RBL Bank Set to Bring IPO

RBL Bank Set to Bring IPO

With the IPO, RBL Bank will become India’s first private-sector bank to go public in more than a decade time span

MUMBAI: In the financial services space, investors are left with just a few choices when it comes to banking stocks. Public sector banks, though available cheap, are riddled with asset quality concerns, while private sector banks, delivering strong earnings growth, are trading at hefty premiums. Against this backdrop, RBL Bank, the first private sector bank to hit the primary market after a long hiatus of over a decade, offers a breath of fresh air.

The bank’s strong loan growth over the last four to five years (albeit on a small base), low delinquency rate, and focussed approach to lending, led by a sound management team, are key positives for investors with a long-term horizon of three to five years.

Valuations too look reasonable when compared to other listed players. RBL Bank (formerly known as Ratnakar Bank), one of the old private sector banks established in 1943, transitioned into a new-age private bank over the last six years, growing aggressively under the aegis of the new management that took over in 2010. RBL Bank’s valuations – 2.1 times its post-IPO book value of FY16 at the upper end of the price band of ₹224-225 a share – lies between the valuations of new (YES Bank and Kotak Bank at around 4 times) and old private banks (Federal Bank at 1.4 times and City Union Bank at 2.6 times).

The only weak link is RBL Bank’s low return ratios when compared to most of its peers. Return on equity of around 11 per cent is much lower than the 15-20 per cent returns sported by many private lenders. Low returns are a result of large investments in branches and manpower over the last couple of years, to drive its aggressive growth in retail and micro-finance segments. As these businesses attain scale and operational efficiency sets in, returns are likely to improve, but only after a couple of years. Hence, investors willing to bet on the long-term prospects of the bank and strong management team can subscribe to the issue.