burning desires ipo outlook rbl bank

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Burning Desires IPO Outlook- RBL Bank

Burning Desires© SARKAR BHAVAN, PATEL VILLA, AHMEDABAD

Yogesh Vallabhbhai Gabani Chief Administrator- Burning Desires

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The issue comprised of fresh issue of equity shares by the bank aggregating up

to Rs 832.5 crore; and an offer for sale up to 1,69,09,628 equity shares,

including 38,79,070 shares by 48 shareholders like Elephant India Finance,

Capvent India Private Equity Fund, Gaja Trustee Company (on behalf of Gaja

Capital India Fund I) etc.

Other shareholders in offer for sale are Beacon India PE Fund (95, 05,558

shares) and GPE India (35, 25,000 equity shares).

Critical Aspect

The bank will not receive any proceeds from the offer for sale.

The objects of the fresh issue are to augment bank’s Tier-I capital base to meet

future capital requirements which are expected to arise out of growth in

assets, primarily loans/advances and investment portfolio, and to ensure

compliance with Basel III and other RBI guidelines. In addition, the bank

believes that the listing of equity shares will enhance visibility and brand name

among existing and potential customers.

Qualitative Aspects

The company changed its name to RBL Bank from Ratnakar Bank in 2014 as

part of a brand-building exercise that saw it spread its network from western

Maharashtra and northern Karnataka, to other parts of the country.

As of FY16, it has 197 interconnected branches (88 branches in Tier 1 centers

and 109 branches in Tier 2 to Tier 6 centers) and 362 interconnected ATMs

spread across 16 Indian states and union territories serving approximately 1.90

million clients.

Understanding

Banking

companies have

to maintain two

types of broad

category of

capital.

Tier-I and Tier-II

The intent of

this IPO is to

meet future

capital

requirement for

Tier-I Capital

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As part of growth strategy, the bank acquired certain Indian businesses of the

Royal Bank of Scotland (RBS), including RBS’s business banking, credit card and

mortgage portfolio businesses, in FY14.

It also recently acquired a minority stake in Swadhaar FinServe Private Limited,

a company acting as a business correspondent, facilitator, agent and distributor

for financial services providers for Rs 20.5 crore.

As per Burning

Desires, the

bottom line here

is not how many

branches and

ATMs that RBL is

having as of

now. Rather it

would be the

capital

expenditure

(CapEx) that it

could incur in

times to come,

because that

could hurt the

return numbers.

But CapEx

spending has got

power of

sentiments. So,

need not to fear

about Tier-I

capital spending

-- Yogesh V. Gabani

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Earnings

Profit in the year ended March 2016 increased 41.2 percent, net interest

income 47.2 percent, operating profit 50.6 percent and other income 21.6

percent compared to FY15.

Net interest margin remained stable at 3 percent in FY16 and FY15 each

against 2.7 percent in FY14 and 3.2 percent in FY13.

For banking,

make no

mistakes, Profit

margin is the

next criteria

after NIM- Net

Interest Margin.

Since RBI is in

mood to further

lower down the

interest rates

and guidelines

to improvise

interest rate

transmission is

lined up down

the line, the

numbers could

pick up in

quarters to

come.

-- Yogesh V. Gabani

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ASSET QUALITY

Asset quality deteriorated in the year ended March 2016 as net non-

performing assets (NPA) more than doubled to 0.59 percent compared to

FY15. Asset quality concerns were also seen across the banking sector

especially in the second half of FY16.

Why NPA is Critical?

As per Burning Desires, It’s a Bad Debt for any bank. Here, bank has to forget

about Interest income, but it won’t even get the money lent. Along with that it

has got direct impact to bottom line and thus it can change the investors’ opinion

and sentiments for particular bank in the market.

As mentioned

earlier also,

Burning Desires

has a lot to

explain as long

as NPAs are

concerned. Here,

NPA has

escalated as

compared to

previous year to

0.59%, But is not

a great concern

as its one of the

lowest of them

all.

-- Yogesh V. Gabani

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Wasim Shaikh, Editor-In-Charge at Burning Desires explains how the NPA

behavior is found in Public and Private sector bank. As per his analysis private

sector banks are having better asset quality and lower NPAs as compared to

public sector banks.

2011-12

2012-13

2013-14

2011-12

2012-13

2013-14

2011-12

2012-13

2013-14

Overall Public Sector

Banks Private Sector

Banks

Gross NPA Ratio(%) 2.79 3.26 3.85 2.98 3.59 4.33 1.96 1.86 1.82

Net NPA Ratio(%) 1.04 1.71 2.16 1.18 2 2.53 0.36 0.36 0.62

Net NPA / Net Worth (%) 13.04 16.39 21.19 17.54 22.39 29.21 2.7 2.97 3.78

0

5

10

15

20

25

30

35 V

alu

es i

n %

Public and Private Sector Banks Comparison (NPA)

As per Wasim

Shaikh, Editor-In-

Charge at Burning

Desires, private

sector banks are

having better

asset quality and

lower NPAs as

compared to

public sector

banks because of

Policy gaps in

terms of

Administration,

Formation and

Interference.

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The bank had provided for an amount of Rs 93.19 crore during the fiscal year

ended March 2016 towards provision for NPA, non-performing investments,

depreciation on investments, write-off and sacrifice for restructured advances.

One of the best

aspects is downward

pick up in

Provisioning

coverage ratio along

with Cost to Income

ratio, Which declined

to 55.87 percent in

FY16 from 68.28

percent in FY15.

As per committee

headed by Yogesh

V. Gabani, the cost

to income ratio

may increase in

times to come due

to CapEx in terms

of Branch

expansion and

reach. As in

banking sector

employee cost is

one of the major

cost head after

interest expense

-Vikas Jain, Moderator,

Burning Desires

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LOAN EXPOSURE

The bank’s exposure to real estate sector stood at Rs 2,248 crore at the end of March 2016, representing 7.08 percent of gross credit portfolio.

Its exposure to the industries exceeding 5 percent of the total gross credit exposure (as per Basel III disclosure) are infrastructure, traders, and food processing, construction, NBFC (MFI) and chemical products. Furthermore, it has substantial exposure to agriculture and MSMEs, the priority sectors. Gross priority sector advances aggregated Rs 6,862.22 crore as per prospectus data.

Its aggregate loans advanced to 20 single largest borrowers amounted to Rs

4,635.29 crore, representing 14 percent of total advances as of March 2016.

Credit exposure is

nothing but as per

burning desires, it’s

monetary outflow in

terms of loans to

various categories.

As the chart displays

the credit exposure

to Infrastructure and

real estate is highest.

As thee current

government supports

this two sectors, RBL

can leverage on the

same as previous and

upcoming budget will

also be in favor to

this.

-Yogesh V. Gabani

That’s how RBL is safeguarding its NPAs.

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ADVANCES

As of March 2016, 82.67 percent of net advances were secured by collateral,

including real estate assets, property, gold ornaments, plant, equipment,

inventory, receivables, current assets and pledges or charges on fixed assets,

bank deposits, NSC/KVP/insurance policy or financial assets such as

marketable securities and guarantees.

If we look at the

change in credit

exposure to various

sectors, the portfolio

is best modified. RBL

has reduced exposure

to uncertain and

highly dependent

sectors including

Aviation, Metal,

Rubber and Plastic,

Cement etc.

-Yogesh V. Gabani

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A 17.33 percent (or Rs 3,678.87 crore) of net advances were unsecured.

DEPOSITS

RBL’s total deposits at the end of FY16 stood at Rs 24,348.7 crore against Rs

17,099.3 crore in FY15.

Gross and Net

advances running

parallel due to

negligible NPAs.

RBL is having highest

amount as term

deposit under total

deposits year on

year, maintaining

liquidity by blocking

money movement at

a given point in time.

-Yogesh V. Gabani

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As on FY16, top 20 depositors constituted 22.88 percent of total deposits as

compared to 27.32 percent and 23.82 percent as of FY15 and FY14.

DIVIDEND & COMPETITORS

The bank paid dividend of 9 percent (90 paise) and 12 percent (Rs 1.2) per

equity share to shareholders for FY14 and FY15, respectively. It has also

paid an interim dividend of 15 percent (Rs 1.5) per share for FY16.

RBL said it did not expect to pay any final divided over and above the

interim dividend already paid as per prospectus data.

Capital adequacy

ratio is above both

RBI guidelines and

industry average. So,

not a concern for us

as long as investment

consideration goes..

As explained earlier

there has been a

decline in CASA-

Current account

saving account

because of

continuous increment

in term deposits.

As per Burning

Desires there are

certain strong

competitors like Yes

Bank, UCO Bank,

Kotak Mahindra,

IndusInd Bank and

Union and DCB.

Because, RBL is

having more

corporate exposure.

-Yogesh V. Gabani

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Comparison with listed industry peers (FY16)

Burning Desires Committee Recommendations- Sector Specific View

The Indian economy is now on the threshold of a major transformation, with

expectations of policy initiatives by the change in guard at the Centre and

Indian government has also came up with numerous initiatives to boost the

economy. Positive business sentiments, improved consumer confidence and

more controlled inflation should help boost the economic growth. With a new

and stable Government in place now, a clear revival in the investment climate

is sure to come because if Economy has to grow, strong banking industry

should be at place. Higher spending on infrastructure, speedy implementation

of projects and continuation of reforms will provide further impetus to growth.

A moderate recovery is likely to be seen in FY15 and the real GDP is expected

to grow by 5.3% - 5.5% after normalizing inflation rate. While the CPI inflation is

expected to remain an important challenge for India, it should witness a

downward trajectory during the major part of FY15.

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Technology Innovation and Technology Impartment

Life has become complex and in the era of competitive business, account holders and

B2B clients are demanding fast service at their time. Specifically for public sector

banks technology innovations are required to fulfill the client needs because customer

choices would change dramatically with technological innovations in upcoming years

to come, as a result of which lenders which still depend on savings deposits to attract

customers, could face oblivion in the next five years. Otherwise specifically in Semi-

Urban and Urban areas domestic private and public sector banks won’t be able to

compete with foreign banks because, with increasing volume and complexity of the

banking business, it will be imperative for the regulator to move gradually towards

more offsite monitoring than onsite. Technology will play a much larger role in the

overall supervision of the banking system. There are likely to be transformational

changes in the entire regulatory system for financial services.

On the other hand, the recent decision of the government to capitalize public sector

banks based on their efficiency could go a long way in ending the muscle power that

the state-run banks enjoy, if the government sticks to the strategy of selective

infusion of capital because the growth of weaker banks are still on the line. Weaker

banks' survival would be in question as their ability to raise capital from the market

would be limited because of mounting non-performing loans and NPAs are also

constituently rising as far as public sector banks are concerned.

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Current scenario of Banking Sector

We should not deny the fact that if economy has to grow, there should be a

strong presence of banking sector in the country. In India, Private sector banks

has been achieving superior performance as compared to PSU banks if we

compare them in terms of various significance indicators such as NAPs, Net

Interest Earning, Profit per employee and profitability growth. The total asset

of all scheduled commercial banks was nearly 4500000 crore rupees by

financial year ending March, 2014 but increasing trend in NPAs remains a big

challenge ahead particularly for PSU banks but it could impact the banking

sector as a whole as far as equity investment is concerned but still Future

earning potential in Indian banking sector is expected to remain high, may not

be in the current year.

IPO Recommendation:

As this is the first banking sector IPO after 6 years and after the YES Bank IPO,

Conservative and sector specific investors will get activated. One should subscribe

with minimum holding period of 4 Months and positional traders should avoid as due to

price sentiments overnight gains may not attained.

-Yogesh Vallabhbhai Gabani

Chief Administrator, Burning Desires

Currently, Public

sector bank is

holding 74% of total

banking sector

assets. So, immense

scope for private

sector banks to grow.

On top of that

budgetary liquidity,

transmission

measure and lower

inflation rate will

provide incentive to

banks in times to

come.

-Yogesh V. Gabani

burning desires ipo outlook rbl bank

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