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IDBI Bank: In the reckoning... - Views on News from Equitymaster

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IDBI Bank: In the reckoning...

Jan 22, 2005

Performance summary
A buoyant third quarter result released by IDBI Bank last Thursday, was an icing on the cake for its shareholders who stand to gain even in respect of the merger ratio with parent IDBI. Driven by a significant growth in net interest income, IDBI Bank posted a 53.7% YoY growth in bottomline for 3QFY05. This is coupled with a significant 63% jump in treasury gains and fee income. What remains a concern to mull over is the extraordinary growth in operating expenses (grown by 40% YoY) that continues to subdue the operating margins despite a healthy 25% growth in topline.

Rs (m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Income from operations 1,923 2,402 24.9% 5,287 6,852 29.6%
Other Income 501 818 63.3% 1,584 1,844 16.4%
Interest Expense 1,035 1,333 28.8% 2,974 3,745 25.9%
Net Interest Income 888 1,069 20.4% 2,313 3,107 34.3%
Other Expense 649 902 39.0% 1,846 2,381 29.0%
Operating profit / (loss) 239 167 -30.1% 467 726 55.5%
Operating profit margin (%) 12.4% 7.0%   8.8% 10.6%  
Provisions and contingencies 174 103 -40.8% 546 515 -5.7%
Profit before tax 566 882 55.8% 1,505 2,055 36.5%
Tax 203 323 59.1% 557 754 35.4%
Profit after tax/ (loss) 363 559 54.0% 948 1,301 37.2%
Net profit margin (%) 18.9% 23.3%   17.9% 19.0%  
No. of shares (m) 213.5 217.1   213.5 217.1  
Diluted earnings per share (Rs)* 6.8 10.3   5.9 8.0  
P/E (x)         9.0  
*(annualised)            

One of the most premier banks in the making
IDBI Bank, promoted by India's largest financial institution IDBI (now converted into a bank), is one of the fastest growing banks in India. IDBI Bank has a strong focus on the retail segment, especially housing loans. Its quality of assets is one of the best in the industry and is comparable with the likes of HDFC Bank. The bank had 121 branches and 320 ATMs at the end of 3QFY05. Its merger with IDBI will make IDBI Bank a strong contemporary for behemoths like SBI and ICICI.

What drove performance in 3QFY05?
Core income growth:  The bank has achieved a 48% YoY growth in its credit books while deposits have amplified by 38% YoY. While retail assets grew by 73% YoY and accounted for 46% of the total customer assets, the growth was also witnessed in corporate assets (up 33% YoY). Low cost deposits which form 38.6% of the total deposits grew by 45.7% YoY and helped the bank augment its net interest income.

Other income fillip:  IDBI Bank seems to have leveraged on its retail expertise to achieve a 63% jump in fee income. This is in tune with the performances of most of its peers in the private banking sector.

Clean asset book:  Although the incremental NPA provisions have been marginally curbed, the bank has succeeded in further pruning its NPAs that stand at 0.1% of net advances (lowest in the sector) as compared to 0.4% in 3QFY04. The provision coverage to the tune of 97% of gross NPAs is by far the highest in the sector.

What to expect?
At a price of Rs 72 the stock is trading 2.3 times its 3QFY05 book value. The merger ratio of 1.42:1 is itself enthusing for IDBI Bank’s shareholders as they stand to be the larger beneficiaries of the same. Post merger with parent IDBI, the book value is expected to considerably multiply and entail better valuations for the shareholders. Please read our view on the post merger scenario.

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