lower valuation of 2.1x & 2.6x FY18E ABV. Given the high growth in RBL vs. peers the premium valuation is justified, however leaves limited room for upside from current levels. Further, with the recent demonetization of high value currency and the resultant slowdown in overall lending activities, the growth in the sector is expected to take time returning to normalcy. Considering mature valuation and near term growth concerns, we initiate coverage on RBL Bank with a Neutral rating.

Growth to be organic as well as inorganic: RBL in its ‘Vision 2020’ has a robust loan growth guidance of 35-40% p.a. In H1FY17, the total advances grew 44% YoY along with a 38% deposit growth, resulting in a business growth of 40.7% to Rs52,835 crore (Sept. 30, 2016). Going ahead, led by a robust growth in retail advances, RBL aims to reduce its wholesale advances book to 50% of the total. While the bank is expected to witness some slowdown in its advances growth in H2FY17 due to an impact of demonetization, the long term prospects remain intact. Hence, we expect a business CAGR of 34% over FY16-19E, backed by advances and deposits growing at a similar pace.

One of the best-in-class asset qualities: Despite robust growth in advances, RBL has been able to maintain a healthy asset quality with gross NPAs (non-performing assets) of 1.1% at the end of Q2FY17 (down 3bps QoQ) and net NPA of 0.55% (down 11bps QoQ). Post recent demonetization of high value currency, while there may be some pressure on the NPAs during the H2FY17, the bank expects minimal impact on its asset quality and recoveries to come-in by end of FY17. Also, with a LAP book of ~9% of total advances, the impact of delayed payments is likely to be manageable. Going ahead, RBL is expected to improve its NPA ratios to 0.87% gross NPA and 0.41% net NPA by the end of FY19E.

Healthy financials: Over FY11-16, RBL has reported robust fundamental growth - net interest income (NII) and net profit CAGR of 54% and 87%, respectively. While NIMs declined due to lower CASA over the period, the reduction in credit cost coming from improving asset quality let to better profitability. Cost-income ratio (CI%) declined to 58.6% compared to a high of 83.1% in FY11. Return ratios improved from 1.7% RoE and 0.46% RoA in FY11 to 11.2% RoE and 0.88% RoA in FY16. Going ahead, in its Vision 2020, RBL plans to reduce its CI% to ~51-52% by 2020 and increase its RoA to 1.5%. Over FY16-19, we expect net profit CAGR of 44% and return ratios of 17.3% RoE and 1.1% RoA.

Source: Centrum Wealth
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