Strong management team & focused approach to drive growth: The new
Management led by MD & CEO Mr Vishwavir Ahuja which took charge in 2010
has been instrumental in the outstanding growth of the bank over the years,
wherein the bank transformed itself from being a traditional bank to a new age
bank. RBL has been largely focusing on funding working capital to large and midsized
corporates. It has recently ventured into retail lending by buying out the
credit card business of Royal Bank of Scotland (RBS) and has been expanding its
retail business by introducing other new retail-centric products.
Expect 33% CAGR in loan book over FY2016-18: Over FY2012-16, RBL has
expanded its loan book at a CAGR of 50%. With increasing size of its balance
sheet, we believe it will still be able to grow at a CAGR of ~33% over FY2016-18.
Large and mid-sized corporates form 39% and 21% of the loan book,
respectively; while retail and the high yielding MFI segment account for 17% and
15% of the book. We expect strong growth from all the segments going ahead.
Growth without a compromise in asset quality is likely to be the business mantra:
While the new Management has been aggressive in growth, it has also put in
place an efficient risk management system which has led to GNPAs being
contained below 1% in the last four years. For FY2016, GNPAs at 0.98% and
NNPAs at 0.59% are very much comparable to that of new age private sector
banks. Avoiding loans to long gestation projects has helped the bank in
maintaining superior asset quality and we believe the same is sustainable
provided it continues to maintain a conservative approach towards the segment.
Reduction in cost/income (C/I) & improvement in CASA should be ROE accretive:
A 2x rise in branches and 3x rise in employee count over the past few years have
kept the cost structure high for the bank. Front loading of investments resulted in
C/I going upto 70% in FY14, which is down to 58% in FY16, we see further scope
for cost rationalization. Also, the bank’s CASA base at ~18.5% is still low and we
see that improving to 22% by FY18 end. While we have not factored in major
improvement in NIM, there is scope for that in the years to come. ROE is expected
to see a 200bp improvement over FY2018, backed by lower cost structure and
increasing fee income.
Outlook & Valuations: Currently the stock is valued at 2.3x its FY2018E BV of
`130; this we feel is quite attractive given the growth prospects of the bank.
Changing business mix & stable credit cost are expected to lead to a predictable
earnings growth. While the ROE improvement could be gradual, we believe
absolute growth in earnings could accelerate going ahead. RBL in our view has all
the ingredients to become a multi-year growth story with a stable asset quality.
Keeping this in mind we feel the stock should be valued at 2.5x its FY2018E BV.
We recommend ACCUMULATE on the stock with a target price of Rs325.

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