RBL Bank IPO Review and Recommendation

RBL Bank IPO (#RBLBankIPO) is open for subscription from 19 August and will remain open till 23^rd August. The price band for the IPO is fixed at Rs.224 to Rs.225 per share. RBL Bank (Erstwhile Ratnakar Bank) is planning to raise around Rs.1,200 through this IPO. Let’s us sail through the Pros and Cons of the IPO and decide whether to invest in RBL Bank IPO or not?

About RBL Bank

RBL Bank was incorporated as Ratnakar Bank in 1943 in Maharastra with only two branches in Kolhapur and Sangli. In the year 1959, RBL bank was categorized as “scheduled commercial bank” within the meaning of the Reserve Bank of India Act, 1934. Since then the operations of bank have expanded to various cities and union territories of India.

Beginning from 2010 RBL bank has started transforming and upgrading its traditional business into a New Age banking business through modern technology-enabled channels like phone banking, internet banking and mobile banking and become one of the fastest growing private sector banks in India in the past 6 years.

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In the year 2014, RBL Bank has acquired certain Indian businesses of the Royal Bank of Scotland (“RBS”), including RBS’s business banking, credit card and mortgage portfolio businesses which help to enhance the pace of growth of and expanded the presence across India of Bank.

RBL Bank which was earlier limited only to south western Maharashtra and northern Karnataka has now expanded its reach through the country by opening 25 new branches across various states including in the key cities of Kolkata, Delhi, Mumbai, Chennai and Bangalore. As of 31^st March, 2016, RBL bank had 197 interconnected branches and 362 interconnected ATMs spread across 16 Indian states and union territories serving approximately 1.90 million customers.

RBL Bank Business Segments

RBL Bank business segment consist of corporate and institutional banking (C&IB) which accounts 38.56%, commercial banking (CB) which accounts 21.26%, branch and business banking (BBB) which accounts 17.15%, agribusiness banking (AB) which accounts 8.27% and development banking and financial inclusion (DB&FI) which accounts 14.76% of the total advances as at 31^st March, 2016.

Features of RBL Bank IPO

• Issue Opens On: Friday August 19th, 2016
• Issue Closes On: Tuesday August 23rd, 2016
• Issue Type:100% Book Building
• Issue Price Band: Rs.224–Rs.225 per share
• Discount: No Discount to Retail Category Only
• Face Value Per Share: Rs.10
• Minimum Bid Lot: 65 Equity Shares and in multiples of 65 equity shares thereafter
• Minimum Order Value: Rs.14,560 to Rs.14,625
• Issue Size: Rs.1,210 crore
• Proposed Listing: Bombay Stock Exchange and National Stock Exchange
• Lead Managers: Kotak Mahindra Capital Company Limited, Axis Capital Limited, Citigroup Global Markets India Private Limited, Morgan Stanley India Company Private Limited, HDFC Bank Limited, ICICI Securities Limited, IDFC Securities Limited, IIFL Holdings Limited and SBI Capital Markets Limited
• Registrar: Link Intime India Private Limited
• Company Promoters: No Identifiable Promoter
• Download RBL Bank IPO Prospectus HERE

Objectives of RBL Bank IPO

RBL Bank would raise around Rs.1,210 crore through IPO in which Rs.832.5 crore through fresh issue of 3.7 crore equity shares and remaining Rs.378.5 crore through offer for sale (OFS) of 1.69 crore equity shares by existing shareholders.

Sale proceeds from OFS would directly go to the existing shareholder and remaining sale proceeds would be utilized in the manner as follows:

1. Enhance the Bank’s Tier-I Capital Base to meet the future capital requirements and to ensure compliance with Basel III and other RBI guidelines.
2. Augment the brand name and visibility to attract the potential customers.
3. Other General Corporate Purposes like listing fees, promotional expenses, BRLM’s fees etc.

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Category wise Proportion of RBL Bank IPO

Financial Performance of RBL Bank Limited

1. RBL’s total income has grown from Rs.532 crore in fiscal year 2012 to Rs.3,235 crore in the fiscal year 2016 which translates into Compounded Annual Growth Rate (CAGR) of 57.03% for the past 4 years.
2. RBL’s other income has increased from Rs.67 crore in Fiscal 2012 to Rs.491 crore in Fiscal 2016, which represents a CAGR of 64.42% for the past four fiscal years.
3. RBL’s net profit after tax has increased from Rs.65 crore in Fiscal 2012 to Rs.292 crore in Fiscal 2016, which represents a CAGR of 45.59% for the past four fiscal years.
4. RBL’s deposits grew from Rs.4,740 crore at the end of Fiscal 2012 to Rs.24,349 crore at the end of Fiscal 2016, which represents a CAGR of 50.55% for the past four fiscal years.
5. RBL’s advances grew from Rs.4,132 at the end of Fiscal 2012 to Rs.21,229 crore at the end of Fiscal 2016, which represents a CAGR of 50.54% for the past four fiscal years.
6. RBL has given low return on equity of 8.76% for the past 3 years and reported EPS of Rs.9.43 for the year ended on 31^st March, 2016.

Turn-on Points of RBL Bank IPO

1. RBL Bank is consistently growing under its new management and able to reduce its Gross NPA to 0.98% as of March 31, 2016 and Net NPA ratio to 0.59% as of March 31, 2016 which is lowest in the banking sector.
2. RBL has shown efficiency and increased profitability by reducing cost to income ratio to 58.60% in FY 16 from 62.50% in FY 15 and 70% in FY 14. The bank had 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.
3. RBL has bagged in several achievements and awards namely “Best Corporate Payment Project” by The Asian Banker Achievement Awards (Technology Innovation Awards) in 2016, “Best Bank Overall (Small)” and “Best Bank (Quality of Assets)” by Business Today – KPMG Best Bank Survey in 2015, “The Best Bank – Priority Sector Lending (Private Sector)” by Dun & Bradstreet Banking Awards in 2014 and 2015, “Global Growth Company” by the World Economic Forum in 2014, “The Fastest Growing Small Bank” by Business World Magna Awards – PwC Best Bank Survey in 2013, 2014 and 2015 and “India’s Best Bank (Growth) in the Mid-Sized Bank segment” by Business Today – KPMG Best Bank Survey in 2012, 2013, 2014 and 2015.

Turn-off Points of RBL Bank IPO

1. RBL has given very low return on equity of 9.29% for FY 2015 which is way below the return on equity of 15.74% provided by other private banks.
2. RBL’s CASA ratio is declined from 20.43% in fiscal year 2014 to 18.64% in fiscal year 2016. Also RBL is involved in certain legal proceedings in India and may face certain liabilities if results come against them.
3. RBL bank has posted negative cash flows from operating activities in recent fiscal years.

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Should You Invest in RBL Bank IPO?

While valuing the RBL bank with its peer group banks, the asking price seems to be on higher side. At a price of Rs.225, RBL IPO priced at PE ratio of 23.9X based on EPS of 9.43 of the last fiscal year which is more than the establish Yes bank which is currently trading at 19.6X of its FY 16 earnings. However, another private bank Kotak is trading at premium of PE of 40.4X of its FY 16 earnings.

Price to book value of 2.40 seems to be fair at an asking price of Rs.225. Other players such as Yes bank trades at P/BV of 3.6 and Kotak Bank trades at P/BV of 4.2.

The main setback of RBL Bank IPO is Return on Equity of 9.29% which is very low as compared to other banks. However, RBL bank has edge over other banks in terms of NPA figure, also consistent growth and adequate CAR seems to be eye catching. Grey Market Price of the RBL Bank IPO was Rs.50 on the opening day. So one can subscribe to RBL Bank IPO for medium term for moderate gains.

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