RBL Bank (RBL) has shed its image of an old generation bank by reinventing itself under the current management and accelerated growth by making the requisite changes to its business model. However, valuations are expensive and return ratios are lower as investments take precedence. We initiate coverage with a Sell rating and TP of Rs 350. In an environment challenged by high impairment and slow growth, RBL has differentiated itself with solid revenue growth of ~60% CAGR led by ~60% CAGR loan growth since FY2011.
We see revenue growth at ~30% CAGR led by ~33% loan growth and 30% CAGR in earnings for FY2017-19E. The bank is building strong expertise in the mid-market space having avoided the pain in the corporate sector by judiciously selecting sectors that offer better risk adjusted returns.
The bank has a low impairment ratio with gross NPL at 1.1% (net NPLs at 0.5%). It has a growing share in commercial banking (19% of loans), business banking (18% of loans) and development banking (14% of loans).
Since FY2010, the board has made significant changes at the senior management level, bringing in a team of professionals from leading foreign and domestic private banks and giving them greater responsibility with an attractive retention programme. Today, less than 10% of the bank’s employees are under the IBA compensation platform.
The rising brand of the bank along with a stable team that is willing to adopt technology and build new kinds of partnerships to identify, acquire and retain clients makes it a key bank to watch out for among Indian banks.
Low return ratios primarily led by a high cost structure in the business imply that the bank would be reliant on capital infusion to fund growth. Infrastructure expansion would be critical to improve its liability profile and maintain growth, given its size and concentration in a few states.
Any negative surprise on impairment ratios or execution could have negative spiraling effect on raising capital, improving return ratios, growth as well as hiring talent. We initiate coverage with a Sell rating with a TP of Rs 350, downside of ~40%. We find valuations expensive at current levels leaving limited room for any mistake on execution.
We see medium-term RoEs at 15% levels and expect earnings growth to remain strong at 30% CAGR. At our TP, we value the bank at 2.5X book and 17X March 2019 EPS.