This bank gains by 153% since IPO; analysts say to stay invested ahead, know why

In the midst where banking sector faces historic low credit growth, heavy stressed assets, high provisions and low earnings, one bank has decided to make a difference especially when it comes to trading on stock exchanges. While we must be guessing big names like SBI, HDFC Bank or ICICI Bank, guess what! It is RBL Bank which made it’s entry in August 2016 on stock exchanges has performed quite well compared to other banks. On Friday, RBL Bank finished at Rs 553.85 per piece higher by nearly 3%. With it promising business portfolio, good financial performance and low stressed assets, RBL Bank has catched many experts attention and they have even raised the 12 months target for this bank further.

This month, RBL bank touched a new high of Rs 570.20 per piece, which has supported it to grow by 28.71% in one year. With this it outruns even benchmark indices Sensex and Nifty who have only grown between 20% - 22% in a year.

Not only this, if we look at it’s IPO issue price, RBL Bank has given a massive 153% return compared to upper issue price of Rs 225 per piece.

The market valuation of RBL Bank currently stands at Rs 23,294.90 crore.

It’s financial performance is also very commendable compared to other banks who have booked massive rise in their gross NPAs. As on March 2018, RBL Bank’s asset quality improved as GNPAs for the quarter declined by 16 bps qoq to 1.4 per cent in Q4FY18 vs 1.56 per cent in Q3FY18 and 1.2 per cent in Q4FY17. NII for the quarter rose by 42.1% on yearly basis to Rs 500 crore, while net profit increases by 36.8% yoy to Rs 178 crore.

A ICICI Securities report says, investing in a high-growth stock like RBL Bank (RBL) at a time when system loan growth is near historic lows may appear to be a contradiction, but it is allayed by a list of factors. Here’s what makes the broking firm interesting in RBL Bank stock price.

Firstly, top quality professional management from diverse banking backgrounds dedicated to grow the bank’s profitably. Secondly  no significant legacy issues for the team to deal with. Thirdly, significant opportunity for RBL to not only grow at a reasonably fast clip, but also to maintain growth sustainably for at least a few years given its below-peer RoA levels at 1.2% and its relatively high risk-adjusted retail yields, which bode well for margin expansion given its lower than peer CASA mix of 28%.

Lastly Experience of turnaround in peer banks like IIB demonstrate the opportunity ahead for RBL for a well-run bank with a cohesive management team.

ICICI Securities explains that, “we estimate 37% CAGR in RBL’s loan growth up to FY20E aided by improving RoA on the back of higher margins and lower credit costs causing RoA and RoE to improve to 1.4% and 16% respectively by then; this implies a 43% CAGR in EPS growth up to FY20E.”

RBL trades at 3.2x P/ABV and 25x P/E 1-year forward. However, on a growth-adjusted P/E ratio basis (PEG), it is more reasonably valued at well under 1.

Sachin Sheth  and Sandeep Joshi analysts at ICICI Securities said, “We benchmark its target PEG at the 5-year average of peer banks at ~0.75 leading to an implied trailing P/E target multiple of 33x – not out of sync with its trading history – and a fair value of Rs780.”

The duo added, “Based on our DDM model, we arrive at a similar target price of Rs780, implying a 45% upside to the stock from current levels. We initiate coverage with a BUY rating.”