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IDBI Bank: Sees improved profitability - Views on News from Equitymaster
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IDBI Bank: Sees improved profitability
Apr 19, 2011

IDBI Bank declared its FY11 (financial year 2011) results. The bank has reported 22% YoY and 60% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 92% YoY in FY11, on the back of a 14% YoY growth in advances.
  • Capital adequacy ratio currently stands at 13.6% at the end of FY11 from 11.3% at the end of FY10.
  • Net interest margin comes in higher at 2.1% as compared to 1.3% in FY10.
  • Net NPA (non-performing assets) to advances slightly higher at 1.06% in FY11 from 1.02% in FY10.
  • Cost to income ratio shrinks from 40% in FY10 to 35% in FY11.
  • Net profit margins improve by 2.1% YoY in FY11, due to higher NII, despite higher tax outlays and lower other income.
  • The board recommends a dividend of Rs 3.5 per share for FY11, working out to a dividend yield of 2%.

Standalone numbers
Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 40,833 50,251 23.1% 152,613 186,008 21.9%
Interest expense 33,212 39,166 17.9% 130,052 142,719 9.7%
Net Interest Income 7,621 11,085 45.5% 22,561 43,289 91.9%
Net interest margin (%)       1.27% 2.10%  
Other Income 5,446 6,755 24.0% 23,017 20,837 -9.5%
Other Expense 6,133 6,173 0.6% 18,314 22,547 23.1%
Provisions and contingencies 5,419 2,819 -48.0% 16,817 18,769 11.6%
Profit before tax 1,515 8,849 484.1% 10,447 22,810 118.3%
Tax -1,669 3,687   136 6,307  
Effective tax rate   41.7%   1.3% 27.6%  
Profit after tax/ (loss) 3,184 5,163 62.1% 10,311 16,503 60.0%
Net profit margin (%) 7.8% 10.3%   6.8% 8.9%  
No. of shares (m)         984.6  
Book value per share (Rs)*         147.9  
P/BV (x)         1.0  
* (Book value as on 31st March 2011)

What has driven performance in FY11?
  • IDBI Bank has armed itself with a higher capital adequacy ratio, post the government's preferential issue. It has however underperformed the sector average by clocking in 14% YoY growth in advances in FY11, compared to a sector average of over 20%. However, the bank has paid heed to margins which have improved over the year. It has increased from 1.3% at the end of FY10 to 2.1% currently in FY11. IDBI has indeed been aggressive in growing its retail advance and SME portfolio, which has grown at a faster clip than that in most PSU banks, although on a lower base. It has waived off all charges on current and savings account transactions starting September, 2010, accounting for a build-up in such accounts.

  • The rise in the proportion of CASA (current and savings account) from 14.6% in FY10 to 20.9% in FY11 is very encouraging. This is along with the focused strategy of the bank to increase its retail client base, and thus improve profitability and margins. It plans to increase its CASA levels to around 25% going forward.

  • The advance growth and NIMs have come in higher than our estimates, which were more conservative.

    Increased focus on retail
    (Rs m) FY10 % of total FY11 % of total Change
    Advances 1,382,020   1,570,980   13.7%
    Retail 186,940 13.5% 294,420 18.7% 57.5%
    Corporate 1,011,090 73.2% 1,033,880 65.8% 2.3%
    SME 101,590 7.4% 135,270 8.6% 33.2%
    Deposits 1,676,670   1,804,860   7.6%
    CASA 244,600 14.6% 376,780 20.9% 54.0%
    Tem deposits 1,432,070 85.4% 1,428,080 79.1% -0.3%
    Credit deposit ratio 82.4%   87.0%    

  • IDBI's other income fell by 10% in FY11 due to lower treasury gains, bringing the non-interest income to 32% of total income in FY11 from 51% in FY10. The proportion of fees to total income, however remained relatively stable at around 27%, compared to 31% in FY10. This can be attributed to the bank expanding its 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 increased slightly to 1.06% in FY11, from 1.02% earlier. The bank's provision coverage ratio, is now in compliance with RBI's mandate of 70% coverage by 9mFY11. It currently stands at 74.6%. Going forward, this will reduce the provisioning requirement of the bank and fetch it some cost advantage due to its lean structure. The company did some write-back of provisioning in the last quarter, (4QFY11), positively impacting the bottomline.

  • IDBI has also contained the rise in its cost to income ratio which has been lowered to 35% in FY11 from 40% in FY10. Thus the bank still has the potential to leverage its lean cost structure and improve its provisioning policy while growing its asset base. The bank uses its technology very effectively, and has the lowest employee base, with less than 14,000 employees. Since most of its operations have been centralized, and pushed to the back office, the branches can work on garnering more business.

What to expect?
At the current price of Rs 147, the stock is valued at 0.9 times our estimated FY13 adjusted book value. ResearchPro subscribers can click here. The bank's improved capital adequacy ratio at 13.6% in FY11 is reasonably adequate to sustain the current growth rates in the medium term. Going forward, the management of the bank expects to again underperform the sector average in terms of loan growth, but instead focus more on increasing profitability in a sustainable manner. We are enthused by the bank's efforts to bring in efficiency in operations, increase its CASA base, and thus improve its margins. We reiterate our long term positive view on the bank.

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