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IDBI Bank: Profits down by 75% - Views on News from Equitymaster
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IDBI Bank: Profits down by 75%
Feb 26, 2014

IDBI Bank declared its results for the third quarter of the financial year 2013-14 (3QFY14). The bank has reported 5.3% YoY growth in interest income, whereas 75% YoY fall in net profits for the quarter. 9mFY14 observed 55% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 5.3% YoY in 3QFY14, on the back of 4.4% YoY growth in advances.
  • Net profit declines by 75% YoY in 3QFY14, on account of lack of interest income and significant fall in other income.
  • Net interest margin grew marginally to 2.16% during 9mFY14 from 2.09% a year ago.
  • Cost to income ratio jumps to 38.7% in 3QFY14 from 32.0% in 3QFY13.
  • Net NPA (non-performing assets) to advances increase to 2.93% in 3QFY14 from 1.93% in 3QFY13.
  • Capital adequacy ratio currently stands at 12.7% at the end of 3QFY14 as per BASEL III norms.

Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 62,004 66,178 6.7% 186,674 198,819 6.5%
Interest expense 47,872 51,294 7.1% 147,343 154,349 4.8%
Net Interest Income 14,132 14,884 5.3% 39,331 44,470 13.1%
Net interest margin (%)       2.09% 2.16%  
Other Income 8,698 5,321 -38.8% 20,726 18,278 -11.8%
Other Expense 7,306 7,810 6.9% 21,416 24,439 14.1%
Provisions and contingencies 9,630 10,334 7.3% 19,674 27,418 39.4%
Profit before tax 5,895 2,061 -65.0% 18,968 10,892 -42.6%
Tax 1,728 1,021 -40.9% 5,691 4,860 -14.6%
Effective tax rate 29.3% 49.6%   30.0% 44.6%  
Profit after tax/ (loss) 4,168 1,040 -75.1% 13,276 6,032 -54.6%
Net profit margin (%) 6.7% 1.6%   7.1% 3.0%  
No. of shares (m)         1,604.0  
Book value per share (Rs)*         133.6  
P/BV (x)         0.4  
* (Book value as on 31st December 2013)

What has driven performance in 3QFY14?
  • There seems to be no respite coming the IDBI bank's way. Tight liquidity conditions, lack of credit off-take and the asset quality deterioration have together taken a toll on the bank's profitability. 3QFY14 witnessed profits shrinking by 75% YoY. The net profit at Rs 1040 mn was down on account of insignificant income reported during the quarter. For 9mFY14, the profits decelerated by 54% YoY.

  • The growth in advances has remained tepid for the third quarter gone by. The credit growth was reported at mere 4.4% during 3QFY14. Both corporate and MSE lending dropped by 2.3% YoY and 13.3% YoY respectively. Moreover, the credit-deposit ratio at undesirable levels of 92% only indicates impending liquidity pressures. Given the continued economic slowdown, the bank expects to report < 10% credit growth for the current fiscal.

  • IDBI Bank continues to carry bulky deposits on its balance sheet with terms deposits contributing almost 78% to the total deposits. However, CASA share stands lower and the CASA traction stood moderate with mere 1.5% growth YoY during 3QFY14. The overall deposits for the third quarter grew by mere 3.9% YoY.

    Corporate, Agri+SME advances witness downfall
    (Rs m) Rs (m) % of total Rs (m) % of total Change
    Advances 1,709,590   1,785,280   4.4%
    Retail 313,190 18.3% 327,250 18.3% 4.5%
    Corporate 853,020 49.9% 833,060 46.7% -2.3%
    Agri+MSE 150,750 8.8% 130,660 7.3% -13.3%
    Deposits 1,866,230   1,938,580   3.9%
    CASA 415,690 22.3% 422,010 21.8% 1.5%
    Tem deposits 1,450,540 77.7% 1,516,570 78.2% 4.6%
    Credit deposit ratio 91.6%   92.1%    

  • Cumulatively, the business growth for IDBI bank at 4.1% YoY stood almost flat. Further, the priority sector target fulfillment remaining an overhang, the business growth is not expected to witness any significant traction in the near to medium term.

  • Lack of sufficient credit off-take during 3QFY14 marred the interest income performance of the bank. The NII for the quarter grew by mere 5.3% YoY. Moreover, this poor credit off-take coupled with lower CASA base and priority sector target fulfillment dragged the margins for the quarter. NIMs stood on the lower side at 2.18% in 3QFY14 as against 2.3% in 3QFY13. Margins are expected to remain under pressure going forward.

  • Besides poor core income performance improved, the non-interest income show too stood out to be dismal. The 38.8% fall in other income can be largely attributed to the poor commission and fee income reported during 3QFY14.

  • While the operating costs spiked by 6.9% YoY, the cost-income ratio stood higher at 38.7% during 3QFY14.

  • The quarter witnessed lower provisions that increased by mere 7.3% aiding the profitability growth. However, the asset quality pressures stand looming. The gross NPA at 5.44% is an alarming number. For 3QFY13, the number stood as 3.67%. The net NPAs for 3QFY14 at 2.93% again is a high number as against 1.93% in 3QFY13. Moreover, slippages have stood on the higher side adding significant stress to the asset book. It is expected to remain on the higher side given the bank's exposure to certain infrastructure accounts. Moreover, the restructured stock at Rs 155 bn has exasperated asset quality woes for IDBI Bank.

  • Higher NPAs, lower margins and shrinkage in profitability have depressed the return ratios of the company. The RoEs for the bank stood at dismal 2.1% and RoAs at 0.14% during 3QFY14. This is the lowest number in the industry.

  • The capital adequacy for the bank stands at 12.7% with Tier I at 7.9% as per BASEL III norms. With profitability trending lower and assets getting weaker, the current capital stock may soon prove insufficient.
What to expect?

At the current price of Rs 56, the stock is valued at 0.4 times the FY16 adjusted book value.

Weak credit off-take, asset quality pressures, shortfall in priority sector requirements and poor return ratios are reflective of a weak balance sheet. We do not expect a business revival anytime soon; given the macro challenges.

As highlighted in the previous quarter, IDBI bank stands on a weak footing with respect to all the operational parameters. Hence, we reiterate SELL recommendation on the stock. Investors looking for rewards in the form of dividend yields may continue to hold the stock (dividend yield on our original recommendation price is in excess of 3%). Nonetheless, the above-mentioned concerns cannot be dismissed.

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