IDBI Bank: Casting away IDBI's shadow - Views on News from Equitymaster

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IDBI Bank: Casting away IDBI's shadow

Apr 19, 2002

The new generation private sector bank, IDBI Bank has reported a triple digit rise in FY02 earnings. This is despite of a 4% decline in interest income. The bank's strong profit growth was on the back of its initiatives to reduce cost of funds and higher money market income (included in other income).

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Income from operations 1,515 1,330 -12.2% 5,325 5,093 -4.3%
Other Income 190 320 68.7% 696 1,225 76.1%
Interest expense 1,152 959 -16.8% 4,309 3,657 -15.1%
Net interest income 362 371 2.4% 1,016 1,436 41.3%
Other expenses 333 497 49.5% 1,026 1,430 39.4%
Operating Profit 29 (126)- (10) 6 -
Operating Profit Margin (%)1.9%-9.5%-0.2%0.1%
Provisions and contingencies 108 13120.6% 450 52216.1%
Profit before Tax 111 63-43.2% 237 709199.7%
Tax 10 (42)- 43 185330.2%
Profit after Tax/(Loss) 101 1064.0% 194 524170.8%
Net profit margin (%)6.7%7.9%3.6%10.3%
No. of Shares (m) 140.0 140.0 140.0 140.0
Diluted Earnings per share*2.93.01.85.0
P/E Ratio6.53.9
*(annualised)

IDBI Bank has however, reported a disappointing performance for the fourth quarter of year with operating loss of Rs 126 m. In the first nine months of FY02, the bank had reported operating profits of Rs 132 m. Higher operating expenses on account of network expansion and investments in technology, pressurized the bank's earnings figure. Its cost to income ratio in the fourth quarter increased to 72% from 60% in the corresponding previous quarter. A 69% rise in other income, mainly from trading in call money markets and reduction in tax provisions, helped fueling the bank's fourth quarter profits figure.

During FY02, the bank exited vulnerable corporate assets to improve the quality of its loan assets. It has sold assets over Rs 8 bn and 85% of its corporate credit portfolio is now rated 'A' and above. The growth in corporate assets in the current year was impacted due to capital constraints problem faced by the bank (its capital adequacy ratio stood at 9.6% as on March 2002). Corporate loans account for 90% of total loans of the bank and it targets to grow this asset base by about 15-20% in the current year.

The bank has established a strong foothold in retail assets by increasing the proportion of retail assets to 10% of total customer assets from 5% in the previous year. Over 300% rise in the bank's housing portfolio has accorded a strong growth of 175% in retail assets. The bank expects to double the retail portfolio during the current year. The bank's relentless customer acquistion drive has resulted in addition of 85,000 customers for the March quarter, taking the total number to over half a million accounts. It aims to double this number in the current year, by increasing its branch and ATM network and launching new retail products. The bank currently has 75 branches and 225 ATMs. It aims to expand into Tier-II cities, where penetration of new private sector banks is relatively lower. This would enable IDBI Bank to achieve higher deposits growth and also the advantage of third party product distribution.

IDBI Bank's continued focus on retail deposits and a secular downtrend in interest rates, resulted in decline in its average cost of deposits to 7.5% in FY02 (9.5% in FY01). Low cost deposits currently accounts for 34% of total deposits, which is line with its peers in the sector. Reduction in cost of borrowings increased the bank's net interest income by 41% in FY02.

During FY02, the bank has increased its non-performing assets (NPA) provision coverage to 63% and brought down the net NPAs to customer assets to 1.6%. It has already started recognising NPAs on 90 days basis.

At the current market price of Rs 30, IDBI Bank is trading at a P/E of 4x and Price/Book value ratio of 1.6x. The bank has indicated to sell 26% stake of its parent in the next 3-6 months to enhance its capital base. However, delay in raising capital is expected to hamper its growth plans during first quarter of FY03. It has also made its stance clear, by ruling out the future possibility of reverse merger of its parent IDBI. This is likely to act as a near term trigger for the bank's stock price. Considering the bank's focused management team and growth plans, its earnings are likely to display strong growth in the next 2-3 years. However, in the long term, it could be difficult for the bank to sustain high growth rates unless it opts for inorganic growth.

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