IDBI Bank: The sheen in question - Views on News from Equitymaster

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IDBI Bank: The sheen in question

Apr 10, 2001

IDBI Bank with its new brand identity is in focus these days. The bank is taking initiatives to move in line with the developments taking place in other private sector banks. ‘What can i do for you’ is the new corporate brand identity of IDBI Bank, which it is banking on to gain a competitive edge over its rivals in retail business. This new identity is slated to provide the bank with a launching pad for significantly increasing market share backed by superior quality of customer service. IDBI Bank has created a unified brand and has appropriated the lowercase, ‘i’, which signifies the individual in the bank, the consumer and the bank itself.

IDBI Bank is the first to introduce smart card in India compatible with its ATMs. Under the brand name of ‘MoneySmart’ the bank has launched a card, which will facilitate payment for small value purchase. The bank has already signed up with more than 100 merchant establishments and aims to increase the penetration level to 15,000. This will help it to reduce transaction costs materially.

IDBI Bank has recently launched WAP and SMS mobile banking services in select metros in an endeavor to offer convenient banking to customers while on move. This product launch marks the beginning of its retail strategy. The bank has upgraded its systems to Finacle banking software from Infosys at an investment of Rs 400 m.

These initiatives are expected to assist the bank in increasing the contribution of retail assets, which presently account for just 5% of total assets. The bank plans to increase the proportion of retail assets to 25% over the next few years, by expanding its portfolio to cover small and medium enterprises (SMEs). IDBI Bank aims to expand its retail reach from the present 51 branches to 75 branches and introduce 230 high end ATMs from the existing 69 over the next eighteen months. The bank will thus increase its reach, leverage its technological and human resource strength and offer a whole suit of retail products like demat accounts, home loans, educational loans, mutual fund and insurance products.

IDBI Bank is also eyeing cash management services and is working closely with its parent IDBI. The bank has relationship with around 400 corporates, which it is likely to tap for CMS product. It is expecting to receive a business of around Rs 85 bn in the first year and Rs 160 bn in the second year. As CMS is a low margin and high volume business, foray into this area will help the bank in increasing its revenue base.

Performance indicators
Year ended March '00IDBI
Revenues / employee (Rs m) 7.7
Profits / employee (Rs m) 1.1
NPM / employee14.4%12.7%17.8%10.8%
Deposits / branch (Rs m) 884 1,218 759 1,167
Deposits / employee (Rs m) 63.0 73.4 42.0 77.4
NPA / total advances2.0%1.1%0.8%4.7%

IDBI Bank’s productivity ratios compares well with other private sector banks. However, the concerns are its association with its parent IDBI, which has large non-performing assets. Also, performance of the bank in first nine months of the current fiscal was unimpressive. Its topline and bottomline (excluding provisions) grew at a marginal rate of 1.9% and 13.2% respectively. Higher provision and contingencies actually led to a fall of 69.2% in net profits. Operating margins declined sharply by 137 basis points to 16.7%, which are comparatively lower than its peers in the industry. The bank’s deposits and advances also grew at a disappointing rate of 22% and 17% respectively.

At the current market price of Rs 19 IDBI Bank is trading at a P/E of 4 times and Price/Book value ratio of 1 times. The bank’s lower valuations are due to its inability to show improved financial performance due to high cost of funds and non performing assets. The re-rating of the stocks depends on its future growth apart from its technology focus and quality of services provided.

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