Dear All,
Please see below my analysis on RBL Bank, would be glad to have your feedback.
Background:-
RBL bank was transformed from an age old private regional bank to professionally run, pan India fastest growing new age Bank under the leadership of Vishwavir Ahuja. Between FY10 until now under his leadership Bank grown almost 40 times and recently at CAGR of 35~40% the Bank is well poised to achieve its FY2020 vision of Advance growth of 30-35%, CASA ratio – 0.75-1% increase in every year, Other Income – 1/3rd of Total Income, Cost to Income ratio – 51~52% and Return ratio – 1.5% ROA.
Vision:- Banks vision is clearly articulated in terms of key metrics stated above. Additionally, all these are being done with strong focus on asset quality evident by both Gross and Net NPA being well within 1.3% and 0.7% respectively.
Moat:- Bank’s unique strategy being leverage technology such as Digital savings accounts, Fintech and partnership with leading consumer facing organization for credit cards such as Bajaj Finance, Book my show etc. It’s card business one of the fastest growing in the industry from 0.6m in Dec 2017 to 1.71m in Mar 2019 which contributes significantly towards fee income (45% of Fee Income) and ROA. Healthy conversion of cards spend into Consumer loans provides stability and stickiness to portfolio.
Bank is also able to leverage analytics to enhance cross sell and customer targeting. Bank enhances distribution through a combination of owned branches and Business correspondences which minimizes overall fixed cost and also adopts cluster based strategy for Branch expansion which helps in attracting customers, brand awareness at minimal incremental cost.
Profitability:- NII grew at ~40% YoY to 2539cr in FY 2019, NIM grown from 3.8% in FY18 to 4.1% in FY19 in spite of tight liquidity scenario in industry led by lower cost of funds at 6.8% and stable yields on Advances at 11.8%, Other Income grown at ~40% to 1442cr and 1/3rd of total revenue stand. Cost to Income ratio at ~ 51% and ROA at 1.3% and ROE 12.2%. Bank aim to achieve 1.5% on the bank of growth in fee income particularly card business.
Balance Sheet: - Advance and Deposit grew at ~35%, Advance mix is well diversified into Wholesale, Retail (LAP, Credit Cards etc.), Micro Banking and MSME business.FY19 growth in Deposit was led by 37% CASA deposits. Currently CASA stands at 25% of deposit Term Deposit is well diversified into borrowing streams .Loan portfolio too well diversified into category, sectors etc. The Bank is well capitalized to support growth though there has been Equity dilution.
Network/Distribution:-The Bank has growing distribution network into Metro, Urban and Rural and has strong presence in Maharashtra and Gujrat (Set up operation in GIFT city) and now looking into clustered based expansion into Easter and North Eastern states.
Shareholding is diversified even though promoter does not hold significant stake. This is one of the area of concern. Bank received many awards for the best private and small Bank.
Management quality: – MD and CEO Vishwavir Ahuja has rich experience as CEO of Bank of America for Indian subcontinent and spearheaded growth. All other management personnel are professionally qualified.
Risk management:– Bank has strong risk management practices led by analytics, CIBIL etc. which is evident by change in strategy to respond to external environment example :- currently, Bank adopts restrained approach to grow Micro banking and Agri business on the back of GST, Demonetization and election.
Risk Factors:– Partnership with Bajaj Finance for card business is one of the fragility given that it’s for 3-4 years and there’s a non-competing clause.
To support growth Bank resorts to Capital infusion due to which it never achieved high ROE (more than 11~12%) and ROA ( more than 1.3%) even though their recent focus is growing card business which’ll help ROE
Any changes in regulation for credit card fee by RBI could impact Bank significantly due to over reliance on credit card business
Valuation:– At per share price of 670/- Bank is trading at price to book of 3.7 for FY 19 but given the growth trajectory it’s justified to command premium. The only area of concern is it’s return ratio is tad lower from the likes of HDFC bank and Bajaj Finance of ( ROE of ~18%) but then these banks are traded at far more premium valuation as well.