IDBI: Too much, too little! - Views on News from Equitymaster

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IDBI: Too much, too little!

Apr 23, 2007

Performance summary
IDBI declared results for the fourth quarter and full year ended March 2007, reporting the consolidated numbers for the United Western Bank (UWB) SBU in its books. While the benefits of the merger in terms of improved NIMs and lower operating costs have evidently aided IDBI’s net profit margins for the full year, UWB’s legacy of poor assets has aggravated IDBI’s provisioning requirements. In terms of advance growth, the bank continues to lag its peers in the sector while the fee income growth has shown no signs of improvement.

Standalone numbers
Rs (m) 4QFY06 4QFY07 Change FY06 FY07 Change
Interest income 15,738 18,144 15% 53,807 63,454 18%
Interest expense 12,389 16,017 29% 50,008 56,874 14%
Net Interest Income 3,349 2,127 -36% 3,799 6,580 73%
Net interest margin (%)       0.5% 0.8%  
Other Income 3,703 3,709 0% 12,804 10,272 -20%
Other Expense 3,025 2,052 -32% 8,595 7,784 -9%
Provisions and contingencies 2,014 1,648   2,399 2,763 15%
Profit before tax 2,013 2,136 6% 5,609 6,305 12%
Tax 280 32 -89% 274 523 91%
Effective tax rate 13.9% 1.5%   4.9% 8.3%  
Profit after tax/ (loss) 1,733 2,104 21% 5,335 5,782 8%
Net profit margin (%) 11.0% 11.6%   9.9% 9.1%  
No. of shares (m) 723.0 724.1   723.0 724.1  
Diluted earnings per share (Rs)* 9.6 11.6   7.4 8.0  
P/E (x)         10.6  
* (12 months trailing)

Sleeping giant
Merger of IDBI and IDBI Bank was largely anticipated to be a win-win situation for both the entities. The erstwhile IDBI Bank, given its clean assets and impressive fundamentals, has offered valuable growth prospects, access to low cost deposits and extended reach, which in future will enable the consolidated entity to seek a better spread on its infrastructure funding. Post the merger with IDBI Bank, the government holding in IDBI stands at 58%. The bank is currently functioning with two SBUs handling the development finance and banking businesses separately. It currently has two subsidiaries namely IDBI Housing Finance and IDBI Capital Services. Although the merged entity is in the league of the largest banks in the country in terms of asset size, its lackadaisical rate of growth leaves it way behind its peers in terms of performance.

What has driven performance in 4QFY07?
Assets – unwary of costs: The integration with the United Western Bank has been the mainstay of IDBI’s operational highlights of FY07, with a positive impact on the bank’s flagging margins and operational efficiencies. IDBI managed to grow its advance book by 18.6% this quarter, in line with our estimates, albeit lower than most of its peers in the sector. Retail credit, which has been the focus of IDBI, ever since it converted into a banking entity, however, has shown some signs of slowdown with the rise in interest rates and comprised only 16% of the bank’s advance book in FY07. Home loans, which comprise 87% of the bank’s retail loans, grew by 16% YoY in FY07. While the deposit growth continues to be healthy (67% YoY), albeit on a lower base, it must be noted that there has been a fall in the proportion of CASA from 31% in FY06 to 25% in FY07. This suggests that the incremental deposits were largely high-cost term deposits. What, however, is enthusing is the fact that IDBI managed to improve its net interest margins to 0.8% (from 0.5% in FY06) due to the better NIMs of UWB and by retiring the high cost debts. IDBI’s achievements, nevertheless, are sparsely comparable to that of its peers. We expect the bank’s NIMs to remain below 1% until FY09.

Assets…chugging ahead
(Rs m) FY06 % of total FY07 % of total Change
Advances 527,390   624,710   18.5%
Retail 84,382 16.0% 98,079 15.7% 16.2%
Corporate 443,008 84.0% 526,631 84.3% 18.9%
Deposits 260,000   433,540   66.7%
CASA 81,120 31.2% 108,385 25.0% 33.6%
Tem deposits 178,880 68.8% 325,155 75.0% 81.8%
Credit deposit ratio 202.8%   144.1%    

Of the Rs 90 bn SASF, cases worth Rs 44 bn (settlement amount Rs 51 bn) were resolved until FY06. Of this, Rs 2 bn, Rs 8 bn and Rs 5 bn were recovered in FY05, FY06 and FY07 respectively.

Fees yet to catch up: The bank’s fee income (18% of total income in FY07) shows little signs of growth. The bank has entered into a life insurance venture with Federal Bank and Fortis Insurance International, in which IDBI will have 48% stake. Also, it is contemplating to start an asset management company. IDBI and India Infrastructure Finance Company (IIFCL) have recently entered into a Memorandum of Understanding (MoU) for pooling in their resources and expertise to assist infrastructure projects, which typically have elongated payback periods, with funds on competitive terms. These initiatives will, however, contribute meaningfully only in the longer term.

Low cost advantage: Thanks to UWB’s relatively lower cost operations, the lowering of the blended cost to income ratio from 52% in FY06 to 46% in FY07 has aided the bank’s operating margins. Given the fact that the branch franchise of UWB is largely present in the rural and semi urban areas, the same has not had an adverse impact on the bank’s cost ratio.

Quality takes a backseat: After successfully halving the gross NPAs in this portfolio from 4% (of advances) in 1HFY06 to 2.2% in 1HFY07, the same had once again gone up to 2.4% in 9mFY07 (net NPAs rose from 1.4% to 1.6%). This was due to the loss assets of UWB (Rs 49 bn) taken into IDBI’s books. The bank has brought down this ratio to 1.1% in FY07. IDBI’s provision coverage, despite rising from 35% in FY05 to 50% in FY06, lies way below that of its peers. This will entail additional provisioning liability for the bank in the coming quarters. Also, any write-back of provisioning may not augur well for the bank in a rising interest rate scenario, as the risk of higher delinquencies loom large.

Benefits of UWB yet to filter in: Although at less than 10% of IDBI’s balance sheet size, UWB offered an extensive franchise and a strong presence in the rural and semi-urban areas of Maharashtra. The benefit of the deal to IDBI is further underlined by the fact that while the net compensation payable by IDBI to UWB shareholders (at Rs 28 per share against book value of Rs 21) was Rs 359 m, the cost of setting up UWB’s franchise (branches and ATMs) would have come to Rs 534 m approximately. Also, IDBI’s employees per branch ratio that was unreasonably high at 27 in FY06 is expected to get rationalised to 18 post integration with UWB.

What to expect?
At the current price of Rs 85, the stock is attractively valued at 0.8 times our estimated FY09 adjusted book value. The bank will float a US$ 1.5 bn Tier II borrowing programme in FY08 for funding international banking business. It also plans to open two offshore banking units in Singapore and Bahrain. With a comfortable CAR of 13.7%, while the downsides to the bank’s future prospects are almost negligible, the recovery process will be gradual and time consuming. However, the bank’s merger with UWB, on one hand has given a boost to its balance sheet growth, and on the other has also compensated for IDBI’s shortcomings. This has led us to believe that the recovery process is set to accelerate. Its comfortable capital adequacy position and possible upsides in terms of NIMs and NPA recovery also make the stock attractive from a long-term perspective. Here, we need to emphasise on the caveat that it would require atleast 2 to 3 years for the valuations to reflect the same.

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Aug 5, 2020 03:37 PM


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