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IDBI: Stagnant ‘core’ business - Views on News from Equitymaster
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IDBI: Stagnant ‘core’ business
Jan 18, 2008

Performance summary
  • Zero growth and de-growth in net interest income during 3QFY08 and 9mFY08 respectively.

  • Deposit growth buoyant at 51% YoY aided by UWB franchise.

  • Net interest margins languish below 1%.

  • Higher other income due to profit on sale of investments.

  • Net profit margin moves up to 8.5% due to lower operating costs and tax incidence.

Standalone numbers
Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest income 16,974 20,772 22% 45,310 57,711 27%
Interest expense 14,854 18,643 26% 40,857 53,506 31%
Net Interest Income 2,120 2,129 0% 4,453 4,205 -6%
Net interest margin (%)       0.5% 0.6%  
Other Income 1,803 3,942 119% 6,562 12,570 92%
Other Expense 1,890 2,145 13% 5,732 6,493 13%
Provisions and contingencies 497 1,952 293% 624 4,826 673%
Profit before tax 1,536 1,974 29% 4,659 5,456 17%
Tax 267 215 -19% 490 610 24%
Effective tax rate 17.4% 10.9%   10.5% 11.2%  
Profit after tax/ (loss) 1,269 1,759 39% 4,169 4,846 16%
Net profit margin (%) 7.5% 8.5%   9.2% 8.4%  
No. of shares (m) 724.1 724.8   724.1 724.8  
Book value per share (Rs)*         85.6  
P/BV (x)         1.9  
* (Book value as on 30th September 2007)

What has driven performance in 3QFY08?
  • No show in assets: The integration with United Western Bank (UWB) in FY07, does not seem to have done much to the operating metrics of IDBI as the bank managed to grow its advance book merely by 13% this quarter, marginally under- performing our full year FY08 estimates, albeit much lower than the sector average.

    While the deposit growth continues to be healthy (51% YoY), the fall in the proportion of CASA from 31% in 1HFY07 to 21% in 9mFY08 is very disappointing, suggesting that the bank is targeting growth at the cost of margins. The incremental deposits garnered by the bank this quarter were again largely high-cost term deposits. We have estimated the bank’s NIMs to remain below 1% until FY10.

    Assets…chugging ahead
    (Rs m) 9mFY07 % of total 9mFY08 % of total Change
    Advances 604,660   684,430   13.2%
    Retail 96,746 16.0% 107,456 15.7% 11.1%
    Corporate 507,914 84.0% 576,974 84.3% 13.6%
               
    Deposits 376,001   568,890   51.3%
    CASA 117,312 31.2% 119,467 21.0% 1.8%
    Tem deposits 258,689 68.8% 449,423 79.0% 73.7%
    Credit deposit ratio 160.8%   120.3%    

    The bank has divulged no further details with regard to the recoveries from the Rs 90 bn SASF, suggesting little effort on this aspect as well.

  • Fees offer hope: IDBI’s other income (of which Rs 2 bn can be attributed to profit from sale of 0.9 m equity shares of NSE, constituting 2% of the latter’s issued and paid up capital, in 1QFY08) has been the only enthusing factor in the nine-month results. The bank’s fee income (18% of total income in FY07) has also shown a good traction in the past few quarters. The life insurance venture with Federal Bank and Fortis Insurance International (in which IDBI has 48% stake) and proposed asset management company are expected to aid the momentum. IDBI and India Infrastructure Finance Company (IIFCL) have recently entered into a Memorandum of Understanding (MoU) for pooling in their resources and expertise to assist infrastructure projects, which typically have elongated payback periods, with funds on competitive terms.

  • Low cost advantage: Due to UWB’s relatively lower cost operations, the lowering of the blended cost to income ratio from 48% in 3QFY07 to 35% in 3QFY08 has aided IDBI’s operating margins. Given the fact that the branch franchise of UWB is largely present in the rural and semi urban areas, the same has not had an adverse impact on the bank’s cost ratio.

  • Wake up call on provisioning: After successfully reducing its net NPAs that had gone up to 1.6% in 9mFY07 due to the loss assets of UWB (Rs 49 bn) taken into IDBI’s books, to 1.1% in FY07, the same have remained stable at 1.1% in 9mFY08. IDBI’s provision coverage, despite rising from 35% in FY05 to 42% in FY07, lies way below that of its peers. However, the higher provisioning booked this quarter seems to be a wake up call in this regard for the bank and augurs well for the sustenance of its asset quality in future.

What to expect?
At the current price of Rs 162, the stock is fairly valued at 1.2 times our estimated FY10 adjusted book value. The bank has floated a US$ 1.5 bn Tier II borrowing programme in 3QFY08 for funding international banking business. It also plans to open two offshore banking units in Singapore and Bahrain. While the capital adequacy ratio of the bank at 13.3% is comfortable, the resilient nature of the bank’s efforts to accelerate growth and improve margins is a cause of concern. Having said that, the current valuations of the bank factor in most of the near term upsides.

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