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IDBI Bank: NII takes a hit due to higher costs - Views on News from Equitymaster

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IDBI Bank: NII takes a hit due to higher costs
Feb 3, 2012

IDBI Bank announced the third quarter results of financial year 2011-2012 (3QFY12) .The company has reported a 13.6% YoY increase in topline and a 28.9% YoY decrease in net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) falls by 11% YoY in 3QFY12 on higher costs of funds, despite a 16% YoY growth in advances. However for the 9 month period, the NII increased by 5.4 YoY%.
  • Capital adequacy ratio currently stands at 13.5% at the end of 3QFY12 from 14.1% at the end of 3QFY11.
  • Net interest margin comes in at 2% compared to 2.1% in 9mFY11.
  • Net NPA (non-performing assets) to advances slightly higher at 1.96% in 9mFY12 from 1.2% in 9mFY11.
  • Cost to income ratio rises from 35% in 9mFY11 to 39% in 9mFY12.
  • Net profits grow by 11% YoY in 9mFY12, on account of muted NII, lower other income. However a reversal of provisioning, despite higher tax outlays helps cushion profits.
  • The bank declared an interim dividend of Rs 2 per share.

Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 47,016 58,492 24.4% 135,178 172,905 27.9%
Interest expense 35,083 47,897 36.5% 103,554 139,565 34.8%
Net Interest Income 11,933 10,595 -11.2% 31,625 33,339 5.4%
Net interest margin (%)       2.1% 2.0%  
Other Income 4,580 4,318 -5.7% 14,660 13,418 -8.5%
Other Expense 5,167 6,670 29.1% 16,374 18,142 10.8%
Provisions and contingencies 6,519 4,064 -37.7% 15,950 11,527 -27.7%
Profit before tax 4,826 4,179 -13.4% 13,961 17,089 22.4%
Tax 285 81 -71.6% 2,620 4,481 71.0%
Effective tax rate 5.9% 1.9%   18.8% 26.2%  
Profit after tax/ (loss) 4,541 4,098 -9.7% 11,341 12,608 11.2%
Net profit margin (%) 9.7% 7.0%   8.4% 7.3%  
No. of shares (m)         984.6  
Book value per share (Rs)*         141.2  
P/BV (x)         0.7  
* (Book value as on 31st December 2011)

What has driven performance in 9mFY12?
  • IDBI Bank has performed in line with RBI estimates on banking sector growth for the fiscal by clocking in 16% YoY growth in advances in 9mFY12. This is in line with the company's strategy to grow its advance book by around 16% growth in FY12. However, the bank has paid heed to maintaining its margins which have remained in line with the situation last year, despite higher costs. It has decreased slightly from 2.1% at the end of 9mFY11 to 2% currently 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 dip in the nine month period. The company is trying to grow its priority sector book in order to meet regulatory guidelines. It expects to reach the 40% priority sector target by FY13.

  • The rise in the proportion of CASA (current and savings account) from 15% in 9mFY11 to 21% in 9mFY12 is also very encouraging. This is along with the focused strategy of the bank to increase its retail client base, and thus 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 in competition for the same, especially current accounts. While some private sector banks have raised their savings bank rate post the deregulation, IDBI doesn't believe that it makes sense to do so at this point.

    SME advances see a sharp dip...
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 1,344,910   1,562,170   16.2%
    Retail 226,280 16.8% 273,170 17.5% 20.7%
    Corporate 912,140 67.8% 1,080,140 69.1% 18.4%
    SME 119,050 8.9% 89,460 5.7% -24.9%
    Deposits 1,502,390   1,771,230   17.9%
    CASA 226,090 15.0% 376,780 21.3% 66.7%
    Tem deposits 1,276,300 85.0% 1,422,840 80.3% 11.5%
    Credit deposit ratio 89.5%   88.2%    

  • DBI's other income fell by 8.5% in 9mFY12 due to lower profits on investments and on forex, bringing the non-interest income to 29% of total income in 9mFY12 from 32% in 9mFY11. The proportion of fees to total income however fell from around 26%, to 23% at the end of 9mFY12. The bank has been doing well on the fee income front; however it still has scope for improvement on the loan syndication, project appraisal and project advisory front. This was more to do with the overall economic scenario.

  • Our biggest concern for IDBI Bank so far had been its poor provisioning policy. The same has now been addressed and will be benign to the bank's performance at a time when its margins are on an upward trend. The bank actually reported a write back of provisioning which helped improve profits. IDBI Bank's net NPAs have increased to around 2% of advances in 9mFY12, from 1.2% earlier. The bank's provision coverage ratio currently stands at 69.1%, from 76% in the same quarter last year. The bank was able to reduce its provisioning expenses by 28% YoY in 9mFY12 on account of the increased buffer it had kept earlier, despite an increase in the restructured book.

  • The bank's restructured loan portfolio increased to Rs 95 bn from Rs 88 bn in September. These currently stand at 6% 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. The bank has been seeing recovery from its restructured portfolio. It has declared its Kingfisher account as NPA (around Rs 7 bn exposure). The bank does not have any exposure to State Electricity Boards. However it may see some further pressure on restructuring as the Air India account is still vulnerable to losses.

What to expect?
At the current price of Rs 97, the stock is valued at an attractive 0.6 times our estimated FY14 adjusted book value. The bank's provisioning policy helped stand it in good stead, as it was able to reverse some of its provisions and thus improve its profitability. However having a large proportion of bulk deposits and a relatively lower CASA share impacted NII growth. Despite this fact, 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.

IDBI 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 and the rate environment. We are also enthused by the bank's efforts to bring in efficiency in operations, increase its CASA base, and sustain its margins. A few concerns are increased slippages and restructured accounts in risky sectors. Irrespective, we expect the company to take this in its stride and we reiterate our long term positive view on the bank on account of its reasonable valuations.

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