See 200 bps improvement in RoE for RBL Bank in 2 years: Angel

For the next two years, he expects a 200 basis points improvement in the return on equity (RoE) for the bank, says Purohit.Below is the transcript of Siddharth Purohit’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18. Anuj: Is RBL Bank a compounder like YES Bank was or is it going to be one of those where there is too much promise and not too much of delivery? What is your initial thought? A: What I believe is that if you go and check their history, when the management took over the affairs of the erstwhile Ratnakar Bank, it was pretty small and just another bank and not really focused in any particular direction. Ever since the new management has come in, there has been a phenomenal growth, almost 50 percent compounded annual growth rate (CAGR) for the last five years. Now when the base was pretty small, 50 percent was quite possible, but now they have, from a less than Rs 2,000 crore of loan book, now they are close to Rs 21,000 crore of loan book. Now what I believe is here onwards, 30-35 percent loan growth is something we want to see from the bank and that is very much doable given the still low base of the bank. Now, if you come back to the management bandwidth, a band needs a capital and certainly the intention to grow. And now, this IPO is giving them the capital to grow and there is a strong management at the bank which is going to drive it. So, I believe that it is really a growth story for next 2-3 years and after that possibly, that growth can taper down because of obviously high base, not because of the lack of creative demand. Now, if you come back to the earnings point, if you just go back and check their last 3-4 years history, the management has invested heavily in the capital expenditure (Capex) both in terms of branch expansion and employee addition. So, that has taken a toll on the cost to income ratio of the bank. Now if you compare to any other private sector banks, RBL’s cost to income ratio is at a much higher level. It was almost 58 percent for FY16. So, there is enough scope for this cost to income ratio to come down. And certainly, this will add to the return on assets (ROA) and return on equities (ROE) going ahead. Another point what I like about the bank is that despite very aggressive growth, they have really been able to contain their asset quality at a much comfortable level and really which is at par with the new generation private sector banks. Their gross non-performing assets (NPA) was less than 1 percent for FY16. Now, as long as the bank is really able to contain their asset quality and credit cost below 60 basis points, there will not be any negative surprises on the earnings and that should really help the earnings growth momentum. And my rough calculation is that the bank, after considering some cost reduction, both on the interest cost as well as the operating cost side, should be able to hit a book value of somewhere close to 130 for FY18. So even at the listing price, it is quite decent at this current level and it has the potential to trade somewhere close to 2.5 times on a forward book value basis. So, I see a lot of potential going ahead also for the bank. Sonia: RBL Bank looks extremely mouth-watering for a lot of retail investors because they have learnt from what YES Bank has done, the kind of value that YES Bank has created for retail investors in the past. So, the expectation is that RBL Bank could become the next YES Bank. Over the next 2-3 years, what kind of value do you think the stock can give a retail investor who buys now post listing? A: What I can say is that the bank has all the ingredients to become a meaningful player in the private sector space. So now there is a case for strong earnings growth with stable management at the top end. So, I believe that it is a story for multiple years. So, it could mimic the earnings growth and possibly rerating can happen subject to your improvement in ROE. One point to be noted that because of high cost, RBL has seen compression in ROA and ROE. So their ROE was somewhere close to 11.5 percent for FY16. So, as and when we see improvement in ROE, possibly the multiples can change. But I feel that for the next two years, possibly we will see marginal improvement in ROE. So, I am not expecting multiple change here onwards. But certainly, if the bank is able to take their ROE somewhere close to 14-15 percent, maybe 3-4 years down the line also and possibly it can be a very good story. But for those investors, those who have got allotment and want to hold on to the bank, it is a good strategy. They can expect decent returns on a compounded basis for the next 2-3 years. So, I am confident about the growth structure for the bank and there is not much to worry about the performance o9f the bank as of now.