RBL Bank: A unique model – on a fast lane

RBL Bank

Initiating Coverage | Sector: Financials - Banks

RBL Bank

Buy

BSE Sensex

27,253

S&P CNX

8,432

CMP: INR376

TP: INR450 (20%)

A unique model – on a fast lane

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

M.Cap. (INR b)

M.Cap. (USD b)

RBL IN

361.7

274/405

134.9

2.1



RoA improvement of 40bp, EPS CAGR of 40%+ over FY16-19E



Financial Snapshot (INR b)

2016 2017E 2018E

Y/E March

NII

8.2 12.5 16.3

5.4

9.0 12.2

2.9

4.5

6.5

NIM (%)

2.7

3.0

3.1

EPS (INR)

9.0 12.5 18.1

EPS Gr. (%)

27.6 38.4 45.1

BV/Sh. (INR)

92.0 114.4 129.0

RoE (%)

11.2 12.6 14.9

RoA (%)

0.9

1.0

1.2

P/E(X)

42.2 30.5 21.0

P/BV (X)

4.1

3.3

2.9

P/ABV (X)

4.2

3.3

3.0

Div. Yield (%)

0.4

0.5

0.8

Shareholding pattern (%)

Sep-16

Promoter

Public

Others

100



RBL has been in existence since past 73 years; the bank underwent the

transformation as new management took control in FY10. RBL has turned around

the corners in key operating parameters (loan CAGR of 62% over FY10-16,

earnings CAGR of 58% FY10-16, RoA of 0.9% v/s 0.2% in FY11 and Tier I of 12.5%).

RBL has adopted a unique business model whereby a) the bank has adopted a

linkages based approach to agricultural lending, b) has used large corporate

accounts as an entry strategy to gain access to their supply chain ecosystem, and

c) has strategically acquired business banking clients in the emerging sectors

(primary bankers to gain lion’s share of their wallet).

We strongly believe RBL has a potential to generate significant returns in the

next three years led by (1) pedigreed leadership team, which is driving high-

quality loan growth (CAGR of 37% over FY16-19E), (2) niche business model, (3)

improvement in core income, driving down cost-to-income (C/I) ratio by ~7%,

We expect robust EPS CAGR of 40%, with RoA improving by ~40bp and RoE by

670bp. Steady asset quality, structural change in balance sheet and Strong

improvement in profitability to continue to drive re-rating. We initiate with a Buy

and a TP of Rs450 (3x FY19 BV).

A Unique business model

RBL has created a niche for itself in the agri-lending space, whereby, it caters to

the entire supply chain in this segment (following a needs based approach –

tractor, irrigation loans, warehousing facilities). We believe the bank has

cracked the right business model in a difficult (yet rewarding) segment,

evidenced by agri NPAs of just 0.6% (as against banking system NPAs of >5%).

RBL is treating the acquisition of large corporate as the means to gain access to

their vendor base and high quality salaried accounts. Moreover, the bank

realizes the importance of early stage acquisition of high quality SMEs. This will

not only benefit them in terms of higher margins, but also enable the bank to

piggyback on the success and growth of these emerging corporates (increasing

business and fee income over the entire lifecycle)

A unique model – on a fast lane

RBL Bank

Well poised for accelerated, high-quality growth

Having initially focused on overhauling risk management architecture (toward

high quality) and identified its niche growth engines, RBL is now poised to

accelerate its loan growth (FY16-19E CAGR of ~37% compared to system

average of +12-13%). Given that the bank is well capitalized post its recent IPO

(CET1 of 12.5%), we expect RBL’s market share to double over next five years,

but will still remain less than 1%.

91 22 3982 5505

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Sohail Halai

10 November 2016

RBL Bank

Core income acceleration

and operating efficiency

should drive ROAs up by

40bp

Primed for operating leverage benefits

RBL’s business transformation has coincided with significant investments in human

capital (senior management), service offering (product suite), customer acquisition

(including inorganic portfolios), technology and brand building (branch expansion

and re-branding). All these capacity-building measures have reflected in C/I ratio,

which rocketed by ~16% during the investment phase (59% in FY16). With significant

capacity already in place, RBL is now primed to sweat its investments and benefit

from improving operating efficiencies. Led by sharp improvement in core income

growth, we expect C/I ratio of ~51% by FY19, as against 59% currently.

Sharp improvement in return ratios;

EPS

CAGR of ~40%

We expect core income (as % of assets) to improve ~90bp over next three years, led

by a) margin improvement of +60bp and b) rising share of fee income. While ageing

of branches will drive operating efficiency, continued expansion will keep cost to

assets at ~2.5%. We expect asset quality to remain stable; however, on a prudent

basis, we factor in a 10bp rise in credit cost to 0.55%. Overall higher share of core

income should drive RoA improvement of ~40bp to 1.3%, and strong growth (in turn

higher leverage) is likely to push RoE higher by 670bp to 18%. Considering the strong

growth and investment phase, current capitalization may not be sufficient for more

than two years. Thus, another round of capital infusion is possible in FY19, which,

however, is not factored in our estimates. Overall, we expect EPS CAGR of ~40%

over next three years, highest for our coverage universe.

Governance transformation led by pedigreed management team

With the hiring of a pedigreed leadership team in 2010, RBL undertook a massive

makeover exercise, encompassing: (a) governance transformation (a highly

independent and professional Board), (b) revamped risk management framework

and (c) a new “fresh start” brand identity. Top management is adequately

incentivized with outstanding ESOPs at 9.4% of the capital base, and ~67% of its

employees are covered under the ESOP plan.

Initiate with Buy; valuing the bank at 3x FY19E BV

We value RBL based on the residual income (RI) model and build in 40%+ EPS CAGR

over FY16-19. We factor in average 18% growth in the explicit period (FY19-36) and

terminal growth rate of 5%. We also factor in cost of equity of 13.6%, with RF of

7.25%, beta of 1.3x and risk premium of 5.0%. At our target price of INR450, the

stock would trade at 3x of FY19E BV of INR149 and 18x of FY19E EPS. We believe

RBL deserves significant premium compared to peers, considering its industry

leading growth rate, improvement in profitability and pristine asset quality.

Key risks

a) Relatively unseasoned loan book.

b) Heightened dependence on wholesale deposits during high-growth phase.

10 November 2016

RBL Bank

Story in charts

Exhibit 1:

Loan book to grow at 34% CAGR until FY21

Loans (INR b)

932

Exhibit 2:

Deposits to keep pace with loan growth

Deposits (INR b)

717

551

1,102

842

638

64 98

8 12 19 41

144

212

303

408

116 171

47 83

9 11 13 16 20

243

337

464

denotes phase-1 CAGR

Source: MOSL, Company

denotes phase-2 CAGR

denotes phase-3 CAGR

denotes phase-1 CAGR

Source: MOSL, Company

denotes phase-2 CAGR

denotes phase-3 CAGR

Exhibit 3:

Book value CAGR of 18% over FY10-16

BV/Sh (INR)

129

149

209

175

Exhibit 4:

EPS growth has picked up since FY14

EPS (INR)

42.0

32.1

23 19 28 31 33

50 53

74 76

114

-5

denotes phase-1 CAGR

Source: MOSL, Company

denotes phase-2 CAGR

denotes phase-3 CAGR

denotes phase-1 CAGR

Source: MOSL, Company

denotes phase-2 CAGR

denotes phase-3 CAGR

Exhibit 5:

Loan book mix (%) – FY16

Development

banking &

Financial

Inclusion

Exhibit 6:

Deposit mix (%) – FY16

Current

Corporate and

Institutional

Banking

Term

Savings

Agri

Banking

Branch and

Business

Banking

Commercial

Banking

Source: MOSL, Company

10 November 2016

RBL Bank

Story in charts

Exhibit 7:

GNPAs at less than 1% in last five years

10.3

7.6

6.8

Gross NPA (%)

1.9

6.0

2.1 2.3

0.7

1.6

1.1 0.8

1.0 1.1 1.4

0.4 0.8 0.8

1.1 1.1

1.4

0.8

0.4

1.0 1.0 1.0

1.0

1.2 1.3

Exhibit 8:

Average slippage ratio ~1% in last five years

Slippage Ratio (%)

0.5

Source: MOSL, Company

Exhibit 9:

Provisioning coverage expected to rise

PCR (%)

75 73

65 67

Exhibit 10:

Operating efficiencies to drive C/I lower

Cost to Income (%)

47 42

55 58

62 59

54 53 51 51 50

Source: MOSL, Company

Exhibit 11:

Fees to assets at lower end of private banks

Non-fun based as a % of total exposure

Fee Income as a % of assets

1.2

0.7

1.4

1.0

1.5

1.3

Exhibit 12:

Core income and strong growth to drive ROEs

RoA (%)

RoE (%)

Source: MOSL, Company

10 November 2016

RBL Bank

Story in charts

Exhibit 13: Low stress sector exposure for RBL in comparison

to other banks indicative of selective lending

Funded Stressed exposures as a multiple of networth

1.96

1.40

1.36

1.29

Exhibit 14:

High CA:SA – focus on transaction accounts; to

leverage relationships for savings account

420

320

ICICIB

YES

HDFCB

KMB

AXSB

1.11

220

0.90

0.60

120

100

150

RBL

IIB

200

250

CA/Branch (INRm)

Stressed sectors include Iron & Steel, Construction, Textiles, Cement

and Infrastructure (including Power)

Source: MOSL, Company **

Size of the bubble denotes the ratio of CA balances to SA balances

Source: MOSL, Company

Exhibit 15:

Low cash intensity among RBL’s clients – function

of initial phase of strong growth

5,507

Exhibit 16:

Average inward NEFT ticket size highest for RBL

among peers – impact of e-commerce firms?

278

4,292

112 118

134

155 157

2,941

2,441

3,104

3,115

ICICIB

HDFCB

KMB

AXSB

RBL

IIB

Data pertains to the period April’16 to July’16

Source: MOSL, RBI

Exhibit 17:

Fee income to assets directly proportional to

non-funded exposure; RBL favorably placed

2.5

IIB

2.0

1.5

1.0

0.5

Non funded/total exposure (%)

Size of the bubble denotes FY16 net worth

Source: MOSL, Company

HDFCB

DCB

AXSB

YES

Exhibit 18:

With 40%+ expected EPS

attractively valued at 2.5x FY19E BV

3.8

3.1

2.3

AXSB

HDFCB

IIB

CAGR,

RBL

YES

DCB

25%

FY16-19E EPS CAGR

35%

RBL

ICICIB

1.6

0.8

ICICIB

15%

45%

Size of the bubble denotes market capitalization

Source: MOSL, Company

**:

(1) Data obtained from latest quarterly disclosures (2) In cases where iron & steel figure not given, exposure assumed to be 75% of total metal exposure

10 November 2016

RBL Bank

Pedigreed leadership; pristine governance

Governance transformation precursor to business transformation



With the hiring of a pedigreed leadership team in 2010, RBL undertook a massive

makeover exercise, encompassing: (a) governance transformation (a highly

independent and professional board), (b) revamped risk management framework and

Top management is adequately incentivized with outstanding ESOPs at 9.4% of the

capital base, and ~67% of its employees are covered under the ESOP plan.

After suffering from a decade-long phase of muted loan growth, a cooperative

banking mindset, directed lending and erratic asset quality performance, RBL (in its

earlier avatar as Ratnakar Bank Limited) embarked on a massive transformation

exercise in 2010. Central to this governance transformation exercise was the

induction of a professional and independent Board of Directors.

Anatomy of governance transformation at RBL

Source: Company, MOSL

This was followed by other integral elements that were gradually put in place by

FY12, including the induction of a pedigreed leadership team, strengthening of risk

(regulatory) capital, and a complete overhaul of the risk management framework.

10 November 2016

RBL Bank

Governance transformation at play – key elements



Revised risk

management

architecture



Experienced middle

management

Human

Capital

Regulatory

Capital



Strengthened

risk capital



Marquee

investors



High-growth

engines



Uncontested

niche "blue

oceans"

Business

Focus

Source: Company, MOSL

Pedigreed leadership team

Aggressive hiring of quality

talent at senior/middle

management levels

Since 2010, when it embarked on the transformation exercise, RBL has strengthened

its leadership team with the induction of experienced and like-minded individuals

across key roles. Most of RBL’s senior leaders (Exhibit 19) have prior experience with

new generation private banks and foreign banks and share an alma mater.

Challenges and flexibility of building a new bank and strong incentive structure have

been the key reasons for getting the strong talent pool, in our view. Over past few

years, we have seen very low attrition at the senior management level.

10 November 2016

RBL Bank

Exhibit 19:

Pedigreed leadership team driving turnaround at RBL

Name

Mr. Vishwavir Ahuja,

Mr. Rajeev Ahuja*,

Mr. Brijesh Mehra,

Mr. Andrew Gracias,

Mr. Sandeep

Thapliyal**, 46

Current role

Managing Director & CEO

Additional Director- Executive &

Head- Strategy, Retail,

Transaction Banking

and Financial Inclusion

Head - Corporate and

Institutional Banking and

Transaction Banking

Head - Financial Markets

Appointment Pedigree/

at RBL

Prior positions

Qualification

PGDM (IIM-A)



MD and Country Executive Officer

June 2010

of Bank of America for the Indian



sub-continent

June 2010



Citibank India, Bank of America,

India



PGDM (IIM-A)



Royal Bank of Scotland N.V. and

June 2016

June 2012

Grindlays Bank Public Limited

Company



PGDM (IIM-A)



B.COM (Mumbai

University), C.A.



Bank of America and UBS



Citibank’s commercial banking

division, MD of investment

banking in Religare Capital

Market Limited

Head - Commercial Banking

April 2013



PGDM (MDI Gurgaon)



B.Tech (Civil Engineering),

Mr. Manoj Rawat, 46 Head - Agri Business

July 2012



NABARD, Fullerton India

MEng., degree in business

administration



B.COM (Mumbai

Mr. Naresh Karia, 41

Chief Financial Officer

November

2010



BFSI Director in Citigroup,

International Bestfoods Limited

Mr. R. Gurumurthy,

Ms. Shanta Vallury,

Mr. Bhavtaran Singh

Uberai, 58

Head - Risk & Governance

Head - Human resources,

Chief of Staff and Head- Change

Management and Service

Delivery

July 2011

September

2010

June 2014



Standard Chartered Bank, Bank of

America, Credit Lyonnais and SBI



VP (Acquisitions and

Partnerships) at American Express

Bank Limited



University), associate

member of the ICAI and

the ICSI

B.COM (Delhi University),

certified associate of the

Indian Institute of Bankers

M.A (Economics) (Mumbai

University), MMM from

JBIMS

Delhi, CA



ABN Amro Bank and Arete

Financial Partners, Singapore



B.COM from SRCC, New

*Nominated for Additional Director; ** Resigned from RBL to join Avendus Capital just prior to the IPO

Source: Company, MOSL Research

Exhibit 20: Changing profile of employees at RBL – contributing to elevated cost structure

Only ~15% of employees

are linked to IBA structure

now

Officers

100%

75%

50%

25%

34%

36%

40%

35%

52%

71%

82%

89%

92%

Clerks

Sub-Staff

Source: RBI, MOSL

10 November 2016

RBL Bank

Lucrative ESOP scheme

offered by RBL to attract

pedigreed leadership

We believe that the incentive package offered to RBL’s leadership is

comparable/better than other new-generation private sector banks. Also, the bank

was able to hire a high-quality senior leadership team due to its attractive ESOP

incentive scheme relative to peers. More than two-thirds of the employee force is

linked to the ESOP scheme. The bank has outstanding ESOPs (~9% of equity base),

which are yet to be vested.

Exhibit 21: RBL's ESOP scheme (mn)

FY14

No. of Options as at beginning of Fiscal

Options granted

Total options vested (includes options exercised)

Options exercised

Total number of Equity Shares arising as a result of full

exercise of options already granted

Options forfeited/ lapsed/ cancelled

Money realised by exercise of options (INR)

Options outstanding (in force)

15.4

10.5

5.8

3.6

1.0

159

21.4

FY15

21.4

18.1

6.5

11.3

2.1

524

26.1

FY16

26.1

16.4

10.0

6.3

2.5

375

33.8

Apr 1 to Aug 20,

2016

33.8

9.6

5.6

8.1

1.3

678

34.0

Source: MOSL, Company

Exhibit 22:

ESOPs as % of total shares

Esops o/s (m)

Total sh o/s (m)

Esops as a % of total shares

1719

4.43

DCB

284

3.06

HDFCB

129

2528

5.09

ICICIB

223

5815

3.84

AXSB

2383

1.49

YES

421

4.60

IIB

595

2.66

RBL

362

9.14

Source: MOSL, Company

We believe a close-knit, like-minded senior leadership team is crucial to RBL’s long-

term growth prospects, especially at the “early growth” stage, when the bank is in

the process of building the foundations and architecture for sustainable, high-

quality growth.

Separation of RM function

and prudent lending

strategy key to RBL’s

success

Revamped risk management framework

RBL’s risk management function has undergone significant changes since FY11. RBL

has made significant investments in technology, processes and human capital during

the revamp (evident from high C/I ratio during FY11-16). However, we believe that

these investments have created long-term value for RBL in terms of its governance

structure, which has a direct positive impact on asset quality and thus shareholder

value. The revamped risk management architecture includes the following key

elements:

10 November 2016

RBL Bank

Key elements of risk management architecture

Source: Company, MOSL

Changes in risk management practices reflected in pristine asset quality

At a time when most other corporate-focused banks are hemorrhaging from

stressed loan accretion, RBL has achieved an impressive combination of exponential

growth and balance sheet strength. Delinquencies (as % of gross loans) have

reduced drastically, lending credit to RBL’s risk management framework.

10 November 2016

RBL Bank

Exhibit 23: GNPLs have reduced drastically post FY10

Despite exponential growth

in loans (60%+) over past

five years, RBL has

consistently maintained

healthy asset quality (GNPA

<1% of gross loans)

10.31

7.59

6.81

6.01

2.12

2.33

Gross NPA (%)

1.12

0.80

0.40

0.79

0.77

0.98

1.10

Source: Company, MOSL

Exhibit 24:

FY14-16 average slippage ratio (%)

Average slippage ratio for

RBL is one of the lowest in

the system

1.42

0.92

0.96

1.69

1.71

2.80

2.27

1.92

YES

RBL

IIB

HDFCB

AXSB

DCB

ICICIB

Source: Company, MOSL

Pristine asset quality can be

attributed to its prudent

client acquisition strategy

and selective lending

In our view, RBL has managed to maintain its asset quality in the current uncertain

environment due to its a) selective lending, b) avoiding lending to high stress sectors

like iron & steel and infrastructure, c) focus on working capital and short-term loans,

d) early warning systems and periodic review, e) rigorous monitoring, f) assessment

of risk at customer, product, enterprise, geography and inter-bank levels and g)

separate risk management teams for each product and business segment.

Segregation of wholesale and retail segments:

RBL has put in place separate

credit origination, appraisal and monitoring processes for its corporate (wholesale)

and retail segments.



Wholesale:

RBL’s underwriting standards for various client segments are based

on internal risk ratings, security structure and other risk parameters. The bank

has set up an internal credit rating system, based on a two-dimensional

framework around borrower and facility ratings. RBL insists on a mandatory

external rating for all facilities above INR50m.



Retail:

The retail segment relies on standardized product programs for credit

risk assessment and approvals. Due to the granularity of exposures, consumer

finance credit risk is managed on a portfolio basis across various products and

customer segments. This is similar to the risk management practice adopted by

other blue-chip retail lenders like HDFC Bank.

10 November 2016

RBL Bank

On the highway to accelerated earnings growth

Market share of just 30bp – to increase to 50bp by FY19



Loan book composition

(FY16, %)

DB&FI, 15

C&IB,

Having initially focused on overhauling risk management architecture (toward high

quality) and identifying its niche growth engines, RBL is now poised to accelerate its

loan growth.

We expect RBL’s loan market share to increase from 28bp to 50bp over next three

years, with loan CAGR of ~35%+ compared to system average of +12-13%.

We expect Branch and Business Banking (BBB), Development Banking & Financial

Inclusion (DB&FI) and Agri Banking (AB) to be the key drivers of growth. Their share in

overall business now stands at ~40%.

AB, 8

RBL’s business segments comprise of:

Corporate and Institutional Banking (C&IB),

Commercial Banking (CB), Branch Business Banking (BBB), Agribusiness Banking and

Development Banking & Financial Inclusion. The bank acquired Royal Bank of

Scotland’s (RBS) business banking, credit cards businesses and mortgage portfolio in

India in FY14. The share of corporate lending (including commercial banking) in

overall book stands at ~60%.

BBB,

CB, 21

Diversified and differentiated positioning

Early-stage acquisition of

high-growth businesses

RBL has adopted a differentiated approach of building a diversified loan book using

a sensible positioning strategy. RBL’s corporate (including commercial banking)

lending (60% of the loan book) segmentation strategy is similar to other banks

(segmented on turnover). However, in case of other segments, the bank has

adopted different business models based on tie-ups and partnerships.

Given that large corporate lending is subject to intense competition and thin

spreads, we believe growth in this segment for RBL should gradually decelerate. In

case of SME/MSME business, growth rates may be modest in the near term,

considering recent asset quality hiccups faced by the bank in the segment.

10 November 2016

RBL Bank

Exhibit 25:

Client segmentation strategy

Companies with annual turnover

>INR15b/gross block > INR7.5b

Companies with annual turnover

between INR2.5b-15b

Companies with annual turnover

between INR350m-2.5b

Companies with annual

turnover < INR350m

Mid-sized

corporates

C&IB

SMEs

BBB

Source: Company, MOSL

Building blocks for growth;

Focus on becoming the

banker of choice to early-

stage emerging businesses

We believe that RBL has the requisite capabilities to manage a portfolio of early-

growth mid-sized corporates (start-ups), especially in emerging high-growth

businesses (e-commerce, logistics, etc.). RBL should benefit not only in terms of

better pricing power but also in terms of its wallet share as some of these small

businesses mature over the medium term.

While most banks consider the agriculture segment as an obligation (PSL targets),

RBL has a differentiated approach to create sustainable profit pools in this segment.

We believe RBL’s differentiated agri-business model – built around identifying gaps

in supply chain linkages – is a genuine competitive moat. By FY21, we believe RBL

will build a sizeable market share in its targeted segments.

Focus on agri banking

opportunities

10 November 2016

RBL Bank

Corporate and Institutional Banking

Loan book composition

(FY16, %)

DB&FI,

AB, 8

Penetrating large corporates to boost fees and transaction floats

C&IB business, accounting for ~39% of loan book, has been one of the key growth

drivers for RBL. While spreads in this business are thin (due to strong competitive

intensity), RBL treats the acquisition of such large corporate accounts as a means

to: a) generate retail (employees of large corporates) and SME (vendors and

contractors) leads, b) focus on asset light fees and c) transaction float, which is

driving CA growth. As other businesses gain traction, we expect the share of C&IB

business in overall loans to decline gradually.

The C&IB segment targets large companies, which are defined either on the basis of

annual turnover (> INR15b) or gross block (>INR7.5b). The business is carried out

from eight major commercial hubs in India: Mumbai, Delhi, Chennai, Bengaluru,

Kolkata, Ahmedabad, Pune and Hyderabad. RBL has carved out a few specialized

sub-segments within C&IB:



Financial Institutions & Government Undertakings Group (FIGU):

This

segment deals with public sector undertakings, government boards and

departments, and financial institutions.



Corporate Finance:

This division handles advisory for capital raising and M&A.

C&IB loans grew at a CAGR of 44% over FY13-16 and accounted for 39% of the loan

book as at March 31, 2016. Given that RBL has very little pricing power in such

accounts, we expect the contribution from this business to gradually reduce over

next 2-3 years.

Exhibit 26:

C&IB loan book - ~40% of overall loans

C&IB,

BBB,

CB, 21

C&IB segment has

witnessed strong 44% CAGR

over FY13-16

AUM (INRb)

Y-o-Y growth

56%

46%

30%

FY13

FY14

FY15

FY16

Source: Company, MOSL

Penetrating large business

accounts and tapping their

ecosystem to generate

retail and SME leads

As majority of the public sector banks (PSBs) continue to be distracted by their own

credit challenges, RBL (like other private sector banks) has made inroads into the

highly rated large corporate accounts. It is also interesting to note that RBL treats

the acquisition of such large corporate accounts as a mean to generate retail

(employees of large corporates) and SME (vendors and contractors) leads. We

believe this is symptomatic of how any sensible, mid-sized bank needs to operate –

such banks tend to have limited bargaining power with large corporates, and hence

10 November 2016

RBL Bank

it is important to leverage such relationships and gain a foothold in other

commercially viable segments.

Client acquisition strategy

skewed toward

transactional businesses;

high stress sectors avoided

RBL has positioned itself as a working capital-oriented bank focused on transactional

businesses for its C&IB clients. It has been selective in lending to large corporates

and is strongly focused on the quality of business originated from such clients. The

bank has avoided exposure to stressed sectors (as defined by the RBI in its most

recent Financial Stability Report), such as iron & steel and infrastructure, and does

not offer long-term project finance.

Exhibit 27:

Exposure to stressed sectors (multiple of FY16 networth)

1.96

1.40

Selective lending reflected

in RBL’s low exposure to

stressed sectors relative to

peers

1.36

1.29

1.11

0.90

0.60

Stressed sectors: Iron & Steel, Construction, Textiles, Cement and Infrastructure (including Power)

Source: Company, MOSL

Transaction accounts and

large non-funded exposure

leading to high fee income

to assets proportion

RBL has a rising mix of non-funded exposure (~19% of total exposure to C&IB

segment), with resultant implications on fee income. Given its small balance sheet

size, we believe non-funded exposure is a transient entry strategy into large

corporate accounts.

Exhibit 28:

Rising mix of non-funded exposure

Non-fun based as a % of total exposure

Fee Income as a % of assets

1.5

1.2

0.7

FY10

0.7

FY11

FY12

1.4

1.0

1.3

FY13

FY14

FY15

FY16

Source: MOSL, Company

Long-term growth levers in

place

Given its (a) focus on quality revenue stream (fee income), (b) selective client

acquisition strategy and (c) clean balance sheet (pristine asset quality), we believe

RBL is well positioned to extract market share gains over next five years.

10 November 2016

RBL Bank

Commercial Banking (CB)

Loan book composition

(FY16, %)

DB&FI, 15

C&IB,

Focus to become primary banker early in life cycle of the customer

Commercial Banking (CB) business focuses on the emerging and fast-growing

companies, SMEs and MSMEs. Due to a limited lender base, competitive intensity

is relatively less (implying better pricing power), which provides RBL an

opportunity to become a primary banker in such accounts. Lending to

SMEs/MSMEs is one the oldest businesses of the bank. RBL’s focus is on getting

transition banking business, generating leads in the supply chain and boosting CA

floats.

The CB segment operates just below the C&IB funnel in the customer pyramid and

caters to SMEs (companies with annual revenue between INR350m and INR2.5b)

and mid-sized companies (annual revenue between INR2.5b and INR15b). The CB

portfolio grew at a 31% CAGR between FY13 and FY16, accounting for 21% of the

bank’s loan book as at March 31, 2016.

Exhibit 29:

Commercial banking AUM

AUM (INRb)

Y-o-Y growth

AB, 8

BBB,

CB, 21

35%

28%

31%

FY13

FY14

FY15

FY16

Source: Company, MOSL

Focus on emerging and fast-

growing companies, SMEs

and MSMEs can offer an

early-mover advantage

The CB clientele primarily comprises a) emerging and fast-growing companies from

relatively “new-economy” industry segments such as logistics, e-commerce,

consumer services and organized retail and b) SMEs and MSMEs. Although such

corporates are small in size, they predominantly operate in high-growth segments

and thus offer strong growth potential for bankers. We believe RBL can get an early-

mover advantage in such niche blue oceans.

Given that such accounts are relatively small as of now (although important from

RBL’s size perspective), they offer an opportunity to RBL to position itself as the

primary banker in such accounts. It also provides strong pricing power to the bank.

Further exposures are largely collateral based, which provides comfort on asset

quality. RBL targets a toehold in the supply chain (ecosystem), non-fund business

and transactions (payments and collections) business, largely looking for current

account business.

Targeting entire supply

chain, non-fund business

and generating CA floats

10 November 2016

RBL Bank

Branch and Business Banking (BBB)

Making inroads with both organic and inorganic strategies

Loan book composition

(FY16, %)

CB,

BBB,

AB, 8

Branch and Business Banking (BBB) focuses on SMEs, MSMEs and retail business of

the bank. The acquisition of the RBS portfolio provided the bank with access to a

strong customer base and helped expedite growth in the credit card, mortgage

and business banking segments. On the liability side, this segment focuses on

niche areas like trusts, societies, clubs, NRIs and HNIs. This business accounts for

17% of loan book, and is expected to be the biggest growth driver for the bank in

coming years.

The Branch and Business Banking (BBB) segment, established in 2015, combines

RBL’s erstwhile retail branch banking business and business banking segments. BBB

caters to individual and business accounts via both traditional branches and digital

channels. The BBB portfolio grew at a 74% CAGR over FY13–16 to INR36b (17% of

loan book) as at March 31, 2016.

RBL’s business accounts focus on SME and MSME clients with high-volume

transaction banking requirements (in turn working capital) and contribute

significantly to its relatively strong current account franchise. In urban locations, RBL

is focused on credit cards, small enterprise loans and personal loans to salaried

individuals. RBL also originates home loans for HDFC, India’s largest housing finance

company.

Exhibit 30:

BBB loan book

AUM (INRb)

Y-o-Y growth

137%

45%

FY14

FY15

54%

FY16

Source: MOSL, Company

C&IB,

DB&F

I, 15

FY13

RBS portfolio acquisition

helped expedite growth in

credit card, mortgage and

business banking

RBL is also actively looking for opportunities to acquire portfolios that complement

its existing customer profile. The BBB franchise has benefited from the bank’s

acquisition of RBS’ India-specific business banking, credit cards and mortgage

portfolios in FY14. The acquisition enabled RBL to expand its

operations/geographical presence, launch new products (credit cards) and add an

attractive customer segment to its existing service proposition. Most importantly,

the acquisition helped to inherit a highly experienced team of RBS employees with

domain expertise in business banking, which has considerably reduced RBL’s time-

to-market in this segment. The portfolio acquisition from RBS added assets of INR3b

and liabilities of INR11b (largely CASA) to the bank’s balance sheet.

10 November 2016

RBL Bank

Exhibit 31:

Focus on high-quality credit card customers – partially helped by RBS portfolio

FY16 Average Credit card Spend - POS

4,292

5,507

2,941

2,441

3,104

3,115

ICICIB

HDFCB

KMB

AXSB

RBL

IIB

Source: MOSL, RBI

CA balances driven by

strong SME and MSME

business

RBL’s liability franchise is also unique, in terms of a higher CA ratio (compared to the

SA ratio), which implies a higher proportion of balances that earn zero interest. We

believe this is indicative of a significant catchment of frequently transacting clients

(traders and businesses), as well as unique client segments such as hospitals,

educational institutions, cooperative banks, embassies and trusts. Also, this is a

result of early part of the lifecycle of any private bank.

Exhibit 32:

Highest proportion of zero-cost liabilities (CA deposits) - SME/MSME clients

420

320

220

120

100

120

140

160

180

CA/Branch (INRm)

200

220

240

ICICIB

YES

IIB

KMB

HDFCB

AXSB

RBL

Size of the bubble represents the proportion of CA deposits to SA deposits

Source: Company, MOSL

RBL’s SA is significantly ahead of where IIB and YES were at a similar stage of

maturity. Higher savings rates and a focus on bulk SA from trusts, clubs, societies,

HNIs and NRIs are leading to high SA per branch. As cross selling and penetration

increases, we expect granularity of SA to go up. In Exhibit 36, we compare RBL’s

liability franchise with those of IIB and YES when they were at 200 branches.

Exhibit 33:

Comparison of liability franchise @200 branches - RBL has a better SA franchise

Milestone comparison

CA/branch

SA/branch

IIB (FY09)

164

YES (FY11)

216

RBL (FY16)

146

Source: Company, MOSL

Various strategies at play to

acquire retail customer

base

Post a steep learning curve between FY12 and FY14, RBL has consciously segmented

its retail customers for specific products. Key drivers to this client acquisition

strategy are growing presence in strategic economic centers (NH4 and NH8),

increasing use of technology, introduction of multiple new products and greater

cross-sell.

10 November 2016

RBL Bank

Development Banking and Financial Inclusion (DB&FI)

1/6

of loan book – growing at a rapid pace

Loan book composition

(FY16, %)

BBB,

AB, 8

DB&

FI, 15

CB,

C&IB,

Apart from direct rural lending, RBL lends to financial intermediaries such as MFIs,

HFCs involved in affordable housing finance and NBFCs engaged in lending to

MSMEs. It has entered into partnerships with business correspondents (BCs),

acquired stakes in MFIs/SFBs and tied up with brands like BookMyShow, Yum food

chain and e-commerce companies to grow this business. Such partnerships /tie-

ups help the bank to extend its reach beyond a traditional branch network. Apart

from high-yielding loans, the focus under this segment is on cross-sell (payment

products) and savings deposits.

RBL has extended its reach in the unbanked and under-banked areas via business

correspondents and digital channels. While distribution is handled by business

correspondents, technology infrastructure, risk management and governance are

handled by the bank. This has enabled RBL to operate a profitable business model

and keep costs under check.

Under this segment, RBL has adopted a multi-product strategy, whereby it cross-

sells remittances, savings deposits and insurance products in addition to loan

products. As of March 31, 2016, the bank had nearly 1.3m DB&FI customers.

Exhibit 34:

DB&FI loan book

Portfolio CAGR of 63%;

accounts for 15% of loan

book

AUM (INRb)

Y-o-Y growth

82%

58%

51%

FY16

Source: Company, MOSL

FY13

FY14

FY15

In our view, RBL has built a differentiated business proposition for low-income

consumers. While most MFIs and banks are primarily ‘lenders’ in this space, RBL is

creating long-term sustainable relationships with its clients. Its recent partnerships

in this business show its commitment toward the same.



RBL acquired a 30% stake in Swadhaar Finserve Private Limited (SFPL) for a

consideration of INR205m. SFPL is a business correspondent that targets under-

served segments of businesses, households and enterprises.



Recently, it acquired a 10% stake in Utkarsh Micro Finance Private Limited

(UMFI), a microfinance institution (MFI) with a small finance bank (SFB) license.

UMFI has an outstanding group lending (GL) portfolio of INR15b and other loans

(micro enterprises and housing loans) of INR1b.

10 November 2016

RBL Bank

Loan book composition

(FY16, %)

BBB,

CB,

Agribusiness Banking (AB)

Focus on building gaps in agriculture supply chain

AB,

DB&

FI, 15

C&IB,

Agribusiness banking focuses on the entire agriculture supply chain. Its strategy is

aimed at improving the income potential at each stage and minimizing the

probability of default across the value chain. With various checks in place, RBL

ensures that the loan amount does not surpass the borrower’s repayment and

servicing capacity. The focus on AB and D&IB business has helped the bank to

meet/surpass PSL targets easily and profitably.

In a classic “obligation v/s opportunity” scenario, while other banks are focused on

agri-lending to meet their regulatory obligations (priority sector lending targets),

RBL’s entry strategy is built around funding the gaps in the agricultural supply chain.

Its strategy is aimed at improving the income potential at each stage, minimizing the

probability of default across the value chain. RBL also provides farmers with

warehousing facilities for crops to help them maximize the value of their harvest

during the off season.

RBL’s unique linkages-based approach, deep understanding of the agriculture value

chain and prudent lending norms give it a competitive advantage. AB portfolio CAGR

was 102% between FY13 and FY16, and stood at INR18b (8% of loans) as of FY16.

Exhibit 35:

AB loan book

AUM (INRb)

195%

Y-o-Y growth

114%

31%

FY14

FY15

FY16

Source: Company, MOSL

Differentiated entry

strategy – focus on building

gaps in agri supply chain

FY13

Responsible lending –

Agriculture NPA at just

64bp

RBL considers three key parameters before lending to an agricultural borrower –

CIBIL, High Mark and 7/12. It limits its exposure to 50% of the farmer’s annual

income (taking into account productivity, average selling prices and harvesting

season). With these checks in place, RBL ensures that the loan amount does not

surpass the borrower’s repayment and servicing capacity. RBL’s agri-NPA of just

0.6% is the best in the system.

The average agricultural borrower usually exhibits low price elasticity, and hence,

does not often shop for lower interest rates. The proof of the pudding is evident in

the fact that the average stickiness of a bank’s agricultural customer is about 7

years. This is consistent with our understanding that the bank has managed to

identify the gaps in this segment.

Low price elasticity, high

stickiness of agricultural

borrower

10 November 2016

RBL Bank

Poised for operating leverage benefits

“Capacity building” phase behind; scale economies to kick in



RBL’s business transformation has coincided with significant investments in human

capital (senior management), service offering (product suite), customer acquisition

(including inorganic portfolios), technology and brand building (branch expansion and

re-branding). Cost CAGR over FY11-16 stood at ~50%.

All these capacity-building measures have reflected in C/I ratio, which rocketed by

~17% during the investment phase (59% in FY16).

With significant capacity already in place, RBL is now primed to sweat its investments

and benefit from operating leverage levers. We expect C/I ratio to average ~51% by

FY19.

Apart from business transformation, RBL had to invest aggressively in brand

building, attracting talent from large banks and branch expansion. Earlier, RBL was

predominately a regional bank (largely in Maharashtra and Karnataka); however, its

new management is focusing on making RBL a pan-India bank (initial focus is on NH4

and NH8, i.e., Mumbai-Delhi and Mumbai-Chennai corridor). Now, less than 15% of

its employees are linked to the IBA pay structure. This, along with RBS portfolio

acquisition cost (accounted upfront), has impacted its cost ratios.

Exhibit 36:

Geographical distribution of branch network (%)

Diversifying geographical

presence

FY13

Metro

FY14

Urban

Semi-urban

FY15

Rural

FY16

Source: MOSL, Company

We believe RBL’s cost structure is less favorable than its peers, largely on account of

the “capacity building” phase that the bank has undergone over past few years in

terms of physical infrastructure and human capital. Over FY10-16, while the number

of employees grew at a CAGR of 33%, the number of branches grew at 14%. More

importantly, the identity transformation (from old private sector bank to a new-gen

bank) is also reflected in the evolving mix and profile of its employees. All these

have elevated the cost structure further.

10 November 2016

RBL Bank

Exhibit 37:

Capacity building – distribution network and human capital

Branch expansion has been

measured; Focus on digital

and feet-on-street model;

Employees per branch going

up at rapid pace

Branches

Employees per branch

1328

545

7.3

7.0

6.9

544

6.7

6.5

704

7.8

9.1

12.3

16.3

18.9

3872

19.7

15.0

100

108

124

172

183

197

indicates total number of employees

Source: Company, MOSL

Exhibit 38:

Changing profile of employees at RBL contributing to elevated cost structure

IBA-linked employee force

has come down to 15%

Officers

19%

47%

19%

45%

19%

41%

20%

45%

Clerks

15%

33%

71%

82%

89%

92%

Sub-Staff

10%

19%

12%

34%

36%

40%

35%

52%

Source: Company, MOSL

Incremental cost per

employee is also likely to

come down, as large part of

recruitment is likely to

happen at lower levels

Exhibit 39:

Sharp rise in cost per employee over FY11-16

Avreage cost per employee (INRm)

83.0

63.7

46.7

42.1

53.6

92.0

55.1

58.4

70.3

62.5

58.6

C/I ratio (%)

0.3

0.4

0.3

0.4

0.9

0.8

1.0

Source: MOSL, Company

Exhibit 40:

Average employee costs amongst the highest for RBL

Employee cost/asset

Other expenses/assets

Opex/assets

RBL

1.12

1.20

2.32

1.21

0.93

2.14

DCB

1.39

2.79

HDFCB

0.88

1.74

2.61

ICICIB

0.73

1.12

1.86

AXSB

0.68

1.36

2.05

YES

0.86

1.11

1.97

IIB

0.98

1.93

2.92

Source: MOSL, Company

10 November 2016

RBL Bank

Exhibit 41:

Elevated cost structure driving low return ratios for RBL

23.0

18.0

13.0

8.0

3.0

0.2

0.7

1.2

ROA (%)

1.7

2.2

YES

HDFCB

IIB

RBL

DCB

AXSB

ICICIB

Size of the bubble denotes CET1 %

Source: MOSL, Company

Considering the strong expansion, capacity is under-utilized and productivity levels

are low compared to peers. With new products, employees willing to adapt to new

technologies, leverage on existing relationships and ageing branch network, we

expect productivity levels to improve. Further, incremental cost of expansion is

likely to be lower. Overall, we expect cost/core income ratio to moderate to ~53%

during FY16-19E (from 61% in FY16).

Exhibit 42:

Cost to income to decline to 51% from 59% currently

Productivity improvement

to drive cost to income ratio

lower

Cost to Income (%)

Exhibit 43:

Cost to assets to remain elevated in the high growth phase

Continued expansion to

keep cost to average assets

elevated

2.6

2.5

3.0

2.3

2.1

2.0

Cost to average assets (%)

3.9

2.7

2.2

2.7

2.6

2.3

2.4

2.5

2.4

Exhibit 44:

Employee productivity to rise hereon

Business per employee (INR m)

Profit per employee (INR m)

1.3

1.7

1.8

2.0

0.3

-0.2

0.3

0.6

0.4

0.7

0.8

1.0

105 127 155 192 218 238

Source: Company, MOSL

10 November 2016

RBL Bank

Financial performance

Core income improvement to drive RoA acceleration



We expect core income (as % of assets) to improve ~90bp over next three years, led by

a) margin improvement of +60bp and b) rising share of fee income.

While ageing of branches will drive operating efficiency, continued expansion will

keep cost to assets at ~2.5%.

We expect asset quality to remain stable; however, on a prudent basis, we factor in a

10bp rise in credit cost to 0.55%.

Higher share of core income should drive RoA improvement of ~40bp to 1.3%, and

strong growth (in turn higher leverage) is likely to increase RoE by 670bp to ~18%.

Considering the strong growth and investment phase, current capitalization may not

be sufficient for more than two years. Hence, another round of capital infusion is

possible in FY19, which, however, is not factored in our estimates. Overall, we expect

PAT CAGR of ~45% over next three years, one of the highest in our coverage universe.

Exhibit 45: Core income to drive RoA improvement

Y/E MARCH

Net Interest Income

Fee income

Fee to core Income

Core Income

Operating Expenses

Cost to Core Income

Employee cost

Employee to total exp

Others

Core Operating Profit

Trading and others

Operating Profit

Provisions

NPA

Others

PBT

Tax

Tax Rate

RoA

Leverage (x)

RoE

FY10

3.11

0.65

17.4

3.76

2.04

54.3

1.21

59.1

0.83

1.72

0.04

1.76

0.26

0.00

0.26

1.51

0.50

33.1

1.01

5.5

5.51

FY11

3.58

0.71

16.6

4.29

3.94

91.7

2.72

69.2

1.21

0.36

-0.01

0.34

0.01

0.05

-0.03

0.33

0.12

36.1

0.21

3.7

0.78

FY12

3.58

1.20

25.2

4.78

2.68

56.1

1.61

60.1

1.07

2.10

0.08

2.18

0.36

0.00

1.82

0.58

31.7

1.25

4.7

5.84

FY13

2.55

0.98

27.8

3.54

2.22

62.9

1.23

55.3

0.99

1.31

0.27

1.58

0.22

0.00

1.36

0.44

32.2

0.92

7.3

6.75

FY14

2.19

1.40

39.0

3.60

2.72

75.6

1.19

43.6

1.53

0.88

0.27

1.15

0.30

0.29

0.01

0.85

0.26

30.1

0.59

8.6

5.12

FY15

2.46

1.53

38.3

3.98

2.65

66.5

1.33

50.2

1.32

1.33

0.25

1.59

0.27

0.26

0.00

1.32

0.41

30.9

0.91

10.7

9.76

FY16

2.47

1.30

34.5

3.77

2.32

61.4

1.12

48.2

1.20

1.46

0.18

1.64

0.35

0.31

0.03

1.29

0.41

31.7

0.88

12.7

11.21

FY17E

2.87

1.39

32.6

4.26

2.40

56.4

1.10

46.0

1.30

1.86

0.21

2.06

0.51

0.44

0.07

1.56

0.52

33.5

1.03

12.2

12.65

FY18E

FY19E

2.97

3.09

1.53

1.57

34.0

33.7

4.50

4.66

2.53

2.49

56.2

53.3

1.14

1.10

45.1

44.1

1.39

1.97

2.17

0.25

0.18

2.22

2.35

0.43

0.45

0.43

0.45

0.00

1.79

1.90

0.60

0.64

33.5

1.19

1.26

12.5

14.2

14.85

17.89

Source: MOSL, Company

10 November 2016

RBL Bank

Margins set to expand ~60bp over next three years

Improving balance sheet

mix, rebalancing of loan

portfolio and better retail

deposits are the key

enablers

NIM (calculated) at 2.65% is at the lower end of the private sector banks’ range,

which can be attributed to: a) an investment-heavy balance sheet (investments as a

proportion of total asset book at ~37%), b) low CASA ratio relative to peers and c)

high share of low-yielding corporate loans. Management is aggressively investing

toward building a brand, creating infrastructure and utilizing savings deregulations

to build its savings deposits base. Hence, benefits of some of these initiatives will be

reflected in cost of funds.

Key levers for the margin improvement are: a) expected improvement in CASA ratio

by ~400bp, b) asset reallocation from low-yielding investments to loans, c) rising

share of loans from high-yielding segments and d) benefit of capital-raising

exercises. The share of wholesale liabilities in the balance sheet remains high, which

will be beneficial in the near term given high liquidity and falling interest rate

scenario.

Exhibit 46:

Declining cost of funds to drive improvement in

spreads (+60bps over FY16-19)

Average Yield on funds

Average cost of Interest bearing liabilities

9.6

8.4

7.8

7.0

5.2

7.3

7.6

7.1

9.3

9.4

8.9

9.3

9.1

Exhibit 47:

Balance sheet rationalization to drive ~60bp NIM

improvement through FY19

Calculated NIMs

3.44

3.93 3.85

2.71

2.68 2.65

3.27

3.05 3.15

2.37

5.9

6.5

6.6

6.3

6.1

Source: MOSL, Company

RBL has grown its loan book at a CAGR of 62% over FY11-16. We expect the bank to

continue its growth momentum, factoring in ~37% loan book CAGR over FY16-19E,

driven by traction in the AB, BBB and CB businesses. Considering the already high C-

D ratio of ~87%, we believe deposits will keep pace with loans through FY19.

Exhibit 48:

Loan book to grow at 37% CAGR through FY19

Loans (INR b)

37%

62%

144

116

303

212

171

408

58%

243

551

Exhibit 49:

Deposits to keep pace with loan book growth

Deposits (INR b)

38%

337

464

638

Source: MOSL, Company

10 November 2016

RBL Bank

RBL’s corporate loans constitute 60% of the total book (75% in FY13). We expect its

loan mix to become more granular over next few years with an increased focus on

the high-yielding branch and business banking and agri banking segments. The

bank’s CASA ratio is significantly lower than peers. This can be attributed to the high

growth phase of the bank over FY11-16, during which its CASA ratio showed a

marked decline. However, with increased savings mobilization (employee/branch),

the CASA mix should trend upward from 18.6% in FY16 to ~22.5% over next three

years.

Liability franchise – CASA ratio to improve 400bp over next three years

We expect SA mobilization efficiency to improve over next three years, driving

average SA balances/branch from ~INR90m in FY16 to ~INR350m in FY19. With RBL

operating at a healthy CA balance of ~INR146m/branch, CA deposits will largely

keep pace with overall deposits. Hence, CASA ratio should improve to ~22.5% in

next three years.

Exhibit 50:

CASA ratio to improve ~400bp, driven by traction in SA mobilization

18.6

CASA Ratio

SA as a % of deposits

11.4

6.4

36.1

34.5

21.5

19.7

20.4

18.5

7.2

12.7

14.4

18.6

20.8

21.3

22.5

Source: MOSL, Company

Asset quality to remain healthy; factoring in higher credit cost

Superior risk management,

avoiding high stress sectors

and expertise in agri

segment leading to strong

asset quality

RBL has managed to keep a healthy asset position, with GNPAs at less than 1% in

each of the last five years. The bank has a strong balance sheet due to its superior

risk management and corporate governance framework, despite an environment of

stress in large corporate accounts. We expect slippages to remain below 1.3% and

GNPAs at 1-1.6% over next three years. However, considering strong growth, we

factor in an increase in credit cost to 55bp over next three years from 45bp

currently.

10 November 2016

RBL Bank

Exhibit 51:

Strong asset quality position to sustain

2.33

Gross NPA (%)

Net NPA (%)

1.37

0.48

1.61

0.97

1.12

0.80

0.36

0.20

0.40

0.11

0.79

0.31

0.77

0.27

0.98

0.59

1.08

0.42

0.53

Source: MOSL, Company

Exhibit 52:

Slippages to remain below 1.3%

Credit Costs as a % of average loans

1.38

0.95

0.33

0.99

1.00

0.37

0.48

0.29

0.45

1.00

0.57

Slippage Ratio (%)

1.20

0.55

1.30

0.55

0.23

Source: MOSL, Company

Fee income contribution to rise

RBL’s fee CAGR over last three years stood at 63%. Factors such as introduction of

wealth management products, liability fees, acquisition of RBS portfolio and pick-up

in forex fees have led to strong fee income growth. Furthermore, RBL’s high

proportion of non-fund-based exposure to the C&IB business and high transacting

customer base in the BBB segment contribute to impressive fee growth. We expect

its fee-to-assets ratio to improve to 1.6% of assets by FY19, led by continued

momentum in existing fee income streams and a sharp pick-up in forex fees.

Exhibit 53:

High customer stickiness to drive improvement in fee income to assets

Expect fee income CAGR of

37%+, led by forex and

third-party distribution fees

1.2

0.7

1.0

Fee Income to assets

1.4

1.5

1.4

1.5

1.6

1.3

Source: MOSL, Company

10 November 2016

RBL Bank

Exhibit 54:

Off balance sheet exposure as % of assets

Contingent liability/assets

81.1

66.4

49.0

75.9

4.2

3.3

8.0

Source: MOSL, Company

Operating efficiencies to drive return ratios

Over FY10-16, RBL has invested significantly in physical (2x branch expansion) and

human infrastructure (5x increase in headcount; high average employee cost of

INR1m). With necessary investments already in place, we factor in ~6%

improvement in cost-to-income ratio over FY16-19, driven by operating leverage

benefits. Rationalized asset side and liability franchise, coupled with operating levers

in play, will enable RBL to increase its return ratios (RoA +40bp, RoE +670bp over

FY16-19).

Exhibit 55:

Cost to core income expected to improve ~720bp over FY16-19

Cost to Income (%)

Source: MOSL, Company

Exhibit 56:

Operating leverage benefits to drive higher return ratios

RoA (%)

RoE (%)

11.2

12.6

14.9

17.9

9.8

5.5

1.0

0.8

0.2

5.8

1.2

6.8

5.1

0.6

0.9

1.0

1.2

1.3

Source: MOSL, Company

10 November 2016

RBL Bank

Dilution risk:

In our assumptions, we have not considered the impact of future

capital infusions that may be undertaken by RBL. According to our estimates, RBL

will have leverage ratio of 14.2x by FY19, whereas maximum leverage under current

management has been 12.7x. Given the exponential pace of capital consumption,

we believe RBL will need to undertake frequent bouts of capital infusion, which, in

turn, could pose downside risks to our RoE estimates.

Exhibit 57: We expect RBL to have tier 1 capital ~11% in

FY17

56.3

Tier 1

CAR

Exhibit 58:

Leverage ratio elevated at 12.7% in FY16

Leverage

12.7 12.2 12.5

14.2

34.1

23.1

10.7

17.1 14.6

13.1 12.9 13.1 11.7

10.3

9.8

8.8

7.3

5.5

3.7

4.7

8.6

33.5 55.8 22.8 16.8 14.3 12.7 11.1 11.1

Source: MOSL, Company

Sensitivity analysis of expected capital raise in FY19 – not yet factored in our

estimate

In the light of its aggressive loan growth targets, the bank will need to fund growth

by diluting equity in FY19. While we have not built capital raising in our estimate we

present below the sensitivity analysis for the same. For our analysis, we assume 10%

dilution at 3xFY19 BV, i.e. raising INR34b. This capital will not only raise the tier-1

ratio to 12%, but also enable the bank to sustain superior loan growth and

continuous market share gains. ROA is expected to be strong and ROE to be 17% by

FY21 given strong growth and margin expansion.

Exhibit 59:

Sensitivity analysis of capital infusion in FY19

FY17E

114.4

12.5

1.0

12.6

11.1

FY18E

129.0

18.1

1.2

14.9

9.8

Pre-dilution

FY19E

149.1

24.9

1.3

17.9

8.8

FY20E

175.0

32.1

1.3

19.8

8.1

FY21E

208.8

42.0

1.3

21.9

7.6

FY17E

114.4

12.5

1.0

12.6

11.1

FY18E

129.0

18.1

1.2

14.9

9.8

Post-dilution

FY19E

186.9

23.1

1.3

15.3

12.0

FY20E

FY21E

211.6

243.4

30.5

39.4

1.3

15.3

17.3

10.8

9.7

Source: Company, MOSL

EPS

RoA

RoE

Tier I

10 November 2016

RBL Bank

Exhibit 60:

Peer comparison – key operating metrics (FY16)

Parameters

MARGIN METRICS

Average yield on interest earning assets (%)

Average Cost of Interest bearing Liabilities (%)

Spreads (%)

Net interest margin (%)

BRANCH PRODUCTIVITY METRICS

SA/branch (INR m)

CA/branch (INR m)

Business/branch (INR m)

CASA per branch (INR m)

Employees/branch

EMPLOYEE PRODUCTIVITY METRICS

SA/employee (INR m)

CA/employee (INR m)

CASA/employee (INR m)

Average cost/employee (INR m)

Business/employee (INR m)

KEY RATIOS

ROA (%) - FY16

ROE (%) - FY16

CET1 (%) - FY16

CASA Ratio (%)

C/I (%) - FY16

Core fee income to assets (%) - FY16

GROWTH RATIOS

deposit CAGR (%) - FY13-16

loan book CAGR (%) - FY13-16

PAT CAGR (%) - FY13-16

ASSET QUALITY RATIOS

GNPA (%) - FY16

NNPA (%) - FY16

Slippage Ratio (%) - Average last 3 years

PCR (%)

10.0

6.8

3.2

171

1038

206

0.9

114

0.5

6.0

13.7

32.5

61.2

0.6

-17

2.87

1.52

2.3

DCB

10.6

7.2

3.4

3.9

131

1447

198

0.6

1.1

11.8

12.8

23.4

64.6

0.8

1.52

0.75

1.9

HDFCB

10.4

6.0

4.4

4.7

347

207

2141

554

0.7

111

1.9

18.3

13.2

43.2

47.7

1.2

0.87

0.28

1.7

ICICIB

8.9

5.2

3.7

3.6

316

139

1889

454

0.7

113

1.2

11.5

12.9

45.8

42.2

1.3

5.95

3.11

2.8

AXSB

9.2

5.6

3.6

3.8

385

232

2367

617

0.7

141

1.7

17.1

12.6

47.3

41.5

1.5

1.78

0.74

1.7

YES

10.0

6.9

3.1

3.4

274

147

2528

421

1.0

146

1.7

19.9

10.3

28.1

42.4

1.6

0.76

0.29

0.9

IIB

10.4

6.7

3.6

4.0

192

172

1801

363

0.6

1.8

16.6

14.9

35.2

50.1

2.3

0.87

0.36

1.4

RBL

8.9

6.5

2.4

2.7

146

2030

239

1.0

105

0.9

11.2

11.1

18.6

61.4

1.3

0.98

0.59

1.0

Source: MOSL, Company

10 November 2016

RBL Bank

Initiating with Buy

Valued at 3x FY19 BV



We value RBL based on the residual income (RI) model and build in 40% EPS CAGR

over FY16-19. At our target price of INR450, the stock would trade at 3x FY19BV and

18x EPS.

We factor in average 18% growth in the explicit period (FY19-36) and a terminal

growth rate of 5%. We factor in cost of equity of 13.6%, with RF of 7.25%, beta of 1.3x

and risk premium of 5.0%.

We believe RBL deserves significant premium compared to its peers, considering its

strong growth, improvement in profitability and pristine asset quality.

Given the 37% loan book CAGR that RBL is likely to demonstrate over FY16-19, we

expect its capital consumption rate to be meaningfully north of its pace of internal

accruals. As a result, we expect frequent doses of equity infusion (possibly once

every 24-30 months) over next few years. Hence, RoE will remain volatile at sub-15%

over the foreseeable future. Our derived RoE estimates beyond FY18 assume RBL’s

CET1 ratio falling below 10%, which may not materialize.

Exhibit 61:

RBL deserves a "high-growth" premium

3.8

3.1

2.3

AXSB

1.6

ICICIB

0.8

10%

15%

20%

25%

30%

FY16-19E EPS CAGR

35%

40%

45%

DCB

HDFCB

IIB

RBL

YES

Size of the bubble represents market capitalization

Source: Company, MOSL

As can be seen from Exhibit 64, RBL offers the highest three-year EPS CAGR among

its private sector banking peers, nearly 10 percentage points higher than its

illustrious peers such as YES and IIB. We expect RBL to trade at premium valuations

during this high-growth phase, as long as it continues to deliver pristine asset quality

backed by its superior risk management capabilities. We initiate coverage with a

Buy

rating and a target price of INR450 (3x FY2019 BV).

10 November 2016

RBL Bank

RBL – identifying the closest like-for-like comparable

On most operating metrics, we believe that RBL bears a close similarity to Yes Bank

(circa 2011), with both banks demonstrating similarities around the following

parameters (Exhibit 65):



Five years into the investment phase of their evolution



Exponential growth on both sides of the balance sheet



Strong growth in earnings



Similarly-sized balance sheets



Comparable number of employees and branches

Exhibit 62:

Key operating metrics - RBL (FY16) v/s YES (FY11)

Operating Metrics

No. of employees (#)

No. of branches (#)

Loans (INR b)

Growth metrics

Loan book (5-year CAGR) (%)

Employee additions (5-year CAGR) (%)

Branch additions (5-year CAGR) (%)

RBL (FY16)

3,872

197

212.3

YES (FY11)

3,929

214

343.6

Source: Companies, MOSL

Where are they similar?

A comparison between RBL’s operating metrics for FY16 and Yes Bank’s operating

metrics for FY11 (Exhibit 66) reveals an uncanny resemblance, especially around

headline metrics on branch as well as employee productivity.

Exhibit 63:

Key operating metrics - RBL (FY16) v/s YES (FY11)

Operating Metrics

No. of employees (#)

No. of branches (#)

Employees / branch (#)

Branch productivity metrics

SA / branch (INR m)

CA / branch (INR m)

CASA / branch (INR m)

Employee productivity metrics

SA / employee (INR m)

CA / employee (INR m)

CASA / employee (INR m)

Business / employee (INR m)

Average cost / employee (INR m)

RBL (FY16)

3,872

197

19.7

146

239

4.8

7.6

12.4

105

1.01

YES (FY11)

3,929

214

18.4

216

261

2.3

11.3

13.6

165

1.00

Source: Companies, MOSL

By FY11, Yes Bank was five years into its investment phase (since 2006) – just like

RBL has been since FY11, with exponential growth in branches and employees. RBL

is wholesale-funded on the liability side as was Yes Bank in 2011.

10 November 2016

RBL Bank

Where are they different?

While RBL remains wholesale-funded on the liability side, its asset mix is even more

diversified than that of Yes Bank (circa 2011). RBL enjoys significantly higher

granularity in its loan book (60% corporate loan book), whereas corporate lending

contributed 95% of Yes Bank’s loan book in FY11.

Although headline branch and employee productivity metrics are very similar for Yes

Bank (circa 2011) and RBL, it is worth highlighting that the relative source of

productivity is different in both cases. RBL’s branches are more than twice as

productive as Yes Bank in mobilizing savings deposits, as highlighted in Exhibit 67.

Exhibit 64:

Key operating metrics – RBL (FY16) v/s YES (FY11)

Operating Metrics

Loan book composition (Corporate) (%)

Branch productivity metrics

SA / branch (INR m)

CA / branch (INR m)

CASA / branch (INR m)

Employee productivity metrics

SA / employee (INR m)

CA / employee (INR m)

Business / employee (INR m)

Return ratios

5-year average ROA (%)

5-year average ROE (%)

RBL (FY16)

60%

146

239

4.8

7.2

105

0.8

6.4

YES (FY11)

95%

216

261

2.3

11.3

165

1.5

18.0

Source: Companies, MOSL

Both banks are also different in terms of their return ratios through the investment

phase. While Yes Bank consistently generated high return ratios (FY06-11 average

RoA of 1.5% and average RoE of 18%), RBL has been bogged down by sub-optimal

return ratios (FY10-16 average RoA of 0.8% and average RoE at 6.4%).

RBL’s return ratios are significantly weaker than those of Yes Bank at a similar stage

of evolution. However, this is explained by the fact that Yes Bank was a greenfield

bank during its investment phase. On the other hand, RBL’s investment phase has

been more akin to a turnaround (equivalent of a brownfield).

Considering all the aforementioned parameters, we believe RBL is closely

comparable to Yes Bank (circa 2011).

10 November 2016

RBL Bank

Key risks



Loan book not sufficiently seasoned:

Considering RBL’s elevated asset

portfolio growth over past four years, it may be too early to draw any

conclusions on the bank’s asset quality, given the lack of adequate seasoning.



Ability to attract and retain human capital:

RBL’s recent success can largely

be attributed to the management turnaround led by Mr. Vishwavir Ahuja.

Management’s capabilities, strong reputation, network, relationships and

experience in the banking industry are essential to RBL’s development. There is

significant competition for management and other skilled personnel in the

banking industry, which may impact RBL’s ability to attract and retain people.



Weak SA franchise in a high-growth phase:

The core focus of the bank is to

achieve granularity on both sides of the balance sheet. However, CASA ratio has

fallen from 36% in FY10 to 18.6% in FY16. RBL’s ability to scale up its SA

franchise, especially in line with its growth aspirations, may be restricted owing

to intense competition for customer deposits. Inability to grow CASA ratio in line

with the bank’s estimates could pose a risk to RBL’s margins.

10 November 2016

RBL Bank

Bull & Bear case

Bull Case



In our bull case, we assume a strong loan CAGR of 45% (vs. base case of 38%)

and marginal benefit of operating leverage (average opex to assets lower by 7bp

vs. base case). Given strong growth opportunities across product segments,

there is a strong possibility of growth surprising on the upside.

We also factor in a better-than-expected performance, with cost of funds

driving average NIM higher by ~70bp over FY16-19.

Fees income CAGR to be strong at 45% over FY16/19 vs. the base case of 39%.

Considering RBL is making significant investments to set up banking operations,

its operating leverage remains a key monitorable. We expect the investment

gestation period to be high. We have factored in operating leverage benefit and

an average CI ratio of 51% (vs. 53% in base case).

We factor in a PAT CAGR of 54% (vs. 45% in base case), average ROAs to be

higher by 10bp than in the base case and exit ROAs to be higher by 1.4%.

Based on the above assumptions and keeping cost of equity constant at 13.6%,

our bull case target multiple is 4.0x FY18 BV, implying an upside of 45%.

In our bear case, we factor in slight moderation in growth (despite strong pent-

up demand across product segments) with a 32% CAGR (vs. 38% in base case).

Apart from growth, important factors leading to moderate PAT CAGR of 32%

are: a) higher cost of funds and in turn average NIMs of 2.9% (3.2% in base

case). Bank expected to cut cost hence have given it a benefit of operating

leverage (opex to assets higher by 27bp vs. base case).

Moderate growth, coupled with pressure on margins and cost of setting up

banking operations, should impact the cost-to-income ratio adversely. In our

bear case, we assume the cost-to-income ratio at 55% (base case of 53%).

We factor in a PAT CAGR of 32% (vs. 45% in base case), average ROAs lower by

30bp and exit ROAs lower by 30bp vs. base case.

Based on the above assumptions and keeping cost of equity constant at 13.6%,

our bear case target multiple is 2.0x FY18 BV, implying a downside of 28%.

Bear Case



Exhibit 65:

Scenario Analysis

Parameters (FY16-19)

Loan CAGR

Average NIMs

Fee Income CAGR

Employee exp CAGR

Other Opex CAGR

Average CI Ratio

Opex to average assets

Operating Profits CAGR

Credit Cost average

Average ROA

Average ROE

Exit ROA (FY21)

PAT CAGR

Target Multiple

Upside

Base Case

38%

3.16%

39%

28%

36%

52.80%

2.47%

46%

0.56%

1.20%

15.10%

1.30%

45%

3.0x

20%

Bull Case

45%

3.25%

45%

32%

38%

51.00%

2.40%

53%

0.52%

1.30%

16.90%

1.40%

54%

3.5x

45%

Bear Case

32%

2.92%

30%

24%

30%

55.20%

2.20%

34%

0.60%

0.90%

12.50%

0.90%

32%

2.0x

-26%

Source: MOSL, Company

10 November 2016

RBL Bank

Financials and valuations

Income Statement

Y/E March

Interest Income

Interest Expense

Net Interest Income

Change (%)

Non Interest Income

Net Income

Change (%)

Operating Expenses

Pre Provision Profits

Change (%)

Provisions (excl tax)

PBT

Tax

Tax Rate (%)

PAT

Change (%)

Equity Dividend (Incl tax)

Core PPP*

Change (%)

*Core PPP is (NII+Fee income-Opex)

2012

4,651

2,783

1,868

96.3

671

2,539

123.3

1,400

1,139

1,158.1

187

953

302

31.7

651

1,064.9

1,041

1,350.1

2013

8,793

6,218

2,575

37.9

1,264

3,840

51.2

2,244

1,596

40.1

226

1,370

442

32.2

929

42.6

178

1,318

26.6

2014

13,516

10,100

3,416

32.6

2,610

6,026

56.9

4,239

1,787

12.0

462

1,325

398

30.1

927

-0.2

288

1,334

1.2

2015

19,531

13,967

5,564

62.9

4,034

9,598

59.3

5,997

3,601

101.5

602

2,999

928

30.9

2,072

123.6

438

2,880

116.0

2016

27,443

19,251

8,192

47.2

4,905

13,097

36.5

7,673

5,424

50.6

1,144

4,280

1,355

31.7

2,925

41.2

587

4,818

67.3

2017E

37,950

25,456

12,494

52.5

6,952

19,446

48.5

10,452

8,994

65.8

2,213

6,781

2,272

33.5

4,509

54.2

871

8,045

67.0

2018E

47,072

30,772

16,300

30.5

9,787

26,087

34.1

13,870

12,217

35.8

2,379

9,838

3,296

33.5

6,542

45.1

1,263

10,718

33.2

(INR Million)

2019E

61,018

38,993

22,024

35.1

12,441

34,466

32.1

17,719

16,747

37.1

3,211

13,536

4,535

33.5

9,002

37.6

1,738

15,349

43.2

Balance Sheet

Y/E March

Share Capital

Equity Share Capital

Reserves & Surplus

Net Worth

Deposits

Change (%)

of which CASA Dep

Change (%)

Borrowings

Other Liabilities & Prov.

Total Liabilities

Current Assets

Investments

Change (%)

Loans

Change (%)

Fixed Assets

Other Assets

Total Assets

2012

2,149

9,284

11,433

47,393

132.1

10,193

44.5

11,986

1,272

72,084

5,861

22,647

153.8

41,323

116.9

589

1,664

72,084

2013

2,529

13,538

16,067

83,405

76.0

16,444

61.3

27,373

2,787

129,634

6,886

55,160

143.6

63,762

54.3

943

2,883

129,634

2014

2,720

17,427

20,148

115,986

39.1

23,697

44.1

38,955

6,892

181,981

11,923

64,770

17.4

98,350

54.2

1,343

5,595

181,981

2015

2,935

19,370

22,304

170,993

47.4

31,574

33.2

69,627

8,123

271,047

21,703

97,923

51.2

144,498

46.9

1,644

5,278

271,047

2016

3,247

26,645

29,892

243,487

42.4

45,378

43.7

105,362

12,870

391,611

24,499

144,360

47.4

212,291

46.9

1,773

8,688

391,611

2017E

3,617

37,789

41,406

337,229

38.5

70,249

54.8

85,553

15,726

479,914

27,694

137,142

-5.0

302,514

42.5

2,573

9,991

479,914

2018E

3,617

43,068

46,686

463,690

37.5

98,913

40.8

89,144

19,024

618,543

37,223

157,714

15.0

408,394

35.0

3,223

11,989

618,543

(INR Million)

2019E

3,617

50,332

53,949

637,573

37.5

143,662

45.2

92,053

23,045

806,621

47,772

189,256

20.0

551,333

35.0

3,873

14,387

806,621

Asset Quality

GNPA (INR m)

NNPA (INR m)

GNPA Ratio

NNPA Ratio

PCR (Excl Tech. write off)

PCR (Incl Tech. Write off)

E: MOSL Estimates

331

0.80

0.20

74.7

79.9

259

0.40

0.11

73.4

83.5

778

305

0.79

0.31

60.8

65.7

1,112

386

0.77

0.27

65.3

68.3

2,081

1,245

0.98

0.59

40.2

55.9

3,279

1,276

1.08

0.42

61.1

67.7

5,626

1,967

1.37

0.48

65.0

68.6

(%)

8,947

2,950

1.61

0.53

67.0

67.6

10 November 2016

RBL Bank

Financials and valuations

Ratios

Y/E March

Spreads Analysis (%)

Avg. Yield-Earning Assets

Avg. Yield on loans

Avg. Yield on Investments

Avg. Cost-Int. Bear. Liab.

Avg. Cost of Deposits

Interest Spread

Net Interest Margin

Profitability Ratios (%)

RoE

RoA

Int. Expense/Int.Income

Fee Income/Net Income

Non Int. Inc./Net Income

Efficiency Ratios (%)

Cost/Income*

Empl. Cost/Op. Exps.

Busi. per Empl. (INR m)

NP per Empl. (INR lac)

* ex treasury and Recoveries from written off accounts

Asset-Liability Profile (%)

Loans/Deposit Ratio

CASA Ratio

Investment/Deposit Ratio

G-Sec/Investment Ratio

CAR

Tier 1

87.2

21.5

47.8

63.2

23.1

22.8

76.4

19.7

66.1

59.1

17.1

16.8

84.8

20.4

55.8

61.8

14.6

14.3

84.5

18.5

57.3

77.4

13.1

12.7

87.2

18.6

59.3

71.2

12.9

11.1

89.7

20.8

40.7

73.8

13.1

11.1

88.1

21.3

34.0

73.5

11.7

9.8

86.5

22.5

29.7

84.2

10.3

8.8

56.1

60.1

57.4

0.6

62.9

55.3

74.0

0.6

75.6

43.6

77.6

0.4

66.5

50.2

84.6

0.7

61.4

48.2

105.1

0.8

56.4

46.0

126.8

1.0

56.2

45.1

154.7

1.3

53.3

44.1

192.1

1.7

5.8

1.2

59.8

21.7

26.4

6.8

0.9

70.7

23.0

32.9

5.1

0.6

74.7

30.3

43.3

9.8

0.9

71.5

26.8

42.0

11.2

0.88

70.1

26.7

37.5

12.6

1.0

67.1

25.5

35.8

14.9

1.2

65.4

26.6

37.5

17.9

1.3

63.9

27.2

36.1

9.6

11.5

6.7

7.0

7.2

2.6

3.8

9.3

11.7

6.5

7.3

7.4

1.9

2.7

9.4

11.4

6.9

7.6

7.7

1.8

2.4

9.4

11.6

6.4

7.1

7.6

2.4

2.7

8.9

10.9

6.2

6.5

7.3

2.4

2.7

9.3

10.6

6.9

6.6

7.5

2.7

3.0

9.1

10.2

6.5

6.3

6.8

2.8

3.1

9.1

10.1

6.3

6.1

6.5

3.0

3.3

2012

2013

2014

2015

2016

2017E

2018E

2019E

Valuation

Book Value (INR)

Change (%)

Price-BV (x)

Adjusted BV (INR)

Price-ABV (x)

EPS (INR)

Change (%)

Price-Earnings (x)

Dividend Per Share (INR)

Dividend Yield (%)

E: MOSL Estimates

0.3

0.6

0.2

0.9

0.2

1.2

0.3

3.0

3.7

21.2

3.4

-7.2

7.1

107.3

52.9

63.3

73.3

75.1

53.1

63.5

19.5

74.0

16.6

76.0

2.6

92.0

21.1

4.1

89.5

4.2

9.0

27.6

42.2

1.5

0.4

114.4

24.4

3.3

114.0

3.3

12.5

38.4

30.5

2.1

0.5

129.0

12.8

2.9

128.3

3.0

18.1

45.1

21.0

3.0

0.8

149.1

15.6

2.5

148.1

2.6

24.9

37.6

15.3

4.1

1.1

10 November 2016

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