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IDBI Bank: Costs outweigh spreads - Views on News from Equitymaster
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IDBI Bank: Costs outweigh spreads
Feb 5, 2009

Performance summary
  • Interest income grows by 38% YoY in 9mFY09, on the back of 35% YoY growth in advances.
  • Capital adequacy ratio at 11.8% at the end of 9mFY09.
  • Net NPA to advances reduce from 1.2% in 9mFY08 to 1.0% in 9mFY09.
  • Cost to income ratio expands from 40% in 9mFY08 to 49% in 9mFY09.
  • Net profit margins drop by 1.9% during the nine month period despite lower provisioning costs.


Standalone numbers
Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 20,844 32,473 55.8% 57,854 83,694 44.7%
Interest expense 18,643 27,310 46.5% 53,506 75,249 40.6%
Net Interest Income 2,201 5,163 134.6% 4,348 8,445 94.2%
Net interest margin (%)       0.6% 0.6%  
Other Income 3,662 2,660 -27.4% 11,902 9,174 -22.9%
Other Expense 2,145 3,917 82.6% 6,493 8,681 33.7%
Provisions and contingencies 1,745 1,435 -17.8% 4,302 2,804 -34.8%
Profit before tax 1,973 2,471 25.2% 5,455 6,134 12.4%
Tax 215 245 14.0% 610 685 12.3%
Effective tax rate 10.9% 9.9%   11.2% 11.2%  
Profit after tax/ (loss) 1,758 2,226 26.6% 4,845 5,449 12.5%
Net profit margin (%) 8.4% 6.9%   8.4% 6.5%  
No. of shares (m)       724.5 724.8  
Book value per share (Rs)*         93.4  
P/BV (x)         0.7  
* (Book value as on 31st March 2008)

What has driven performance in 3QFY09?
  • IDBI Bank continued to grow its advance book keeping pace with its peers in the public sector banking space, although falling short of low cost deposits to fund the same in the past quarter. It clocked nearly 35% YoY growth in advances in 9mFY09 on the back of 42% YoY growth in deposits, most of the growth coming from term deposits. The bank has not made much headway in terms of improving its net interest margins that continue to languish below 1%. It has indeed been particularly aggressive in growing its retail advance portfolio, which has grown at a faster clip than that in most PSU banks, albeit on a lower base.

    High cost growth
    (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Advances 684,430   921,920   34.7%
    Retail 109,509 16.0% 144,741 15.7% 32.2%
    Corporate 574,921 84.0% 777,179 84.3% 35.2%
    Deposits 568,890   808,030   42.0%
    CASA 177,494 31.2% 169,686 21.0% -4.4%
    Term deposits 391,396 68.8% 638,344 79.0% 63.1%
    Credit deposit ratio 120.3%   114.1%    

  • IDBI’s other income that was higher last year due to profit on sale of stake in NSE has fallen by nearly 21% YoY in 3QFY09 despite doubling of fee income. The bank’s fee income has grown by 103% YoY constituting 80% of other income and 30% of total income in 3QFY09 from 44% of other income and 20% of total income in 3QFY08. This can be attributed to the bank’s extended retail operations and the life insurance venture with Federal Bank and Fortis Insurance International (in which IDBI has 48% stake).

  • IDBI managed to control the slippages in its advance book during the last quarter and marginally bring down its net NPA level. The bank’s provision coverage, despite rising from 35% in FY05 to 50% in FY08, lies way below that of its peers. Also, the lower provisioning booked this quarter and higher operating cost (49% in 3QFY09) signals risks for the sustenance of asset quality in future. The higher operating costs have led to IDBI lose the cost advantage due to its lean structure.

  • In order to fulfill additional capital adequacy requirement, the bank has decided to merge its housing finance subsidiary with itself. This would bore well for the bank in terms of reduction in capital requirement for the subsidiary as well as focus on centralised control over asset quality.

What to expect?
At the current price of Rs 54, the stock is trading at 0.5 times our estimated FY11 adjusted book value. Although the capital adequacy ratio of the bank at 11.8% in 9mFY09 is inadequate to sustain the current growth rates, we see the merger of home finance subsidiary being a positive move. Having said that, while we are enthused by the bank’s efforts to accelerate non-fund income growth, inability to improve margins is a cause of concern.

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