Stocks that debuted on the bourses from the financial services sector this year have already hit a jackpot. Take for instance, Equitas Holdings Ltd and Ujjivan Financial Services Ltd.
The stocks of Equitas and Ujjivan have moved up by a mouth-watering 59% and 108%, respectively, from their issue prices.
Naturally then, there will be a fair bit of anticipation for the forthcoming initial share sale of RBL Bank Ltd. Will the RBL Bank initial public offering (IPO) be as successful?
What works in the bank’s favour is the strong management team that took over in 2010 and started the process of transforming it into a modern bank. The new management has brought in fresh talent from other private sector banks and has invested heavily in technology. Branch network has increased and growth has been robust.
Over FY13-FY16, RBL Bank’s net interest income and net profit have grown at 47% compounded annual growth rate (CAGR) each. Other income has increased at about 57% CAGR during that time. But then, the base is small.
Even as the management has expanded its loan book aggressively, asset quality remains decent. At the end of last financial year, gross non-performing assets (NPA) ratio stood at 0.98% and net NPA was at 0.59%. RBL Bank has also rebalanced its portfolio mix over past few years as it reduced the size of corporate plus small and medium enterprises portfolio to 60% in FY16 from 75% in FY13, pointed out Antique Stock Broking Ltd. During this time, the retail business had increased to 17% compared to 11% in FY13.
The cost to income ratio has declined to 58.6% for FY16 from as much as 70% in FY14, but it is not the best. “With growth in business, we expect the bank to avail to economies of scale and this should unearth enough scope for improvement in the cost structure, which in turn would add to the bottom-line,” wrote Siddharth Purohit of Angel Broking Ltd in a report on 17 August. Return ratios aren’t particularly impressive either. Return on assets for FY16 was 0.98% and return on equity stood at 11.3%. CASA ratio is much lower compared to peers at 19%.
According to Angel Broking Ltd calculations, at Rs.225 per share (price band—Rs.224-225) RBL Bank’s price-book multiple works out to 2.6 times based on the company’s net worth at the end of FY16. The measure for peers, Karur Vysya Bank Ltd (KVB), Federal Bank Ltd and Yes Bank Ltd works out to be 1.4 times, 1.6 times and 4.1 times, respectively.
Yes Bank is several times larger than RBL Bank what with a loan book of Rs.98,210 crore in the financial year 2016. The others too have relatively larger loan books.
Given this background, RBL Bank’s valuations seem to be capturing the optimism adequately. “We believe that while the improving proportion of retail and robust growth trajectory does merit premium valuations but in context to muted return ratios and weak liability franchise we see little upside in the near term,” says Antique Stock Broking. Therefore, chances of a listing pop could well be slimmer. Of course, from a longer-term perspective, if RBL Bank manages its growth effectively along with keeping a lid on costs and improving its asset quality, valuations could improve further.
The issue opens on Friday and includes fresh issue of shares and an offer for sale.