Ratnakar Bank

An Alpha Ideas Presentation

Dec 21, 2012

The History

• Established in 1943 by local businessmen in Kolhapur • Sleepy regional bank with local network • Corrupt practices by directors-lending to own kin, forging dividend warrants etc • Very small in size with a deposit base of only 1585 Crores

The Change

• Vish Ahuja joins Ratnakar Bank in 2010 • He is the former CEO of Bank of America in India • He got laid off in 2009 when Bank of America merged with Merrill Lynch

The New Team

• Ahuja ropes in some of the best banking talent in India to join Ratnakar Bank – Joginder Singh Rana, a Citibanker for 22 years, is the chief operations officer. – R Gurumurthy, head of corporate & institutional banking, from Standard Chartered Bank – Tajinder Kumar , Head of HR from Deutsche Bank Singapore.

The New Team (Cont’d)

• Rajeev Ahuja (formerly head-fixed income, Citi) • Nitin Chopra (CEO, Bharti AXA Life) • Sunil Gulati (Group president, Yes Bank) • Suhas Sahakari (Head SMEs, Axis Bank) • Shanta Vallury (Head liabilities ICICI Bank) • Padmanabhan Kumar (Head Operations at HDFC Bank and Yes Bank) • Naresh Karia (Country controller, Citi).

Why are they joining Ratnakar Bank?

• These senior bankers want to replicate the success of Aditya Puri • Aditya Puri quit as Head Citi Malaysia to start HDFC bank in 1994 • Since then, via stock options, he and his core team have amassed a fortune of 1000+ Crores

The Stock Options Aspect

• Employees got 88.42 L options in 2010-11 and 48.23L options in 2011-12 • The exercise price of these options were Rs.46.50

• This is a very bullish sign that the company will go public in the next 5 years

The Salary Aspect

• Vishy Ahuja , despite experience of 30 years, is getting a salary of 74 Lakhs only (His peers get around 2.5 C -4 C) • Other senior management’s salaries are in the same range • Its clear that the name of the game for these honchos is capital appreciation via stock options

What’s happening now?

• Revamped board with superb and honest people • Raised 720 Crores capital from top class investors like HDFC , Becon,NorWest, TVS Capital etc in 2011 at 67 Rs/share • Tripled employee strength from 565 to 1328 • Set up 21 additional branches and 82 ATMS • Implementing Finacle to automate operations

Why are investors investing?

• The banking sector grows by 2-2.5 Times the GDP growth rate • "

The underpenetration of banking services in rural India, high potential growth rates, a conservative regulator and high entry barriers for new entrants make these small banks a compelling investment case

," says Munish Dayal, partner, financial services, at Baring Private Equity Partners

.

The Financials (In Lakhs)

Company grew fast under new team

Decline is due to payments of pensions and arrears

Concerns

• Market rumor is that they have lent to Deccan Chargers so they may have to suffer losses • Company is private…so difficult to get out of this stock immediately • Company’s original staff is unionised. Can create problems like Dhanlaxmi Bank

Valuations-Peer Comparison

• Banks are typically valued on book value

Bank Name

Axis Bank City Union Bank DCB Dhanlaxmi Bank Federal Bank HDFC Bank ICICI Bank Indusind Bank Yes Bank

Price to Book Value

2.04

1.75

1.24

0.68

1.37

4.57

2 3.77

2.92

What’s next?

• The CEO is confident that bank can grow by 20%-30% year on year for the next couple of years • Another round of funding expected around 102 Rs/share • IPO planned in 2014 • At an average Price to Book Multiple of 2, the price then should be around 180 Rs-200 Rs.

Summary

• The illiquidity aspect of this stock makes it a stock for medium investment horizons (2 Years+) • Since the bank is very small, there is tremendous room for growth • If the management executes well and doesn’t dilute equity, this stock can be the next Yes Bank