Over the past few years, banks promoted by institutions are gaining more popularity compared to their peers in the sector. This is due to their aggressive management, high growth rates and superior asset quality. The brand name of the parent is also helping these new generation private banks to expand their size by both organic and inorganic initiatives.
IDBI Bank, promoted by India’s second largest financial institution, IDBI, in 1994 is one the fastest growing banks in India. When other private sector banks were adopting the retail route, IDBI Bank decided to become a corporate bank (95% of assets have been corporate assets and 77% liabilities were due to corporates). Until August 2000, IDBI Bank leveraged on corporate clients of its parent, though with a limited growth opportunities and relatively high-risk asset portfolio (compared to retail assets).
Nevertheless, IDBI Bank realized the potential of retail market, and beginning 2001 the bank revamped its business strategies. The business thrust of the bank has been redefined to give greater focus on retail activities. ‘What can i do for you’ is the new corporate brand identity of IDBI Bank, on which it is banking to gain a competitive edge over its rivals in retail business. This new identity is slated to provide the bank with a launching pad for retail products and gain market share. The bank is aggressively expanding its retail business with cross-selling strategies. Over a period of one year, the bank has widened its reach to 55 cities with a network of 75 branches and 215 ATMs. It has also launched Internet banking, mobile banking and tele-banking services to catch up with its private sector peers. The bank offers host of products through these retail channels including personal loans, home loans, loan against shares, loan against NSC, loan against RBI relief bonds and demat of shares. The bank also sells third-party products like mutual funds and has tied up with Tata AIG for insurance products. The bank’s liability led retail strategy, whereby it aims to expand into second tier cities, helped it in acquiring 455,00 customer accounts. In the December quarter of FY02, the bank added 85,000 new customer accounts as compared to 100,000 accounts its added in the entire FY01.
The bank’s proactive initiatives such as change in management (it has hired people from top banks including Citibank, ANZ Grindlays, Deutsche Bank, HSBC and HDFC Bank), technology upgradation and re-positioning, point towards a transition. With a new road map, the journey of the bank has just begun. Of course there will be challenges along the way.
The success of IDBI Bank’s retail focus is reflected from its financial performance. Its net profits in first nine months of FY02 witnessed a four-fold rise to Rs 419 m. The bank’s total customer assets grew by 26% to Rs 39 bn and deposits were higher by 32% to Rs 47 bn. The bank was also successful in reducing its average cost of deposits to 7.6% from 9.2% in fourth quarter of FY01. This was possible by increasing proportion of retail deposits to 43% (34% as on March 2001). The bank also brought down its cost to income ratio to 47% from 59% as on March 2001, despite higher investment in technology. The combined benefits of this increased operating margins of the bank to 3.5% in nine months ended December 2001. Going forward, cost to income ratio of the bank is likely to increase with its high investments in technology and network expansion. This could result in stagnant operating margins at least for next two years before these investments starts yielding returns.
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The discouraging part of this performance was a 3% decline in its total interest income. This was largely due to an 18% fall in investment income. This is contrary to the trend witnessed in the banking sector, whereby banks in general have managed to show an overall rise in topline by increasing the proportion of investment income. IDBI Bank is investing in short duration gilt securities, by liquidating long-term securities, to reduce the risk of rise in interest rates. (The average duration of its investment portfolio is just around 2-3 years). This has lowered the bank’s interest income during the current fiscal.
The bank however, managed to post a double-digit growth of 16% in core interest income from lending. Considering its small size and compared to its private sector peers, the growth rate is not so impressive. 94% of its total loans assets are still from corporates. During the current fiscal, the bank reduced its loan portfolio from mid and small corporates by Rs 6.5 bn (38% of total advances). The bank aims to concentrate on large corporates to earn higher average yield on advances and to reduce the overall loan portfolio risk. Its exposure to a single industry does not exceed 8% of total loans and 83% of its customer assets are ‘A’ rated. To de-risk its loan portfolio the bank has targeted to increase the proportion of retail assets to 25% of total assets by FY04 from the current 6%. This will be achieved through aggressive lending for housing loans, car loans, personal loans and loan against shares. However, it remains to be seen whether the bank is able to achieve its ambitious target amidst stiff competition from other private and public sector banks, financial institutions and non-banking financial entities.
Apart from concentrating on expanding core business income, the bank is also focusing on increasing its other income. For the period ended December 2001, non-interest income of the bank rose by 79% accounting for 19% of its total income. An aggressive focus on non-fund based activities helped the bank to compensate for a decline in its core business income.
In its spree to achieve high expansion rate, the bank did not divert its attention from maintaining quality of its assets. Its ratio of net non-performing assets to total assets stood at 2% as on December 2001, comparable to its private sector peers. The bank has also increased the provision coverage on NPAs to 54% by charging higher amount to its income statement. It seems that IDBI Bank has learned from the mistakes of its parent, IDBI.
IDBI Bank’s growth rates are however, constrained by its low capital. The bank’s capital adequacy ratio declined to 9.8% as on December 2001 from 12% as on March 2001. Its parent IDBI still holds 57% stake in the bank. As per the RBI guidelines promoters are required to bring down their stake in new private sector banks to 40% by March 2002. However, the issue of reverse merger of IDBI with the bank is delaying the bank’s plan for non-equity dilution. IDBI Bank has already cleaned up its accounts and has staged a sharp turnaround with independent growth path separate from the parent. The reverse merger of its parent would lead to deterioration in its asset quality and financial performance. These concerns have impacted the bank’s valuations on the bourses. Avoiding merger and maintaining an arms length distance from its parent is the only way to bring a re-rating in the stock.