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IDBI Bank: Slow but steady - Views on News from Equitymaster
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IDBI Bank: Slow but steady
Mar 2, 2011

IDBI Bank declared its 3QFY11 results. The bank has reported 68% YoY and 59% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows by 22% YoY in 9mFY11, on the back of 21% YoY growth in advances.
  • Capital adequacy ratio at 14.1% at the end of December 2010 with the government's capital infusion to the tune of Rs 31 bn.
  • Net interest margins higher at 2.1% from 1.2% in 9mFY10; CASA proportion higher at 15%.
  • Net NPA to advances stable at 1.2% in 9mFY11, as against 1.4% in 9mFY10.
  • Cost to income ratio moves lower from 37% in 9mFY10 to 35% in 9mFY11.
  • Despite fall in other income and higher tax incidence net profits grow by 59% YoY in 9mFY11.


Standalone numbers
Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest income 40,050 47,123 17.7% 111,780 135,767 21.5%
Interest expense 32,890 35,083 6.7% 96,840 103,553 6.9%
Net Interest Income 7,160 12,040 68.2% 14,940 32,214 115.6%
Net interest margin (%)       1.2% 2.1%  
Other Income 4,274 4,472 4.6% 17,571 14,081 -19.9%
Other Expense 5,041 5,167 2.5% 12,181 16,374 34.4%
Provisions and contingencies 2,465 6,519 164.5% 11,397 15,949 39.9%
Profit before tax 3,928 4,826 22.9% 8,933 13,972 56.4%
Tax 1,065 285 -73.2% 1,805 2,620 45.2%
Effective tax rate 27.1% 5.9%   20.2% 18.8%  
Profit after tax/ (loss) 2,863 4,541 58.6% 7,128 11,352 59.3%
Net profit margin (%) 7.1% 9.6%   6.4% 8.4%  
No. of shares (m)         958.0  
Book value per share (Rs)*         126.0  
P/BV (x)         1.1  
(Book value as on 31st December 2010)

What has driven performance in 3QFY11?
  • Armed with higher capital adequacy after the infusion of funds by the government, IDBI Bank has managed to perform in line with the sector average by clocking 21% YoY growth in advances in 9mFY11. Further, in doing so, the bank has paid heed to margins which have improved significantly over the past 12 months, albeit on a very low base. IDBI has indeed been particularly aggressive in growing its retail and SME advance portfolios, which have grown at a faster clip than that in most PSU banks, although on a lower base.

    The rise in the proportion of CASA (current and savings account) to around 15% coupled with upward re-pricing of assets has facilitated the improvement in NIMs for the bank. The advance growth and NIMs have come in marginally higher than our estimates.

    Leveraging SME support
    (Rs m) 9mFY10 % of total 9mFY11 % of total Change
    Advances 1,112,780   1,344,910   20.9%
    Retail 156,902 14.1% 220,565 16.4% 40.6%
    Corporate 857,953 77.1% 923,953 68.7% 7.7%
    SME 61,203 5.5% 119,697 8.9% 95.6%
    Deposits 1,427,980   1,502,390   5.2%
    CASA 187,208 13.1% 226,110 15.1% 20.8%
    Tem deposits 1,240,772 86.9% 1,276,280 85.0% 2.9%
    Credit deposit ratio 77.9%   89.5%    

  • IDBI's other income fell by 20% in 9mFY11 due to lower treasury gains, bringing the non- interest income to 30% of total income in 9mFY11 from 60% in 9mFY10. The proportion of fees to total income, however, remained at 22%. 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).

  • 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. IDBI Bank's net NPAs have remained at 1.2% in 9mFY11. The bank's provision coverage, has however, gone up from 40% in FY09 to 75% in 9mFY11. This makes it compliant with RBI's mandate of 70% coverage by 9mFY11. Going forward this will reduce the provisioning requirement of the bank and fetch it the cost advantage due to its lean structure.

  • IDBI has also contained the rise in its cost to income ratio which has been lowered to 35% in 9mFY11 from 37% in 9mFY10. Thus the bank still has the potential to leverage its lean cost structure and improve its provisioning policy as well as grow its asset base.

What to expect?
At the current price of Rs 137, the stock is trading at 1.3 times our estimated FY13 adjusted book value (ResearchPro subscribers can view latest updates here). The improved capital adequacy ratio of the bank at 14% in 9mFY11 is reasonably adequate to sustain the current growth rates in the medium term. We are enthused by the bank's efforts to accelerate non-fund income growth and sustained asset re-pricing ability. We reiterate our long term positive outlook on the bank.

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