1. RBL Bank rated ‘Buy’ by Citi Bank; says stock is expensive but offers unique ‘early stage’ opportunity

RBL Bank rated ‘Buy’ by Citi Bank; says stock is expensive but offers unique ‘early stage’ opportunity

The stock, while expensive, offers a unique ‘early stage’ opportunity

Updated: May 17, 2017 3:04 PM
RBL is riding the rising India banking opportunity wave and while expensive, with potential risks, offers a unique ‘early-stage’ opportunity. Initiate coverage at Buy; Rs 350 target price. RBL is riding the rising India banking opportunity wave and while expensive, with potential risks, offers a unique ‘early-stage’ opportunity. Initiate coverage at Buy; Rs 350 target price.

This is a new ‘old’ bank that has re-invented itself over the past 6 years, and while small (R210 bn loans), is now ready for take-off: (i) strong loan (35% 3 year CAGR) & earnings momentum (39% 3 year CAGR); (ii) capital infusions & capable mgmt.; and (iii) rising returns (+20-25 bps ROAs, FY19e). RBL is riding the rising India banking opportunity wave and while expensive, with potential risks, offers a unique ‘early-stage’ opportunity. Initiate coverage at Buy; Rs 350 target price.

Differentiated strategy: RBL is following a differentiated growth strategy: (a) Branch-light (b) Partnerships: cust acquisition, costs & reach; (c) Niche focus segments; (d) A few firing asset engines. It’s a bold call, but given RBL’s size/cost realities, it’s probably the appropriate one.

Gaining altitude & speed: RBL is still small and it’s early days but it should lead its more illustrious pvt peers on loan & earnings growth, albeit lag on ROEs. We also see rising returns (+20 bps ROA by FY19E) with: (i) higher NIMs; (ii) cost leverage; & (iii) asset quality stability.

graph-rbl

Be wary of the air-pockets: The opportunity is a big blue sky, but RBL’s flight won’t necessarily be smooth: (i) The market has changed: new banks, aggressively expanding incumbents; (ii) a slow-branch strategy—RBL could miss a step & fall behind; (iii) funding disruptions; and (iv) possible asset-quality flutters.

Should be worth that extra buck: There are no free rides, but ‘early stage’ private bank investing (growth, returns & franchise) has delivered strong stock gains: RBL should follow a similar trajectory. While it’s at a higher starting point (2.3x PBV), we believe it offers a unique opportunity given its strong momentum, management, strategy & the market. We initiate coverage with a Buy recommendation, R350 TP (valued at 2.75x PBV Mar-18E).

—Citi Bank

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