Edelweiss Wealth Research Private Banking

Raj Jha Harsh Shah, CA, CFA Research Analyst Research Analyst [email protected] [email protected] Date: March 11, 2021

Private Banking Sector Bound to Rebound- II

Stress created due to the Coronavirus pandemic seems to have eased for the Raj Jha banking sector. While the same is reflected in the share price movement of Research Analyst banking stocks, overall management commentary too has turned cautiously [email protected] optimistic for the first time since the start of the pandemic. Further, Proforma Harsh Shah, CA, CFA GNPA and restructuring are also below expectations. While the banking sector Research Analyst [email protected] operated in a risk-calibrated manner since the onset of the pandemic, with focus largely on managing risk and maintaining adequate liquidity, we now expect players to concentrate more on asset growth.

Moreover, during the pandemic, banks witnessed a silver lining in the form of cost-savings – a never seen before initiative in the banking sector. Overall, the private banking sector reported one of the lowest cost-to-income ratios in FY21, thanks to the Covid-19 led lockdowns, employees working remotely and reduced discretionary spends. Further, despite elevated credit costs, private banks comfortably reported record-high quarterly PAT in Q3FY21 owing to cost savings and stable margins.

From the onset of the coronavirus pandemic, we have been pitching large private banks like ICICI Bank, , HDFC Bank & , which has robust liability franchise, healthy capital adequacy ratio, strong balance sheet and higher PCR given the uncertainty surrounding asset quality and economic recovery. However, with the economy recovering at a faster than anticipated pace and overall asset quality deterioration is below our expectations, we believe IndusInd Bank (IIB) and RBL Bank (RBL) offer significant value at current prices. Therefore, we initiate TACTICAL BUY on IndusInd Bank Ltd. and RBL Bank Ltd. with an upside of 34% and 32% respectively.

Date: March 11, 2021

Edelweiss Wealth Research 1

Index

Table of Contents

IndusInd Bank Ltd.

I. Asset quality deterioration below expectation; strengthening of balance sheet continues ...... 4

II. Bank regains confidence of depositors ...... 8

III. IIB fifth largest private bank in India (in terms of loan book) ...... 10

IV. Promoters show significant interest in IIB via conversion of warrants ...... 13

V. Strong capital adequacy to support credit growth ...... 14

VI. Return Ratios to amplify on moderation in credit cost and augmentation in credit growth ...... 15

VII. Continuation in planning cycle – 5; however, at moderate pace ...... 18

Outlook and Valuation ...... 19

Financials ...... 20

RBL Bank Ltd.

I. Swift Change in Business Model aided growth ...... 23

II. Focused on building granular deposit base ...... 29

III. Asset Quality ...... 30

IV. Moderating cost to result in superior Return Ratios ...... 31

Outlook and valuation ...... 32

Peer Comparison ...... 34

Financials ...... 35

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IndusInd Bank Ltd. Investor faith intact, growth in advances key focus IndusInd Bank’s (IIB) performance over FY10-20 was nothing short of spectacular. The last Raj Jha decade saw IIB emerge as one of India’s fastest growing (26% Advances CAGR) large private Research Analyst banks with healthy net revenue/PPoP/net profit of 29%/31%/29% CAGR. While the splendid [email protected] performance was backed by stellar credit growth, the bank also successfully increased CASA ratio to 40% in FY20 (v/s 24% in FY10). However, the cap on withdrawals from a large private Harsh Shah, CA, CFA bank in Mar’20 and deteriorating asset quality resulted in IIB witnessing a sharp plunge in Research Analyst [email protected] deposits and share price. Nevertheless, the bank managed to regain depositors’ confidence due to sound fundamentals and delivered 18% deposits growth in 9MFY21 (v/s Q4FY20). The bank has also increased its provision coverage ratio (PCR) to 87% in Q3FY21 (v/s 43% in Q1FY20) at the cost of moderation in net profit. This resulted in RoA declining to 0.8% (average CMP INR: 1,042 of last four quarters) from ~1.9% in FY18. However, we expect the deterioration in asset Rating: Tactical BUY quality to get arrested because majority of corporate stress has recognised in last few quarters. We have projected 15%/15%/55% growth in net revenue/PPoP/net profit over FY21- Target Price INR 1,393

23 on the back of 16% growth in advances. At CMP, the stock is trading at 1.5x FY23E ABV, at Upside: 34% ~30% discount to last five years’ average P/ABV. Therefore, we initiate Tactical ‘BUY’ on the stock with target price of INR1,393/share, implying 34% upside.

Asset quality deterioration below expectation; strengthening of balance sheet continues IIB exhibited robust asset quality (average GNPA at ~1%) during FY10-18; however, asset quality deteriorated to 2.45% in FY20 (v/s 1.13% in Q3FY19) due to slippages related to a large Bloomberg: IIB:IN infrastructure account. Despite riskier exposures like MFI and Auto loans, Proforma GNPA and 52-week restructuring were lower than expectations. Management has increased focus on strengthening 236 / 1,120 the balance sheet through higher provisioning and taking PCR ratio to 87% in Q3FY21 (v/s 53% range (INR): in Q3FY20), which has led to moderation in overall profitability. Share in issue (cr): 77.3

Bank regains confidence of depositors M cap (INR cr): 78,726 Deteriorating asset quality and moratorium on withdrawals from a leading private bank instilled Promoter fear among depositors. This led to customers withdrawing deposits from several private banks 15.2 (including IIB) despite assurances from the Reserve (RBI). Further, this fiasco even Holding (%) resulted in few state governments shifting their deposits from private banks. However, IIB has managed to regain depositors’ confidence over the last few quarters, leading to deposit growth of 5% QoQ in Q1FY21 and 18% in 9MFY21 (v/s Q4FY20). Strong traction in deposits led to healthy LCR and surplus cash. We expect IIB’s deposit traction to continue, which should translate into asset growth.

Promoters show significant confidence in IIB via conversion of warrants

IIB promoters have shown strong confidence in the bank by infusing capital at every juncture. In Feb’21, the promoter groups converted their warrants into stocks at a premium of about 60% over the market price. Consequently, promoters’ stake in the bank increased to 16.56% from 14.67% as on Dec-20. Additionally, the promoter groups also requested the RBI for permission to increase their stake to 26% in IIB. Conversion of warrants into stocks at a 60% premium over market rates not only demonstrates promoters’ confidence in the bank but is also testimony of IIB’s ability to maintain healthy capital adequacy ratio (CAR).

Outlook and Valuation IIB has bounced back sharply from tough times, aided by sound fundamentals and promoters’ confidence. We expect the bank to report healthy improvement in return ratios by H2FY22 with mid-teens credit growth. At CMP, the stock is trading at an attractive level (v/s last five years’ average P/ABV). Therefore, we initiate Tactical ‘BUY’ on the stock with a target price of

INR1,393/share, implying 34% upside.

Year to March (INR cr) FY19 FY20 FY21E FY22E FY23E

Net Revenue 14,493 19,010 18,979 21,588 25,139 PPoP 8,088 10,773 10,978 12,389 14,622 PAT 3,301 4,418 2,907 5,355 7,003

EPS (INR) 54.8 63.7 37.6 69.3 90.6 ABV (INR) 411.1 466.9 541.4 609.6 696.7 ROA (%) 1.4 1.6 1.0 1.6 1.8 ROE (%) 13.1 14.4 7.4 11.7 13.5 P/E (x) 19.1 16.4 27.8 15.1 11.5 Date: March 11, 2021 P/ABV (x) 2.5 2.2 1.9 1.7 1.5

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IndusInd Bank Ltd. Investment Hypothesis

I. Asset quality deterioration below expectation; strengthening of balance sheet continues IIB reported robust asset quality during FY10-18 with average GNPA of ~1%. However asset quality deteriorated and GNPA came in at 2.45% in FY20 (v/s 1.13% in Q3FY19) due to slippages related to a large infrastructure account. The bank witnessed major asset quality pain in corporate loans (GNPA surged from INR720cr in Q1FY19 to INR3,415cr in FY20 and now stands at INR 2,230cr). Thus, share of corporate GNPA in overall GNPA increased from 41% in Q1FY19 to 67% in Q4FY21 and now stands at 61%. However, corporate advances have shrunk to 43% as at Q3FY21 from 60% in Q1FY19 (adjusting BFIL’s merger, corporate loan book mix stood at 48%). IIB aggressively upfronted corporate GNPAs; due to this, slippages are moderating, which provides comfort.

Exhibit 1: Gross non-performing assets

3.5 3.0 2.5 2.0 1.5 1.0 0.5 - FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q1FY21Q2FY21Q3FY21

GNPA Proforma GNPA

Source: Company, Edelweiss Wealth Research

Exhibit 2: Large infra account led to spike in corporate GNPA of the bank

4.5% 4.0% 4.0% 3.7% 3.3% 3.4% 3.5% 3.1% 3.2% 3.2% 3.0% 2.5% 2.5% 2.0% 1.5% 1.1% 1.2% 1.2% 1.1% 1.2% 0.8% 1.0% 0.5% 0.0% Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

Retail GNPA Corporate GNPA

Source: Company, Edelweiss Wealth Research

Over the years, the bank has developed an expertise in Auto Financing, which contributes ~29% of its overall advances. Also, IIB’s exposure in MFI book stands at 11% due to the merger with Bharat Financial. While both segments are perceived to be riskier post Covid-19, IIB’s Proforma GNPA and restructuring was much below expectations.

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IndusInd Bank Ltd. Investment Hypothesis

Exhibit 3: Retail GNPA break-up

4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% PV CV UV 2W MFI Cards Tractor Small CV Small BBG/LAP LAP/HL/PL Equipments Construction

Q4FY20 Q1FY21 Q2FY21 Q3FY21

Source: Company, Edelweiss Wealth Research

Over FY10-18, IIB’s lower GNPA resulted in steady provision coverage ratio (PCR) of ~55% (average of last 5 years). However, the deterioration in asset quality required higher provisioning, which we believe will remain elevated in Q4FY21, and thus, a call to strengthen the balance sheet was taken by management. Accumulated provision over the last four quarters stood at ~INR85.2bn (4.1% of overall current advances including Covid-19 provisions of INR32.5bn), and not only led to lower profitability but also caused a jump in PCR ratio to 87% (PCR including Proforma GNPA at 77%) from 53% in Q3FY20. We believe the current PCR is in line with large private banks and provides much comfort on known and upcoming stress.

Exhibit 4: Bank is operating at life-time high Provision Coverage Ratio (PCR)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q1FY21Q2FY21Q3FY21

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

Asset quality movement in Q3FY21 Collection Efficiency (CE) stood at 97.1% in Dec'20 (v/s 94.7% in Q2FY21). Proforma slippages came in at INR2,508cr (1.2% of overall loans); of this, vehicles and MFI contributed 20% each, secured retail 15%, unsecured retail 30% and corporate 15%. Consequently, Proforma GNPA increased by 61bps (below expectations) sequentially to 2.93%. Overall, Covid-19 provision stood at INR3,261cr (including INR1,100cr provision in Q3FY21). Total PCR stood at 87% in Q3FY21 (including Proforma NPAs, PCR stood at 77%) against 77% in Q2FY21. Overall restructuring request is 1.8% (lower-than- expectations); of this, 0.6% restructuring was implemented as at Dec’20 (the same would be an additional 1.2% after including the restructuring invoked and the ones in process of being implemented). Of the restructuring implemented as at Dec’20, vehicles formed 30%, non-vehicle retail 13% and the balance was contributed by corporate banking. We believe IIB’s overall stress is well within expectations on account of the known exposure to riskier sectors such as Vehicles and MFI.

Segment-wise Asset quality Vehicle Finance (VF) CE in VF rose from 94.3% in Q2FY21 to 96.9% in Q3FY21. Proforma slippages came in at 80bps (v/s normal run-rate of 50bps). Restructuring came in at 1.7% of overall VF portfolio (luxury buses segment). The bank has witnessed excellent credit quality with loans backed by strong collateral from this segment. We expect these customers to return as overall economy further strengthens, and defaults, if any, to be range-bound. Freight demand and vehicle utilization has also been improving but the increasing price of diesel is denting overall profitability of auto operators. We believe asset quality issues are now behind as the economy is on track to revival.

Microfinance CE in MFI was 96% in the last week of Jan’21 and is continuing to improve. Incremental Proforma NPA stood at 2% (fully provided for) while loans disbursed post the lockdown contributed 56% of overall MFI loans with CE in new disbursed loans at 99%. With India’s eastern states seemingly vulnerable for MFI lenders, IIB curtailed its exposure to Assam and West Bengal. Currently, IIB’s overall exposure in Assam stands at INR44cr while in West Bengal, it is 13% (v/s 15% a year ago) of the MFI book or 1.3% of overall advances. CE in West Bengal improved to 93% by end-Jan’21 (v/s 90%/70% in Q3/Q2FY21). Ticket size of fresh loans in West Bengal stands at INR12.6k, which is one- half of Bharat Financial Inclusion Ltd’s average in India and one-third of the industry’s ticket size. Also, IIB’s exposure in West Bengal is in less vulnerable areas, and thus, we expect CE to improve in the state.

Other Retail Assets Proforma slippages in secured retail assets (including LAP and business banking) came in at 1.7%; however, Proforma slippages in unsecured retail assets came in at 9% (v/s normal run-rate of 5%) of unsecured loans. CE in unsecured loans came in at 97% (excluding the impacted portfolio) and is at pre-Covid level. Overall unsecured loans stand at 4% of overall advances and contribute 30% of overall Proforma slippages. We believe asset quality concerns in retail loans will moderate on account of lower unsecured loans and economic revival.

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IndusInd Bank Ltd. Investment Hypothesis

Corporate Bank IIB upfronted stressed asset recognition over the last 3-4 quarters; therefore, addition of fresh NPAs was immaterial. Proforma slippages came in at INR380cr (0.3% of overall corporate assets). Restructuring invoked in this segment is INR2,200cr, predominantly from travel, retail, and hospitality sectors. It also includes couple of large names – one from real estate and another from retail. Management expects the restructuring book to decline as resolution work has started in these two accounts. There was no restructuring in real estate (RE); however, in Q2FY21 results commentary, management highlighted two accounts that are under stress. Of this, one account has been taken over by a large developer. The other stressed account is evaluating ways and means to emerge from the stressed bracket (collateral for this account is >2.0x). Corporate book is expected to perform well on the asset quality front aided by aggressive upfront recognition of stressed assets in the past.

Gems and Jewellery There is no Proforma slippages and restructuring in this portfolio. Diamond supply chain remained steadfast on both pricing as well as inventory management during the Covid-19 crisis. This segment witnessed healthy traction in demand with decent profit margins. Therefore, management does not visualize any material stress in this segment.

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

II. Bank regains confidence of depositors Deteriorating asset quality and moratorium on withdrawals from in Mar’20 instilled fear among depositors. This led to customers withdrawing deposits from perceived weak private banks (including IIB) despite assurances from the RBI. Further, this fiasco even resulted in some state governments shifting their deposits from private banks.

Despite IIB management using television and print media to gain depositors’ confidence in the bank’s overall financial state, deposits declined 7% in Q4FY20 to INR2.02lakh cr from ~INR2.17lakh cr in Q3FY20. Weakening asset quality, outflow of deposits (due to Yes Bank Moratorium fiasco) and Covid-19 stress led to IIB’s share price plunging almost 85% (Aug-18 to Mar-20) and 72% (March 5, 2020 to March 25, 2020).

Exhibit 5: Healthy deposit growth over last decade

3,00,000 Yes bank 40% 35% 2,50,000 moratorium 30% 2,00,000 25% 1,50,000 20% 15% 1,00,000 10% 50,000 5% 0 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21

Deposit Growth YoY- RHS

Source: Company, Edelweiss Wealth Research

Exhibit 6: Covid-led panic and Yes Bank moratorium led to rapid decline in stock price

1200

1000 1075 800

600

400 413 200

0

05-Mar-20 06-Mar-20 07-Mar-20 08-Mar-20 09-Mar-20 10-Mar-20 11-Mar-20 12-Mar-20 13-Mar-20 14-Mar-20 15-Mar-20 16-Mar-20 17-Mar-20 18-Mar-20 19-Mar-20 20-Mar-20 21-Mar-20 22-Mar-20 23-Mar-20 24-Mar-20 25-Mar-20 26-Mar-20 27-Mar-20 28-Mar-20 29-Mar-20 30-Mar-20 Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

We believe IIB has managed to gain confidence of depositors over the last few quarters, leading to 5% QoQ growth in overall deposits in Q3FY21, aided by 13% QoQ growth in savings deposits.. Consolidation in deposits led to (a) selective borrowings such as longer tenure and attractive rates, (b) moderation in credit-deposits ratio, and (c) improving LCR (as at Q3FY21, LCR stood at 156% and the bank had surplus cash of over INR35,000cr). We believe healthy traction in retail deposits would lead to enhanced focus on asset growth.

Exhibit 7: Comfortable credit-to-deposit ratio post Q4FY20

105%

100%

95%

90%

85%

80%

75% Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

Source: Company, Edelweiss Wealth Research

Exhibit 8: Healthy deposit traction led to lower borrowings

70,000 100% 60,000 80% 50,000 40,000 60% 30,000 (INR cr) (INR 40% 20,000 20% 10,000 0 0% Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

Borrowing YoY growth - RHS

Source: Company, Edelweiss Wealth Research

Exhibit 9: Comfortable Liquidity Coverage Ratio (LCR) 156% 160%

150% 140% 140% 124% 130%

120% 112%

110%

100% Q4FY20 Q1FY21 Q2FY21 Q3FY21

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

III. IIB now India’s fifth largest private bank (in terms of loan book)

Over FY05-20, IIB grew its loan book by 23x (v/s overall banking industry advances growth of 9x). Such rapid growth was led by loan products offered by the bank – auto loans (29% mix), MFI (11% owing to the BhaFin merger), and large corporates (20% mix).

Exhibit 10: Vehicle finance & Corporate loans led to Impressive growth over past decade 2,50,000 40% 2,00,000 30% 1,50,000 20% 1,00,000 10% (INR cr) (INR 50,000 0% 0 -10% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21

Advances YoY Growth - RHS

Source: Company, Edelweiss Wealth Research

26% Exhibit 11: Advances CAGR (FY10-FY20)

17% 11%

IndusInd Bank Private Banks Overall Industry

Source: Company, Edelweiss Wealth Research Note: FY20 figure includes effect of BhaFin merger; adjusting the same, growth will be 24% CAGR

Current loan book of the bank has tilted towards retail and MFI. In FY17 and FY18, corporate loan book mix for the bank peaked at 60-61%. Post asset quality issues in the corporate book and merger with BhaFin, the company’s loan book now stands at 43:46:11 (corporate: retail: MFI). However, excluding the impact of BhaFin merger, corporate loan book mix still would have been at 48%, witnessing compression in the corporate book and healthy growth in the retail book.

Exhibit 12: Steady focus on retail and MFI

100%

80%

60%

40%

20%

0% Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

Corporate Retail Microfinance

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

Due to the bank focusing more on retail loans, yield profile improved, resulting in margin expansion from 4% in FY18 to 4.4% in FY20.

Exhibit 13: Retail commands higher yields as compared to corporate book 16% 14% 12% 10% 8% 6% 4% 2% 0% Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Corporate Retail

Source: Company, Edelweiss Wealth Research

Within corporate book, the bank is focused on Lease Rentals, Gems and Jewellery, NBFCs, and Real Estate Developers. We believe these segments are witnessing a healthy demand traction; therefore, we expect incremental within wholesale to come from these segments.

Exhibit 14: Corporate book exposure (as at Q3FY21)

Gems & Jewellery NBFCs (Other than HFCs) Real Estate Developers Steel Power Generation & Distribution Lease Rentals Services Housing Finance Company Other Industry

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

We believe IIB is well poised to grow in mid-to-high teens over FY21-23E backed by (a) steady demand traction in the vehicle industry (where the bank has significant presence) and MFI, (b) healthy LCR, (3) overall deposit base witnessing strong movement for past few quarters, leading to the bank reporting CD ratio of 87% in Q3FY21 (v/s 102% in Q4FY20), and (4) robust capital position. Bank has showcased its ability to attract deposits even after witnessing outflow in Q4FY20. Hence overall liability franchise of the bank is currently at a comfortable position to aide in loan book growth. With overall CV cycle witnessing an uptrend and demand still emerging from the MFI space, we believe IIB is perfectly placed to reap its benefit.

Exhibit 15: Retail & MFI to aide IIB achieve mid-teens loan book growth

3,50,000 40% 3,00,000 35% 2,50,000 30% 25% 2,00,000 20% 1,50,000 (INR cr) (INR 15% 1,00,000 10% 50,000 5% - 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Advances Growth YoY (RHS)

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

IV. Promoters show significant confidence in IIB via conversion of warrants

IndusInd International Holdings Ltd. (IIHL) and IndusInd Ltd., the promoters of IIB, have displayed significant confidence in the bank by acquiring its shares on various occasions since 2015. In Feb’21, the two entities converted their warrants into stocks at a premium of ~60% over the market price. Promoters’ stake in the bank increased to 16.56% from 14.67% as on Dec-20. Additionally, in a filing on 3rd Apr’20, the promoters’ group had requested the RBI’s permission to increase their stake to 26% in IIB. However, in Nov’20, a review paper submitted by an RBI internal committee proposed permitting the promoters of private banks to maintain up to 26% stake in their banks over the long term. The recommendation is yet to be accepted. However, on conversion of their warrants in Feb’21, IIHL explicitly reiterated its desire to increase its stake in IIB to 26%. Further, it claimed that raising debt by pledging some of its shareholding was a part of that drive. Conversion of warrants into stocks at a 60% premium over prevailing market rates not only demonstrates promoters’ confidence in IIB but is also testimony of the bank’s ability to maintain healthy CAR.

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IndusInd Bank Ltd. Investment Hypothesis

V. Strong capital adequacy to support credit growth

IIB’s capital-to-risk weighted assets ratio (CRAR) has been at the highest level over the past few years, especially CET-1. Capital adequacy in Q3FY21 stood at 16.93% including 9MFY21 profit. Of this, CET-1 ratio stood at 14.89%. With the subscription of warrants issued to promoter, CET-1 has seen an addition of another INR2,000cr (~75bps), taking CET-1 ratio to 15.64% and overall capital adequacy to 17.68%. We believe the bank’s current capital adequacy is comfortable to offset the asset quality pain and to ensure credit growth over the next 2-3 years. Ample liquidity with adequate capital adequacy should support credit growth going forward.

Exhibit 16: Comfortable Capital Adequacy Ratio

18.00

16.00

14.00 14.9 14.9 14.5 14.0 12.00 13.4 13.2 13.2 12.7 12.1 10.00 11.2 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q1FY21 Q2FY21 Q3FY21

CRAR CET-1 Ratio

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

VI. Return ratios to swell on moderation in credit cost and augmentation in credit growth

IIB reported substantial improvement in return on assets and equity over the last decade. In FY09/10, RoA stood at 0.6%/1.2% and RoE at 9.8%/17.3%. RoA/RoE improved to 1.9%/16.2% in FY18. Return ratios moderated during FY18-Q3FY21 due to increasing stress, which led to higher credit costs. The bank reported one of the lowest credit costs during FY10-18 (74bps) against industry average of 120bps; however, average credit cost increased over Q1FY19-Q3FY21 to 2.6% (last four quarters average credit cost came in at 4.2%, led by Covid-19 induced lockdown, and therefore, provision for Covid-19). We expect credit cost to remain elevated in Q4FY21, and to moderate thereafter. We project credit cost at 3.2%/2.0%/1.8% for FY21/22/23E.

Exhibit 17: Spike in credit cost is attributable to corporate book stress and Covid-19

5.0%

4.0%

3.0%

2.0%

1.0%

0.0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q1FY21Q2FY21Q3FY21

Source: Company, Edelweiss Wealth Research

In addition to moderation in credit cost, the bank’s net revenue-to-assets increased substantially over the years – it increased from 3.9%/4.9% in FY09/FY10 to 6.5%/7.0% in FY18/20. We believe net revenue-to-assets are likely to remain elevated as almost half of IIB’s exposure is in high yielding assets, which should help generate higher margins. Further, IIB is among the top-3 banks in debt syndication. Due to this, the bank’s non-interest income stands at 39-40% of overall net revenue (average of last 10 years) – one of the highest in the banking sector.

Exhibit 18: Healthy non-interest income to net revenue ratio

8.0% 50%

40% 6.0% 30% 4.0% 20% 2.0% 10%

0.0% 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Net Revenue to Avg. IEA Non-Interest Inc to Avg. IEA Non-Int Inc to Net Revenue (RHS)

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

Digitization and improving productivity per branch and per employee led to moderation in the cost- income (C/I) ratio. The C/I ratio of the bank came in at 60%/51% in FY09/FY10, which reduced to 44%/43% in FY19/FY20. In 9MFY21, C/I ratio came in at ~41% and this moderation is in line with industry average. We believe the lockdown has led to significant jump in digital transactions, which would ultimately reduce operating costs. We have projected ~150bps improvement in C/I ratio over FY20-23. However, the contraction in C/I ratio in 9MFY21 was 200bps YoY, which we believe was largely due to (a) lower origination of loans, and (b) lesser infrastructure, travelling, advertisement and promotional expenses.

Exhibit 19: High digital business sourcing across products post COVID-19 lockdown

95% 92% 91% 86% 79% 69%

43% 40% 37% 35%37% 38% 29%

product 8% 12% 1% % Digital Sourcing for respectivefor Sourcing % Digital Savings Indus Forex Indus Credit Cards Credit Non Resident Non Fixed Deposits Fixed Personal Loans Personal SIP (Indusmart) SIP Q3FY20 Account Current Q3FY21

Source: Company, Edelweiss Wealth Research

Exhubit 20: Revenue per branch and employee (INR lakhs)

1200 80 1000 60 800 600 40 400 20 200 0 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Revenue per branch Revenue per employee (LHS)

Source: Company, Edelweiss Wealth Research

Exhbit 21: Profit per branch and employee (INR lakhs)

300 20 250 15 200 150 10 100 5 50 0 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Profit per branch Profit per employee (LHS)

Source: Company, Edelweiss Wealth Research

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IndusInd Bank Ltd. Investment Hypothesis

The bank has been generating one of the highest PPoP/advances – 5.2% in FY20 (v/s 3.4% in FY10). We believe such healthy operating profit margin provides cushion in case of increasing credit cost.

Exhibit 22: PPoP to Advances

5.2%

4.8% 4.7% 4.7% 4.6% 4.5% 4.3% 4.1% 4.1% 3.9%

3.4%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Edelweiss Wealth Research

Edelweiss Wealth Research 17

IndusInd Bank Ltd. Investment Hypothesis

VII. Continuation in planning cycle – 5; however, at moderate pace

IIB has published its planning cycle (PC) -5, which it does every three years. This was the bank’s fifth planning cycle with the following targets – growth of 15-18%, CASA >40%, revenue growth to exceed balance sheet growth, PPoP/loans> 5%, branch network – 2,500, and customer base doubling to 45mn. However, the loan growth is applicable for FY22-23E. In the past, IIB has either achieved or exceeded its own planning for every three-year cycle. Planning cycle-5 was supposed to begin in FY20; however, it was delayed due to chaos related to (a) weakening asset quality, and (b) outflow of deposits. Given IIB’s loan book and execution track record, we believe PC-5 is achievable and will not only enhance revenue but also profitability.

Exhibit 23: IIB has been able to surpass its own expectations

Source: Company, Edelweiss Wealth Research

Edelweiss Wealth Research 18

Indusind Bank Ltd. Outlook and Valuation

Outlook and Valuation We have initiated Tactical ‘BUY’ on IIB with target price of INR1,393/ share based on 2.0x FY23E ABV. The stock is currently trading at 1.5x 2-year forward P/ABV (Almost 30% discount to last 5 years average 2-yr fw P/ABV multiple), giving us significant comfort on possible re-rating once normalised consistent RoA of 1.7-1.8% is achieved. IIB is currently trading at a discount to its historical average and also lower than the current valuation of its peer private banks.

We believe that corporate stress in the bank is now behind and the bank’s strategy of focusing on high yielding retail and MFI products will lead to overall margin improvement.

Key Risk:  Prolonged Covid-19 led lockdown, new strain of Coronavirus and/or delayed commercialisation of Covid-19 vaccine could lead to higher stress in IIB’s growth and asset quality.

Exhbit 24: 2-year forward price-to-adjusted book value 3.0 2.5 2.0 1.5 1.0 0.5 0.0 01-04-2007 01-11-2007 01-06-2008 01-01-2009 01-08-2009 01-03-2010 01-10-2010 01-05-2011 01-12-2011 01-07-2012 01-02-2013 01-09-2013 01-04-2014 01-11-2014 01-06-2015 01-01-2016 01-08-2016 01-03-2017 01-10-2017 01-05-2018 01-12-2018 01-07-2019 01-02-2020 01-09-2020

P/ABV Mean +1SD -1SD

Source: Company, Edelweiss Wealth Research

Exhibit 25: Share Price

2,500 1 2 2,000

1,500

1,000

500

0 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jan-21 Sep-17 Sep-18 Sep-19 Sep-20 Nov-17 Nov-18 Nov-19 Nov-20 Mar-17 Mar-18 Mar-19 Mar-20 May-17 May-18 May-19 May-20 1. IL&FS crisis 2. Yes Bank Deposit Moratorium Fiasco & COVID-19 led stress

Edelweiss Wealth Research 19

Indusind Bank Ltd. Financials

Income statement Year to March FY19 FY20 FY21E FY22E FY23E Interest income 22,261 28,783 28,391 31,805 37,022 Interest charges 13,415 16,724 15,867 17,474 20,242 Net interest income 8,846 12,059 12,524 14,330 16,780 Non-interest income 5,647 6,951 6,455 7,258 8,359 Net revenues 14,493 19,010 18,979 21,588 25,139 Operating expense 6,405 8,237 8,001 9,199 10,516 - Employee exp 1,854 2,209 2,381 2,689 3,071 - Other opex 4,551 6,029 5,620 6,510 7,445 Preprovision profit 8,088 10,773 10,978 12,389 14,622 Provisions 3,108 4,652 7,076 5,202 5,223 PBT 4,980 6,121 3,902 7,188 9,399 Taxes 1,680 1,703 995 1,833 2,397 PAT 3,301 4,418 2,907 5,355 7,003 Extraordinaries 0 0 0 0 0 Reported PAT 3,301 4,418 2,907 5,355 7,003 Basic number of shares (crs) 60.3 69.4 77.3 77.3 77.3 Basic EPS (INR) 54.8 63.7 37.6 69.3 90.6 Diluted number of shares (mn) 60.3 69.4 77.3 77.3 77.3 Diluted EPS (INR) 54.8 63.7 37.6 69.3 90.6 DPS (INR) 7.5 0 0 3 4 Payout ratio (%) 12.4 0.0 0.0 3.9 5.2

Balance Sheet Year to March FY19 FY20 FY21E FY22E FY23E Paid Capital 603 694 773 773 773 Share Warrants & Outstandings 11 683 - - - Reserve & Surplus 26,072 33,330 42,606 47,682 54,313 Shareholder's Fund 26,686 34,706 43,379 48,455 55,086 Deposits 1,94,868 2,02,040 2,31,794 2,73,718 3,19,460 Borrowings 47,321 60,754 55,631 60,218 67,087 Other Liabilities 8,944 9,558 6,107 10,490 12,049 Total Liabilities 2,77,819 3,07,058 3,36,911 3,92,881 4,53,681 Cash & Bank Balance 14,783 16,004 17,964 20,529 23,161 Investment 59,266 59,980 67,912 78,799 91,942 Loan & Advances 1,86,394 2,06,783 2,20,899 2,56,140 2,99,121 Net Fixed Assets 1,710 1,820 2,048 2,304 2,592 Other assets 15,666 22,471 28,088 35,110 36,866 Total Assets 2,77,819 3,07,058 3,36,911 3,92,881 4,53,681

Growth ratios (%) Year to March FY19 FY20 FY21E FY22E FY23E NII growth 18.0 36.3 3.9 14.4 17.1 Net revenues growth 18.3 31.2 (0.2) 13.7 16.4 Opex growth 14.5 28.6 (2.9) 15.0 14.3 PPP growth 21.5 33.2 1.9 12.9 18.0 Provisions growth 164.4 49.7 52.1 (26.5) 0.4 PAT growth (8.5) 33.8 (34.2) 84.2 30.8

Edelweiss Wealth Research 20

Indusind Bank Ltd. Financials

Operating ratios (%) Year to March FY19 FY20 FY21E FY22E FY23E Yield on advances 11.0 12.2 11.1 11.1 11.1 Yield on Investments 6.7 7.2 6.4 6.4 6.4 Yield on Interest Earning Assets 9.5 10.6 9.6 9.6 9.6 Cost of Deposits 6.1 6.5 5.7 5.5 5.5 Cost of funds 6.2 6.6 5.8 5.6 5.6 Spread 3.3 4.0 3.9 4.0 4.0 Net interest margins 3.8 4.4 4.2 4.3 4.4 Cost-to-income 44.2 43.3 42.2 42.6 41.8 Tax rate 33.7 27.8 25.5 25.5 25.5

Balance sheet ratios (%) Year to March FY19 FY20 FY21E FY22E FY23E Loan growth 29 11 7 16 17 IEA growth 25 9 8 16 17 Deposits growth 28.5 3.7 14.7 18.1 16.7 IBL growth 27.5 8.5 9.4 16.2 15.8 Gross NPA ratio 2.1 2.5 3.8 3.0 2.3 Net NPA ratio 1.2 0.9 0.8 0.6 0.4 Provision coverage 42.4 62.9 79.3 81.0 81.4 CAR 14.2 15.0 17.7 17.6 17.1

RoE decomposition (%) Year to March FY19 FY20 FY21E FY22E FY23E Net interest income/Assets 3.8 4.4 4.2 4.3 4.4 Other Income/Assets 2.4 2.6 2.2 2.2 2.2 Net revenues/Assets 6.2 7.0 6.4 6.5 6.5 Operating expense/Assets 2.7 3.0 2.7 2.8 2.7 Provisions/Assets 1.3 1.7 2.4 1.6 1.4 Taxes/Assets 0.7 0.6 0.3 0.6 0.6 Total costs/Assets 4.8 5.4 5.5 4.9 4.7 ROA 1.4 1.6 1.0 1.6 1.8 Equity/Assets 11.4 10.2 12.3 14.1 13.6 ROAE 13.1 14.4 7.4 11.7 13.5

Valuation metrics Year to March FY19 FY20 FY21E FY22E FY23E Basic EPS (INR) 54.8 63.7 37.6 69.3 90.6 Diluted EPS (INR) 54.8 63.7 37.6 69.3 90.6 Book Value per Share(INR) 437.2 486.0 556.9 622.6 708.3 Adjusted BV per share (INR) 411.1 466.9 541.4 609.6 696.7 Price/ Earning (x) 19.1 16.4 27.8 15.1 11.5 Diluted P/E (x) 19.1 16.4 27.8 15.1 11.5 Price/Book Value (x) 2.4 2.1 1.87 1.68 1.47 Price/Adj. Book Value(x) 2.5 2.2 1.9 1.7 1.5

Edelweiss Wealth Research 21

RBL Bank Ltd Ready for second leg of growth…

Over the last few quarters, RBL Bank Ltd (RBL) has managed to appease multiple Raj Jha doubts regarding its loan book and asset quality, and at the same time, reassured Research Analyst [email protected] investors of its journey from being a corporate bank to a retail-focused bank. As at Q3FY21, RBL’s corporate book mix stood at 42% (v/s 61% in FY16). Further, the Harsh Shah, CA, CFA Research Analyst bank posted impressive growth in the credit cards and microfinance (MFI) [email protected] business, with both contributing 33% of the total loan book as at Q3FY21 (v/s 12.6% as at Q3FY18). Moreover, the bank’s performance over the last decade has been phenomenal – considering the stress RBL faced in its corporate book post the IL&FS crisis, the bank delivered healthy 48%/ 43%/ 54%/ 39% CAGR in CMP INR: 242 Advances/ Deposits/ Net Revenue/ Net Profit over the same period. Hence, we Rating: Tactical BUY initiate Tactical ‘BUY’ on RBL Bank Ltd. Target Price INR: 324 Upside: 32% Swift change in business model aided growth

Till FY18, RBL was focused on corporate book, servicing large as well as mid-sized companies through multiple products and service offerings. Thereafter, RBL changed its business strategy and started focusing heavily on the cards business (it purchased RBS India’s business banking, card and mortgage businesses in FY14 and entered into a strategic partnership with in FY17). These partnerships propeled RBL’s card business with the bank commanding credit card market share of 5% as at Dec’20 (v/s 0.4% in FY15). Thus, RBL’s loan book mix within corporate Bloomberg: RBK:IN and commercial banking reduced to 42% as at Q3FY21 (v/s 61% in FY16). 52-week 102 / 318 Focused on building granular deposit base range (INR): In Q4FY20, RBL witnessed heavy deposit outflows (decline of 8% QoQ in Q4FY20) Share in issue (cr): 59.8 owing to the cap introduced on withdrawals by a leading private bank and a co- M cap (INR cr): 14,461 operative bank. However, thereafter the bank managed to win customers’ Promoter confidence and witnessed substantial sequential growth in deposits (over Q4FY20- - Holding (%) Q3FY21, RBL’s deposits increased 16%). Moreover, RBL is now focused on building a more granular deposit base. Its CASA ratio jumped significantly from 18% in FY16 to 31.1% as at Q3FY21.

Significant comfort on valuation; initiate Tactical ‘BUY’

We expect RBL to post ROA of 1.4% by end-FY23E on the back of strong operating performance and moderating credit cost. Bank has traded at an average valuation of 1.9x 2-year forward P/ABV multiple since listing. Currently, the bank is trading at 1.0x FY23E P/ABV. This gives us significant comfort on the possible re-rating of the stock once ROA normalizes. Hence, we initiate Tactical ‘BUY’ on the stock with a target price of INR324/share, valuing the bank at 1.3x FY23E P/ABV multiple.

Year to March (INR cr) FY19 FY20 FY21E FY22E FY23E Net Revenue 3,982 5,540 5,751 6,480 7,622 PPoP 1,940 2,752 2,893 3,283 3,966 PAT 867 506 521 1,027 1,583 EPS (INR) 20.3 9.9 8.7 17.2 26.5 ABV (INR) 171.6 194.0 198.3 220.5 249.2 ROA (%) 1.3 0.6 0.6 1.1 1.4 ROE (%) 12.2 5.6 4.5 7.8 10.9 P/E (x) 12.1 24.6 28.1 14.1 9.1

P/ABV (x) 1.4 1.3 1.2 1.1 1.0 Date: March 11, 2021

Edelweiss Wealth Research 22

RBL Bank Ltd Investment Hypothesis

I. Swift change in business model aided growth RBL bank had created an robust corporate book, however, prolonged sluggishness post FY18 in the macro-economic environment impacted overall asset quality of the bank which got accentuated by liquidity crunch due to IL&FS crisis. Thus, management took a strategic decision to increase focus towards retail book. Post the IL&FS crisis, RBL Bank swiftly shifted its focus from corporate book to retail book (especially cards and MFI businesses). Acquisition of RBS India’s card business in FY14 and strategic tie-up with Bajaj Finance in FY17 propelled growth of RBL’s card business.

Exhibit 1: Substantial reduction in corporate book Exhibit 2: Overall quality of book has been over the years improving significantly 100% 100% 7% 8% 2% 6% 7% 7% 80% 80% 37% 27% 21% 18% 46% 47% 60% 60% 40% 40% 20% 20% 0% 0% FY16 FY17 FY18 FY19 FY20 H1FY21 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

H1FY21 AAA AA-, AA, AA+ A-, A, A+ BBB-, BBB, BBB+ BB+ and below Corporate Non-Corporate

Source: Edelweiss Wealth Research

Exhibit 3: Focus towards retail book (especially card business) has led to higher mix of retail in overall book

FY14 Q3FY21

13% 12%

36% 32%

23%

46% 10% 27%

Corporate Corporate Commercial Banking Commercial Banking Retail Retail DB & FI (Development Banking & Financial Inclusion) DB & FI (Development Banking & Financial Inclusion) Source: Edelweiss Wealth Research

RBL has witnessed impressive growth in the retail book, especially in credit cards and MFI book. It is one of the fastest growing banks in the credit cards segment with 5x increase in market share in less than five years. According to data released by the RBI, RBL commands credit card market share of 5% with 28lakh cards-in-force as at Dec’20. RBL is currently the fifth largest credit card player in India (climbed from 16th largest credit card player to fifth largest in less than six years).

Edelweiss Wealth Research 23

RBL Bank Ltd Investment Hypothesis

Exhibit 4: Credit Card witnessed impressive Exhibit 5: Impressive growth in Spends Market growth Share as well. 5.1% 30 5% 4.6% 4% 20 2.9% 3% 2.0% 2% 10 0.8% 1.1% 1% 0.3% 0 0% FY16 FY17 FY18 FY19 FY20 Dec-20 FY16 FY16 FY17 FY18 FY19 FY20 Dec-20 Cards in Force (In lacs) Market Share (RHS)

Source:RBI, Company, Edelweiss Wealth Research

We expect RBL’s credit card business to outgrow industry growth rate for at least the next 4-5 years due to increasing penetration within existing customers and also expanding product basket. The company has also recently launched an ‘Edition Card’ in partnership with Zomato and a ‘YOUnique’ card, India’s first customisable credit card.

Exhibit 6: Bank has grown its outstanding cards by 4x of industry growth rate (Cards outstanding CAGR between FY15-20)

98%

27% 32% 22% 19% 22%

Industry Axis Bank HDFC Bank ICICI Bank RBL Bank

Source:RBI, Edelweiss Wealth Research

Edelweiss Wealth Research 24

RBL Bank Ltd Investment Hypothesis

Exhibit 7: Credit cards – customer segment insights

Salaried: Self Employed (SE) mix City Tier Mix

1.14 0.75 19% 29%

0.76 12% 69% 1.09 0.94 71%

Salaried Self-Employed Tier 1 Tier 2 Tier 3

Age Group Mix Carded Mix 1.51 0.83 1.07 3% 13% 18% 20% 1.13

35% 27% 0.99 1.08 0.94 84%

Below 30 30-35 35-45 45+ NTC Bureau Tested Carded

90+ Base: Indexed Delinquency Rate Source: Company, Edelweiss Wealth Research

Edelweiss Wealth Research 25

RBL Bank Ltd Investment Hypothesis

Exhibit 8: Value under Exhibit 9: Status as at 31st Dec'20 moratorium %

24.0% 1.2% 21.8% 0.7% 0.5% 15.7% 9.4% 5% 2%

90+/Changed off 30-89 dpd Aug exit Morat - as of 1-29 dpd Restructured and current Apr' 20 Jun' 20 Aug' 20 30 Sep 20 Current

Source: Company, Edelweiss Wealth Research

Exhibit 10: Collection Efficiency

100% 100% 100% 101% 94% 84% 85% 85% 86% 89% Jan'21 Jun'20 Oct'20 Sep'20 July'20 Dec'20 Aug'20 Nov'20 May'20 Pre-Covid Source: Company, Edelweiss Wealth Research

Apart from credit cards, RBL has also built a robust MFI business, which now constitutes 12% of its loan book (v/s 7% in FY17). RBL’s MFI book has delivered strong 44% CAGR over FY17-20. Microfinance industry has undergone significant changes over the past few years with many events impacting the sector such as demonetization, implementation of GST, etc. We believe RBL will increase its focus in this segment as it has an attractive margin profile; however, growth is epxected remain moderate over the next 1-2 quarters due to ongoing Covid-19 related stress.

Edelweiss Wealth Research 26

RBL Bank Ltd Investment Hypothesis

Exhibit 11: Microfinance industry snapshot – as at 30th Sep’20

Banks SFBs NBFCs MFIs NBFCs Not for profit MFIs

Source: Company, Edelweiss Wealth Research

Not for Banks SFBs NBFC-MFIs NBFCs Total Industry Profit MFIs Unique Live Borrowers ('000) 25,320 14,423 24,729 7,791 781 73,044 Active Loans ('000) 36,726 20,329 36,177 8,580 1,052 1,02,864 Portfolio (`crore) 93,410 42,682 70,142 19,838 1,772 2,27,844 Disbursed Amount (`crore) - JAS'20 17,301 4,411 9,051 1,172 440 32,375 Average Ticket Size (`) -JAS’20 38,862 31,678 31,956 32,006 29,719 35,225 30+ Delinquency (POS) 6.03% 2.79% 4.21% 2.04% 1.34% 4.48% 90+ Delinquency (POS) 0.39% 0.26% 1.25% 0.35% 0.53% 0.63% Source: Equifax SIDBI, Edelweiss Wealth Research

RBL has strategically grown its MFI book with state concentration cap of 15% and district concentration cap of 2%. In Q3FY21 results commentary, management highlighted that collection efficiency for the MFI book has been improving MoM, with the bank witnessing some stress in Assam, West Bengal, Punjab, and certain pockets of . Therefore, new business originations are being done in a risk calibrated manner, with focus being more on collections and engagement with customers.

Exhibit 12: Impressive growth in the MFI book

8,000 70% 7,000 60% 6,000 50% 5,000 40% 4,000 30% 3,000 2,000 20% 1,000 10% 0 0% FY17 FY18 FY19 FY20 Q3FY21

MFI Loan Book (INR cr) Growth (RHS) Mix in overall book (RHS)

Source: Company, Edelweiss Wealth Research

Edelweiss Wealth Research 27

RBL Bank Ltd Investment Hypothesis

RBL MFI Business Metrics

Exhibit 13: RBL Bank's MFI Loan Book Exhibit 14: Loan Tenor

22% 28% 2.70% 6,725 6,445 5,520 5,028 30.06%

(INR Crore) (INR 67.24%

Dec 31' 2019 Dec 31' 2020 Mar 31' 2019 Mar 31' 2020 12 months 18 months 24 months

Exhibit 15: Average OS balance Exhibt 16: Average Ticket Size of new loans

22,139 34,903 38,447 20,892 19,444 31,183

24,807 37,855 38,757 21,690 23,726 33,827

33,413 18,897 19,109 22,335 30,531 28,235

Sep-18 Sep-19 Sep-20 Sep-18 Sep-19 Sep-20

RBL Peer Industry RBL Peer Industry

Average outstanding per customer lower than industry Ticket size declined during Covid-19 outbreak Source: Company, Edelweiss Wealth Research

Exhibit 17: Well diversified MFI Book State Name % of Portfolio Dec'20 % of Portfolio Mar'20 Bihar 12.60% 14.70% Tamil Nadu 13.60% 13.40% Maharashtra 9.60% 10.70% Karnataka 8.60% 8.80% West Bengal 8.40% 8.50% Rajasthan 8.50% 7.30% Uttar Pradesh 6.20% 3.40% Odisha 5.80% 6.20% Madhya Pradesh 5.10% 4.90% Punjab 4.30% 4.60% Haryana 3.70% 3.90% Gujarat 3.10% 3.10% Jharkhand 2.90% 2.10% Assam 2.40% 2.80% Kerala 1.50% 1.50% Chhattisgarh 1.40% 1.70% Uttarakhand 0.70% 0.80% Goa 0.50% 0.60% Tripura 0.50% 0.50% Puducherry 0.50% 0.40% Meghalaya 0.10% 0.10% Himachal Pradesh 0.02% 0.00% Grand Total 100.00% 100.00%

Edelweiss Wealth Research 28

RBL Bank Ltd Investment Hypothesis

II. Focused on building granular deposit base In Q4FY20, along with few other private banks, RBL witnessed heavy deposit outflows (declined 8% QoQ) owing to the cap introduced on withdrawals from a leading private bank and a co-operative bank. However, RBL bounced back with impressive deposit growth in 9MFY21.

The bank has considerably increased CASA deposits over the last few years. Over the last few quarters, RBL has turned cautious and is focused on building a granular deposit book, effect of which will be reflected in the coming quarters.

Exhibt 18: Steadily growing its deposit base

1,20,000 50% Moratorium on Yes Bank 1,00,000 40%

80,000 30%

60,000 20%

40,000 10%

20,000 0%

0 -10% FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Deposits (INR cr) Growth YoY (RHS)

Source: Company, Edelweiss Wealth Research

Exhibit 19: Improving CASA Ratio

29.6% 30.1% 31.1% 31.1% 26.5% 26.8%

29.3% 28.7% 29.5% 26.4% 24.3% 24.2%

Sep 30' 2019 Dec 31' 2019 Marc 31' 2020 June 30' 2020 Sep 30' 2020 Dec 30' 2020

CASA Ratio Average CASA Ratio

Source: Company, Edelweiss Wealth Research

Exhibit 20: Bank is operating at a robust CAR and Tier-1 capital; giving significant comfort 17.917.1 15.3 16.515.3 13.112.7 12.9 13.7 13.6 13.5 11.1 11.4 12.1

FY15 FY16 FY17 FY18 FY19 FY20 Q3FY21

Capital Adequacy Ratio Tier-1 Capital

Source: Company, Edelweiss Wealth Research

Edelweiss Wealth Research 29

RBL Bank Ltd Investment Hypothesis

III. Asset Quality RBL’s GNPA ratio increased to ~2.6% in Q2FY20 (v/s average of <1.0% from FY09-19). In Q2FY20 results commentary, the bank declared stress in its corporate book with respect to few key accounts (including Essel Group, Café Coffee Day, Eveready Group, Sintex group, etc.) totalling to INR1,800cr (~3% of loan book at that time), which was followed by sharp stock price correction.

Over the next few quarters, management took an aggressive stance of creating higher provisioning and simulatenously recognising slippages, avoiding any one-off impact on the overall performance of the bank. Annualized Slippage ratio (calc.), which stood at ~2.1% in Q1FY20, shot up to 12%/8%/5% in Q2FY20/Q3FY20/Q4FY20. Credit cost also increased to >4% (v/s previous trend of 1- 1.5%). At the same time, the bank cautiously started to run down its corporate book, focusing more on growth in the retail and MFI book. Overall asset quality deterioration in the bank is below expectation considering the fact that bank has 33% of its loan book in card and MFI business, which is perceived to be risky in nature. Against which, bank reported 108bps QoQ increase in Proforma GNPA to 4.57%.

With the stress already known and minimal restructuring, we expect management to recognise majority of perceived stress in Q4FY21. We believe FY22E to be a year of normalisation with the bank focusing on growth and superior return ratios.

Exhibit 21: Corporate stress led to deterioration in Asset quality; leading to bank operating at life-time high PCR

5.0 100

4.0 80

3.0 60

2.0 40

1.0 20

0.0 0 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21

GNPA (%) Proforma GNPA (%) PCR (%) - RHS

Source: Company, Edelweiss Wealth Research

Exhibit 22: Credit cost to peak in Q4FY21; expect normalisation in FY22E

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21

Credit Cost Slippages Proforma Slippages

Source: Company, Edelweiss Wealth Research

Edelweiss Wealth Research 30

RBL Bank Ltd Investment Hypothesis

IV. Moderating cost to result in superior return ratios We believe RBL has all the right ingredients for its next leg of growth – (a) comfortable liquidity and capital, (b) adequate provisioning, and most importantly, (c) Higher concentration towards granular deposits, which should significantly aid in growing the retail book.

RBL has reduced its overall costs significantly (cost-to-income ratio of 63% in FY14 declined to 48% in 9MFY21). We believe overall costs will continue to reduce in the coming years due to (a) higher efficiency, (b) increased digitisation, and (c) Focus on high yielding products like cards and MFI business leading to a boost in Net Revenue.

Exhibit 23: Impressive reduction in overall Cost-to-Income ratio

62.5 58.6 53.4 53.0 51.3 50.3 47.9

FY15 FY16 FY17 FY18 FY19 FY20 9MFY21

Source: Company, Edelweiss Wealth Research

Despite the high costs, RBL posted ROA of 1-1.3% between FY17 to FY19. However, with increased credit cost, overall return ratios contracted. With credit cost cycle peaking out and overall costs reducing, we expect RBL to clock ROA of 1.3-1.4% by FY23E. Significant improvement in return ratios will be further aided by growth in cards and MFI business, which has ROA of 4%+.

Exhibit 24: ROA to propel guided by superior retail growth and cost optimising 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company, Edelweiss Wealth Research

Edelweiss Wealth Research 31

RBL Bank Ltd Outlook and Valuation

Outlook and valuation We initiate Tactical ‘BUY’ on RBL with target price of INR324/share based on 1.3x FY23E ABV. the bank traded at an average valuation of 1.9x 2-year forward P/ABV since listing in August-2016. The bank is currently trading at 1.0x 2-year forward P/ABV. This gives us significant comfort on possible re-rating of the stock once the bank achieves consistent normalised ROA of 1.2-1.3% in next 3-4 quarters. RBL is currently trading at a discount to its historical average and lower than the current valuation of its peer private banks.

We believe RBL bank has all the necessary ingredients for its next phase of growth. Further, transformation from a corporate bank to a retail bank with heavy focus on high return generating products like cards and MFI should hold it in good stead.

Key Risk:  Prolonged Covid-19 led lockdown, new strain of coronavirus and/or delayed commercialisation of Covid-19 vaccine could lead to higher stress on the bank’s growth and asset quality.  Any detrimental change in the RBL-Bajaj partnership in the cards business could impact the bank’s overall performance.

Exhibit 25: 2-year forward P/ABV

3.0 2.5 2.0 1.5 1.0 0.5 0.0 01-08-2016 01-10-2016 01-12-2016 01-02-2017 01-04-2017 01-06-2017 01-08-2017 01-10-2017 01-12-2017 01-02-2018 01-04-2018 01-06-2018 01-08-2018 01-10-2018 01-12-2018 01-02-2019 01-04-2019 01-06-2019 01-08-2019 01-10-2019 01-12-2019 01-02-2020 01-04-2020 01-06-2020 01-08-2020 01-10-2020 01-12-2020 01-02-2021

P/ABV Mean +1SD -1SD

Source: Company, Edelweiss Wealth Research

Exhibit 26: Share Price

800 1 2 700 600 500 400 300 200 100 0 Jun-17 Jun-18 Jun-19 Jun-20 Oct-16 Oct-17 Oct-18 Oct-19 Oct-20 Apr-17 Apr-18 Apr-19 Apr-20 Feb-17 Feb-18 Feb-19 Feb-20 Feb-21 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 1. Café Coffee Day Fiasco. 2. Yes Bank Deposit Moratorium Fiasco & COVID-19 led stress.

Edelweiss Wealth Research 32

RBL Bank Ltd Management Profile

Management Profile

Name Designation Profile Mr. Ahuja joined RBL in 2010 when it was a small, regional, southern- Maharashtra based old-age private sector bank. During his tenure, he was instrumental in growing RBL’s balance sheet ~25 times, making it one of India's Managing Director & fastest growing private sector banks. Prior to joining RBL, Mr. Ahuja was the Mr. Vishwavir Ahuja CEO Managing Director and CEO of (India) from 2001 to 2009. Mr. Ahuja holds a Master’s degree in Business Administration from IIM Ahmedabad and an MS degree in International Finance from the University of Michigan, USA. Mr. Rajeev Ahuja has over 28 years of experience in the industry. He has been an integral part of the company's transformation journey and is responsible for building the overall strategy while managing , transaction banking and financial inclusion businesses of the bank. He Mr. Rajeev Ahuja Executive Director is also responsible for the company's capital raising, development of new businesses, partnership and investor relation functions. Rajeev holds a Master’s degree in Business Administration from IIM Ahmedabad and a Bachelor's degree in Commerce from Delhi University. Mr. R. Gurumurthy has over 25 years of experience in the banking sector (both in India and Hong Kong). In his current role (since mid-2016), he is responsible for risk, compliance and legal functions of the bank. He also oversees technology, operations and administration functions and is responsible for the Head, Risk & Mr. R. Gurumurthy Governance regulatory interface of the bank. Prior to this role, he was responsible for the Corporate and Institutional Banking groups since mid-2011. Mr. Gurumurthy has a Bachelor's degree from Delhi University and is a Certified Associate of the Indian Institute of Bankers.

Source: Company, Edelweiss Wealth Research

Key Management Personnel Key Shareholders Person Position Shareholder's name % of holding Mr. Vishwavir Ahuja MD & CEO Promoter group 0.0% Mr. Rajeev Ahuja Executive Director Mutual Fund Mr. R. Gurumurthy Head- Risk Kotak Standard Multicap 2.61% Mr. Brijesh Mehra Head- Corporate Nippon Life (Growth Fund) 2.46% Mr. Harjeet Toor Head- Retail HDFC Trustee (Midcap opportunity fund) 2.36% Aditya Birla Sun Life Equity Fund 1.36% FPI Barings PE (Maple II B.V) 9.44% Govt Pension Fund Global 2.66% Wf Asian Reconnaissance Fund Limited 2.41%

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RBL Bank Ltd Peer Comparison

Peer Comparison:

Net Advances Deposits PPOP PAT M-cap revenue RoA RoA P/ABV* P/E* Company CAGR CAGR CAGR CAGR CAGR FY20-23E FY20-23E FY20-23E FY20-23E FY20-23E FY20 FY23E FY23E FY23E (INR cr) (%) (%) (%) (%) (%) (%) (%) (x) (x)

IndusInd Bank 78,726 13% 17% 10% 11% 17% 1.6% 1.8% 1.5 11.5

RBL Bank 14,462 11% 16% 12% 10% 45% 0.6% 1.3% 1.0 9.3

City Union Bank 12,723 13% 12% 11% 12% 26% 1.0% 1.5% 1.7 14.1

Federal Bank 17,177 12% 13% 9% 11% 12% 0.9% 1.0% 1.3 13.2

HDFC Bank 8,57,373 17% 17% 15% 15% 21% 1.9% 2.1% 3.3 17.9

ICICI Bank 4,32,653 13% 15% 12% 12% 43% 0.8% 1.7% 2.2 13.9

Axis Bank 2,32,930 13% 14% 12% 14% 127% 0.2% 1.7% 1.8 13.4

Kotak Bank 3,89,091 12% 13% 11% 11% 13% 1.8% 2.0% 3.8 31.0

*Standalone

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RBL Bank Ltd Financials

Income statement (INR cr) Year to March FY19 FY20 FY21E FY22E FY23E Interest income 6,301 8,514 8,688 9,781 11,247 Interest charges 3,761 4,885 4,876 5,461 6,183 Net interest income 2,539 3,630 3,812 4,320 5,064 Non-interest income 1,442 1,910 1,939 2,160 2,558 Net revenues 3,982 5,540 5,751 6,480 7,622 Operating expense 2,042 2,788 2,858 3,197 3,657 - Employee exp 636 768 840 948 1,100 - Other opex 1,406 2,020 2,018 2,249 2,556 Preprovision profit 1,940 2,752 2,893 3,283 3,966 Provisions 641 1,999 2,195 1,904 1,841 PBT 1,299 753 699 1,379 2,125 Taxes 432 247 178 352 542 PAT 867 506 521 1,027 1,583 Extraordinaries 0 0 0 0 0 Reported PAT 867 506 521 1,027 1,583 Basic number of shares (crs) 42.7 50.9 59.8 59.8 59.8 Basic EPS (INR) 20.3 9.9 8.7 17.2 26.5 Diluted number of shares (mn) 42.7 50.9 59.8 59.8 59.8 Diluted EPS (INR) 20.3 9.9 8.7 17.2 26.5 DPS (INR) 2.7 0 0 2.5 3 Payout ratio (%) 13.3 0.0 0.0 14.5 11.3

Balance Sheet (INR cr) Year to March FY19 FY20 FY21E FY22E FY23E Paid Capital 427 509 598 598 598 Reserve & Surplus 7,121 10,074 12,074 13,102 14,684 Shareholder's Fund 7,547 10,583 12,672 13,699 15,282 Deposits 58,394 57,812 66,444 76,304 89,391 Borrowings 11,832 17,007 16,888 17,868 17,357 Other Liabilities 2,585 3,576 683 1,854 2,150 Total Liabilities 80,359 88,978 96,687 1,09,726 1,24,181 Cash & Bank Balance 6,602 8,857 8,328 9,450 9,154 Investment 16,840 18,150 24,518 26,601 29,341 Loan & Advances 54,308 58,019 58,984 67,670 78,292 Net Fixed Assets 402 470 504 564 592 Other assets 2,206 3,482 4,353 5,441 6,801 Total Assets 80,359 88,978 96,687 1,09,726 1,24,181

Growth ratios (%) Year to March FY19 FY20 FY21E FY22E FY23E NII growth 43.8 42.9 5.0 13.3 17.2 Net revenues growth 40.5 39.1 3.8 12.7 17.6 Opex growth 35.8 36.5 2.5 11.9 14.4 PPP growth 45.7 41.8 5.2 13.5 20.8 Provisions growth 75.8 212.0 9.8 (13.3) (3.3) PAT growth 36.5 (41.7) 3.0 97.3 54.1

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RBL Bank Ltd Financials

Operating ratios (%) Year to March FY19 FY20 FY21E FY22E FY23E Yield on advances 10.7 12.3 12.0 12.2 12.2 Yield on Investments 6.8 7.8 6.8 7.1 7.3 Yield on Interest Earning Assets 9.1 10.5 9.8 10.0 10.1 Cost of Deposits 6.3 6.9 6.3 6.3 6.3 Cost of funds 6.1 6.7 6.2 6.2 6.2 Spread 3.1 3.7 3.7 3.9 4.0 Net interest margins 3.7 4.5 4.3 4.4 4.6 Cost-to-income 51.3 50.3 49.7 49.3 48.0 Tax rate 33.3 32.8 25.5 25.5 25.5

Balance sheet ratios (%) Year to March FY19 FY20 FY21E FY22E FY23E Loan growth 35 7 2 15 16 IEA growth 30 9 8 13 14 Deposits growth 33.0 -1.0 14.9 14.8 17.2 IBL growth 32.1 6.5 11.4 13.0 13.4 Gross NPA ratio 1.4 3.6 5.6 3.9 2.9 Net NPA ratio 0.7 2.1 2.3 1.3 0.8 Provision coverage 50.0 43.4 58.6 67.4 71.8 CAR 13.5 16.5 19.5 19.2 18.8

RoE decomposition (%) Year to March FY19 FY20 FY21E FY22E FY23E Net interest income/Assets 3.7 4.5 4.3 4.4 4.6 Other Income/Assets 2.1 2.3 2.2 2.2 2.3 Net revenues/Assets 5.8 6.8 6.5 6.6 6.9 Operating expense/Assets 3.0 3.4 3.2 3.3 3.3 Provisions/Assets 0.9 2.5 2.5 1.9 1.7 Taxes/Assets 0.6 0.3 0.2 0.4 0.5 Total costs/Assets 4.5 6.2 5.9 5.6 5.4 ROA 1.3 0.6 0.6 1.1 1.4 Equity/Assets 11.0 13.0 14.3 14.0 13.7 ROAE 12.2 5.6 4.5 7.8 10.9

Valuation metrics Year to March FY19 FY20 FY21E FY22E FY23E Basic EPS (INR) 20.3 9.9 8.7 17.2 26.5 Diluted EPS (INR) 20.3 9.9 8.7 17.2 26.5 Book Value per Share(INR) 176.9 208.0 212.0 229.2 255.7 Adjusted BV per share (INR) 171.6 194.0 198.3 220.5 249.2 Price/ Earning (x) 12.1 24.6 28.1 14.1 9.1 Diluted P/E (x) 12.1 24.6 28.1 14.1 9.1 Price/Book Value (x) 1.4 1.2 1.2 1.1 1.0 Price/Adj. Book Value(x) 1.4 1.3 1.2 1.1 1.0

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Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W) Board: (91-22) 4272 2200

Vinay Khattar Head Research [email protected]

Rating Expected to

Buy appreciate more than 15% over a 12-month period

Hold appreciate between 5-15% over a 12-month period

Reduce Return below 5% over a 12-month period

270

220

170

120 (Indexed) 70

20 Jun-17 Jun-18 Jun-19 Jun-20 Oct-16 Oct-17 Oct-18 Oct-19 Oct-20 Apr-17 Apr-18 Apr-19 Apr-20 Feb-17 Feb-18 Feb-19 Feb-20 Feb-21 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Aug-16 Aug-17 Aug-18 Aug-19 Aug-20

RBL Sensex

240 210 180 150 120

(Indexed) 90 60 30 0 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Oct-16 Oct-17 Oct-18 Oct-19 Oct-20 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20

Indusind Sensex

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