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IDBI Bank: Provisions hold back profits - Views on News from Equitymaster

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IDBI Bank: Provisions hold back profits
Jan 18, 2010

Performance summary
  • Interest income grows by 36% YoY in 9mFY10, on the back of 21% YoY growth in advances.
  • Capital adequacy ratio at 11.5% at the end of 9mFY10.
  • Net interest margins higher at 1.2% from 1% in 9mFY09 despite lower CASA proportion.
  • Net NPA to advances higher at 1.4% in 9mFY10 from 1.3% in 1HFY10.
  • Cost to income ratio shrinks from 49% in 9mFY09 to 37% in 9mFY10.
  • Net profit margins drop by 0.2% YoY in 9mFY10 due to higher provisioning costs.


Standalone numbers
Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 32,338 40,078 23.9% 82,468 111,912 35.7%
Interest expense 27,310 32,891 20.4% 75,249 96,840 28.7%
Net Interest Income 5,028 7,187 42.9% 7,219 15,072 108.8%
Net interest margin (%)       1.0% 1.2%  
Other Income 2,795 4,255 52.2% 10,401 17,439 67.7%
Other Expense 3,916 5,041 28.7% 8,681 12,181 40.3%
Provisions and contingencies 1,435 2,465 71.8% 2,806 11,397 306.2%
Profit before tax 2,472 3,936 59.2% 6,133 8,933 45.7%
Tax 245 1,065 334.7% 685 1,805 163.5%
Effective tax rate 9.9% 27.1%   11.2% 20.2%  
Profit after tax/ (loss) 2,227 2,871 28.9% 5,448 7,128 30.8%
Net profit margin (%) 6.9% 7.2%   6.6% 6.4%  
No. of shares (m)         724.8  
Book value per share (Rs)*         112.1  
P/BV (x)         1.2  
* (Book value as on 31st December 2009)

What has driven performance in 9mFY10?
  • IDBI Bank has managed to outperform the sector average by clocking nearly 21% YoY growth in advances in 9mFY10. Further, in doing so, the bank has paid heed to margins which have improved over the quarters, albeit marginally. IDBI has indeed been particularly aggressive in growing its retail advance portfolio, which has grown at a faster clip than that in most PSU banks, although on a lower base.

    The fall in the proportion of CASA (current and savings account) from 15% in 9mFY09 to 13% in 9mFY10 is also very disappointing, particularly since the CASA base of the bank is very small. However, the downward re-pricing of liabilities has facilitated the improvement in NIMs for the bank.

    High cost growth
    (Rs m) 9mFY09 % of total 9mFY10 % of total Change
    Advances 921,920   1,112,620   20.7%
    Retail 147,507 16.0% 174,681 15.7% 18.4%
    Corporate 774,413 84.0% 937,939 84.3% 21.1%
               
    Deposits 808,030   1,427,980   76.7%
    CASA 122,821 15.2% 187,065 13.1% 52.3%
    Tem deposits 685,209 84.8% 1,240,915 86.9% 81.1%
    Credit deposit ratio 114.1%   77.9%    

  • IDBIís other income grew by 68% in 9mFY10 bringing the non- interest income to 54% of total income in 9mFY10 from 59% in 9mFY09. The proportion of fees to total income, however, remained at 30%. This can be attributed to the bankís extended retail operations and the life insurance venture with Federal Bank and Fortis Insurance International (in which IDBI has 48% stake).

  • Our biggest concern for IDBI Bank has been its poor provisioning policy. The same has come to the fore in terms of impacting the bankís performance at a time when its margins are on an upward trend. IDBI Bankís net NPAs have sequentially increased in the past three to four quarters to 1.4% in 9mFY10. The bankís provision coverage, has however, fallen from 50% in FY08 to 33% in 9mFY10. This is half of RBIís mandate of 70% coverage by 1HFY11 and lies way below that of its peers. Going forward this will entail substantially higher provisioning that will take away the bankís cost advantage due to its lean structure.

  • With cost to income ratio at 37% in 9mFY10 from 49% in 9mFY08, the bank has the potential to leverage its lean cost structure and improve its provisioning policy as well as grow its asset base.

What to expect?
At the current price of Rs 134, the stock is trading at 1 time our estimated FY12 adjusted book value. As the capital adequacy ratio of the bank at 11.5% in 9mFY10 is inadequate to sustain the current growth rates, we see the same being unsustainable going forward. Nonetheless, growth led by equity dilution cannot be ruled out. Having said that, we are enthused by the bankís efforts to accelerate non-fund income growth and sustained asset re-pricing ability. We reiterate our long term positive outlook on the bank.

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