RPT-BREAKINGVIEWS-UAE-India bank deal sets high bar for success​

By Shritama Bose

MUMBAI, Oct 20 (Reuters Breakingviews) - The largest-ever foreign direct investment in India's banking sector comes with a formidable brief. Dubai-based Emirates NBD ENBD.DU on Saturday agreed to pump in about $3 billion to acquire a controlling stake in RBL Bank RATB.NS. It's a bargain for the Mumbai-headquartered lender, which has fought past the worst of its asset quality problems. The infusion could potentially supercharge the target’s growth across multiple business lines, but the challenges are steep.

The deal includes a preferential issue of up to 60% and an open offer to buy up to 26% of RBL's expanded equity capital from its public shareholders. At 280 rupees ($3.19) apiece, the offer values RBL's shares at 1.1 times its average book value for the year ending March 31, per analysts at brokerage Emkay. That's lower than the 1.3 and 1.4 times multiples on which rivals like Warburg Pincus-backed IDFC First IDFB.NS and Sumitomo Mitsui Banking-backed Yes Bank YESB.NS trade.

Emirates NBD's low-ball offer probably accounts for lingering troubles in RBL's microloans and credit card portfolios, which have weighed on returns. The target's 0.51% return on assets last year was less than half those of similarly sized City Union Bank CTBK.NS and Federal Bank FED.NS, and its return on common equity has been below 10% for the past six financial years. The stock traded as high as 319 rupees on Monday, suggesting shareholders are betting there will be a higher bid.

By boosting RBL's common equity tier 1 ratio to nearly 40% in one shot, the deal gives the bank oodles of capital to turbocharge its lending and other businesses. The hope is that this gives it a chance to break out of an infinite loop of high-cost funds and high-risk assets shackling India's small private banks. Emirates NBD also sports a higher credit rating, which will open the door to prime mortgage customers, a wealth business and to financing Indian companies that are expanding along the emerging trade corridor through the Middle East to Europe.

RBL CEO R. Subramaniakumar and his team hope that will drive up return on equity to an annualised 10% by the second half of the financial year to March 31, 2028, a person close to the bank's thinking told Breakingviews. That optimism is hard to translate into reality. India's hypercompetitive mortgage market is dominated by behemoths HDFC Bank HDBK.NS and State Bank of India SBI.NS, and a growing shift of household assets to financial markets is attracting new players into the wealth business, including a joint venture between Jio Financial Services JIOF.NS and BlackRock BLK.N.

RBL's success in weathering a post-Covid credit quality morass has earned it a rare shot at breaking out of its peer group. Living up to it will be its next big test.

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CONTEXT NEWS

Emirates NBD has agreed to acquire a controlling stake in India's RBL Bank through a primary infusion of approximately $3 billion, the latter said on October 18.The investment will be made via a preferential issue of up to 60%, the statement added.

The Dubai-based bank on the same day announced an open offer to acquire 415.59 million shares of RBL, or 26% of its expanded voting share capital, from its public shareholders. The offer values RBL's shares at 280 rupees apiece.