You can tap into a high-growth bank with RBL

Devangi Gandhi

RBL Bank, a Kolhapur-based private lender, plans to raise close to Rs 1,200 crore through public offering and institutional sale totalling about 10% stake to bolster its Tier I capital. The bank reported a turnaround over the past six years after a new management took over. The IPO offers an opportunity to invest in a high-growth, profitable bank with healthy asset quality albeit at a high valuation relative to some of the peers.

Business
RBL Bank has five segments — corporate & institutional banking (C&IB) and commercial banking (CB), development finance and financial inclusion (DF&FI) vertical, Agribusiness Banking (AB), and branch and business banking (BBB).

Over the last three years, the contribution of retail-oriented, DF&FI, AB and BBB segments, has collectively increased from 25% to 40%.

Financials
Between FY12 and FY16, the bank’s loan book, net interest income (NII), and net profit grew at a compounded annual rate of 40-50%. It was able to sustain the growth momentum in FY16 as well.

RBL bank’s CASA ratio has come down from 20.43% to 18.64% in the last two years. Both RoE and cost to income ratios are also inferior to peers, but the management says that the operating ratios will improve as the investment cycle has peaked in FY14.


(Note: ^ pre-issue net worth on diluted shareholding basis)

Valuation
Based on diluted equity after listing, the IPO is priced at 2.9 times FY16 book value per share.

While a strong operating performance in the past may be the rationale behind the relatively higher valuation, as it grows in size the expansion rate may come off. The management is confident to clock above-industry growth rate in the coming years. To be sure, the bank’s business model — with a substantial portion of small finance operations and sound management — does make it a good longterm buy.