Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
IDBI: Research meet extracts - Views on News from Equitymaster
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

IDBI: Research meet extracts
Mar 6, 2006

We recently met IDBI to get an update as to how the bank is aligning its DFI and banking businesses to derive better synergies, the performance of the SASF as well as the management’s take on margin pressures. Following are the key excerpts of the meet. Credit growth – Low base effect: The historically high growth rate witnessed in incremental credit offtakes in FY05 was primarily the consequence of lower growth rates in the past. The overall economy was in a recessionary phase until early 2004. Subsequently, lower interest rates and better economic performance triggered a cycle of higher consumption and high investments. This is turn propelled higher demand for credit from the retail as well corporate segments. While the retail credit demand was immediately ‘visible’, that of the corporate segment remained restricted to getting sanctions and did not materialise into actual disbursements until late 2005. The management has indicated that credit growth is expected to remain buoyant unless the rates rise by more than 100 to 150 basis points.

Incremental offtakes – Retail centric: IDBI, which is currently having only 10% of its advance portfolio in the retail segment, is envisaging near 100% incremental growth in this portfolio over the next 2 to 3 fiscals. This is expected to bring the bank’s exposure to the retail portfolio to 35% of its credit book by FY08. The bank plans to achieve this through higher number of branches (estimated to go upto 500 in FY08 from 178 in FY05). However, going by the bank’s slow growth in assets in 9mFY06, we have been conservative in our assumptions and have assumed CAGR of 40% in the retail book until FY08.

Funding – Borrowings light: Of the high cost debts that IDBI was carrying in its books at the end of 1HFY06, borrowings to the tune of Rs 35 bn (with interest liability at the rate of 11% to 14%) and Rs 60 bn (with interest liability at the rate of 10% to 13%) will get repaid in FY06 and FY07 respectively. With this, the bank will not have any borrowings with interest rates above 10% p.a. in its books. We expect the average borrowing cost to come down to 7% in FY08E from 8% in FY05.

NIMs – Limited downside: If one were to plot banks on a chart as per their net interest margins, IDBI would figure at the rock bottom. However, the same is set to improve. Of the Rs 90 bn SASF, cases worth Rs 44 bn have been resolved until 9mFY06. Of this, Rs 8 bn was recovered in FY05 and recoveries to the tune of Rs 10 bn and Rs 15 bn are expected in FY06E and FY07E respectively. GSecs of equivalent value on getting freed from IDBI’s books will be available for productive usage. Also, the profit on sale of stakes in companies (hitherto booked as other income) will be available for lending purposes. These will shield any further downsides to the bank’s NIMs. Nevertheless, the certainty and quantum of these benefits being difficult to reckon, we have not factored in the same in our projections. Having said that, we do not see the NIMs touching 1% levels by FY08.

Other income – Reasonably hedged: 50% of IDBI’s investments are in the HTM (held-to-maturity) category. Investments in the AFS (available-for-sale) basket also have duration below 1 year. Thus the bank’s investment portfolio stands reasonably hedged with respect to interest rates risks. However, a sharp upturn in the rates could necessitate further shifts to the HTM basket thereby requiring additional provisioning.

New ventures: IDBI is envisaging a foray into the insurance business in collaboration with a foreign player. The bank is in the final stage of negotiations with 3 overseas life insurance companies and will also rope in a third partner for the insurance joint venture (as the RBI guidelines do not permit banks to hold more than 50% stake in an insurance company).

Asset quality – Well guarded: Despite the relatively faster pick up in retail disbursals, the bank has been able to cap the net NPAs in this portfolio at 0.2% (of advances). Also, post SASF, we do not see the overall average net NPA levels shooting higher than the current levels of 1.4% of advances. To that extent, quality and valuations remain well guarded.

Our view
At the current price of Rs 84, IDBI is trading at 0.9 times our estimated FY08 adjusted book value. While we have been fairly conservative when it comes to factoring in the bank’s outlook in our numbers, we definitely concur with the fact that the worst has been factored in for the stock and there are considerable prospects of upsides in the longer term.

Although we must hasten to add that we do not expect IDBI to outperform the sector or compete very effectively against its peers in the medium term, we certainly believe that the growth and expansion plans on materialisation will give the bank enough leverage to elicit a re-rating to its valuations. The same, nevertheless, requires investors to hold on to the stock with a long-term horizon.

To Read the Full Story, Subscribe or Sign In

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Feb 20, 2018 (Close)


  • Track your investment in IDBI BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks