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IDBI Bank: Other income provides a kicker
Jan 23, 2013

IDBI Bank declared its results for the third quarter of the financial year 2012-13 (3QFY13). The bank has reported 6% YoY growth in interest income and a 2% YoY growth in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) increases by 33% YoY in 3QFY13 on a rationalization in the costs of funds, and on the back of a 9% YoY growth in advances. For the 9 month period, the NII increased by 18%.
  • Capital adequacy ratio currently stands at 14.19% at the end of 3QFY13 from 13.53% at the end of 3QFY12.
  • Net interest margin comes in at 2.1% compared to 2.0% in 9mFY12.
  • Net NPA (non-performing assets) to advances come in slightly lower at 1.93% in 9mFY13 from 1.96% in 9mFY12.
  • Cost to income ratio drops from 39% in 9mFY12 to 36% in 9mFY13.
  • Net profits grow by 5.3% YoY in 9mFY12, on account of higher provisioning and increased tax outlay, despite an increase in other income and NII.

Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 58,492 62,004 6.0% 172,905 186,674 8.0%
Interest expense 47,897 47,872 -0.1% 139,565 147,343 5.6%
Net Interest Income 10,595 14,132 33.4% 33,339 39,331 18.0%
Net interest margin (%)       2.0% 2.1%  
Other Income 4,326 8,698 101.1% 13,257 20,726 56.3%
Other Expense 6,670 7,306 9.5% 18,142 21,416 18.1%
Provisions and contingencies 4,072 9,630 136.5% 11,365 19,674 73.1%
Profit before tax 4,179 5,895 41.1% 17,089 18,968 11.0%
Tax 81 1,728 2035.4% 4,481 5,691 27.0%
Effective tax rate 1.9% 29.3%   26.2% 30.0%  
Profit after tax/ (loss) 4,098 4,168 1.7% 12,608 13,276 5.3%
Net profit margin (%) 7.0% 6.7%   7.3% 7.1%  
No. of shares (m)         1278.4  
Book value per share (Rs)*         147.6  
P/BV (x)         0.7  
* (Book value as on 31st December 2012)

What has driven performance in 9mFY13?
  • IDBI Bank has underperformed the sector average by clocking in 9.4% YoY in advances in 9mFY13. This is in line with the company's strategy to slow advance growth and concentrate on its priority sector book. The company expects credit growth to be around 10% in FY13, and this may increase to 13-14% in the next year. However, the bank has paid heed to maintaining its margins which have remained in line with the situation last year. It has increased slightly to 2.1% at the end of 9mFY13 from 2% earlier in 9mFY12. IDBI has been particularly aggressive in growing its retail advance portfolio, which has grown at a fast clip. However, its SME portfolio saw a 50% dip in the nine month period. The company is trying to grow its priority sector book in order to meet regulatory guidelines.

  • The rise in the proportion of CASA (current and savings account) from 19.7% in 9mFY12 to 22.3% in 9mFY13 is encouraging; however it comes in lower than the 24% levels seen in at the end of FY12. This is along with the focused strategy of the bank to increase its retail client base, and improve profitability and margins. It plans to increase its CASA levels to around 25% in the future. However, the fight for CASA over the next few quarters may be tough with many banks competing for the same.

    SME advances see a sharp dip...
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 1,562,170   1,709,590   9.4%
    Retail 273,170 17.5% 313,190 18.3% 14.7%
    Corporate 791,030 50.6% 853,020 49.9% 7.8%
    SME 89,460 5.7% 46,560 2.7% -48.0%
    Deposits 1,771,230   1,866,230   5.4%
    CASA 348,390 19.7% 415,690 22.3% 19.3%
    Tem deposits 1,422,840 80.3% 1,450,540 77.7% 1.9%
    Credit deposit ratio 88.2%   91.6%    

  • IDBI's other income increased by 56% in 9mFY13 due to higher profits on investments and on forex, bringing the non-interest income to 35% of total income in 9mFY13 from 28% in 9mFY12. However, this included a one-off of Rs 1.8 bn on account of the sale of a stake in credit rating agency, CARE. The proportion of fees to total income however increased from 23%, to 26% at the end of 9mFY13. The bank has been doing well on the fee income front, and expects to sustain the momentum going forward.

  • IDBI Bank's net NPAs have remained stagnant at around 1.93% in 9mFY13, from 1.96% earlier. The bank's provision coverage ratio currently stands at 69.2%, from 69.1% in the same quarter last year. The bank's provisions expenses increased by 137% YoY in 3QFY13, and by 73% in 9mFY13. This increase during the quarter was on account of the RBI increasing provisioning on restructured assets to 2.75% from 2% earlier. Plus, the entire exposure to Kingfisher Airlines has moved to the doubtful category of NPAs which attracts higher provisioning.

  • The bank's restructured loan portfolio increased to Rs 151 bn in December from Rs 125 bn in September. These currently stand at 9% of the total advances. IDBI's restructured assets are mainly in troubled sectors such electricity, air transport, textiles and infra, which may be prone to turning NPAs. Around 17% of its restructured accounts have turned NPA. In this quarter the big restructuring that took place was Suzlon energy, Rs 11.5 bn, other restructurings took place in the power, telecom and metals segment.

What to expect?
At the current price of Rs 108, the stock is valued at an attractive 0.7 times our estimated FY15 adjusted book value. However that is not without reason.

The bank has a large proportion of bulk deposits and a relatively lower CASA share. While the core performance was good, the bank continues to see stress on the asset quality front, with higher restructurings seen this quarter, and there seem to be more in the pipeline. The bank was still able to hold onto its margins and with monetary easing expected from the RBI, it may see less pressure on the same going forward as bulk deposit rates come off (with a lower CASA base the bank has a higher proportion of such high cost deposits). The bank is strategically trying to focus on growing its balance sheet at a relatively slow pace. It plans to focus on building up capacity on the priority sector front, to meet RBI guidelines. We believe that this slower target fits in with the current economic climate, however significant accretion to the priority sector lending book may impact margins as such loans have lower yields.

We are enthused by the bank's efforts to bring in efficiency in operations, increase its CASA base, and sustain its margins. However, notwithstanding these, the concern over spike in slippage ratio is overwhelming. The bank's exposure to restructured assets is unreasonably high and shows no signs of coming down. Hence despite our comfort with the bank's valuations, we would recommend investors to not buy any more of the stock, until there is more clarity. Investors who have the stock in their portfolio can hold on to the same.

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