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IDBI Bank: Growth impediment

Apr 28, 2003

IDBI Bank, one of the more efficient private sector banks in the country, has reported robust results for 4QFY03 and FY03. The bank has reported a 56% YoY rise in net profits for 4QFY03 while for FY03 this number stands at 36%. Topline growth has been nearly 17% for both 4QFY03 and FY03. There is an apparent and sizeable improvement in net interest income and this points towards the fact that the bank has reduced its deposit costs significantly in FY03 and specifically in 4QFY03.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Income from Operations 1,330 1,562 17.4% 5,093 5,981 17.4%
Other Income 320 436 36.2% 1,225 1,651 34.7%
Interest Expenses 959 976 1.8% 3,657 3,965 8.4%
Net interest income 371 586 57.9% 1,436 2,016 40.4%
Other Expenses 497 597 19.9% 1,430 2,066 44.4%
Operating Profit (127) (11) -91.2% 6 (49) -951.7%
Operating Profit Margin (%) -9.5% -0.7% 0.1% -0.8%
Provisions and Contingencies 131 155 18.6% 522 489 -6.4%
Profit before Tax 63 270 328.3% 709 1,113 56.9%
Tax (42) 105 -348.6% 185 402 117.3%
Profit after Tax/(Loss) 105 164 56.0% 524 711 35.6%
Net Profit Margin (%) 7.9% 10.5% 10.3% 11.9%
No. of Shares (m) 140.0 140.0 140.0 140.0
Diluted Earnings per share* 3.0 4.7 56% 3.7 5.1
P/E Ratio 5.3 4.9

The bank's aggressive strategy to tap the retail segment seems to be paying off as is apparent from the growth in the topline. The total customer assets of the bank have grown by 26% in FY03 with retail assets forming 32% (10% in FY02) of the total assets of the bank. IDBI Bank is one of the most aggressive players in the home loans market, though it still has a small base. Due to its aggressiveness home loans now form 73% of total retail assets. The bank's interest on advances income seems to have grown mainly due to the growth in retail assets. IDBI Bank's interest income from investments has reduced significantly in 4QFY03 and FY03, indicating that the bank is using a large portion of its resources to grow its retail assets. Also incremental investments are being made on a lower yield and hence this has taken a toll on the income from this avenue.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Interest on advances 696 999 43.6% 2,498 3,685 47.5%
Income on investments 536 511 -4.6% 2,352 2,108 -10.4%
Interest on balance with RBI 27 16 -40.7% 123 84 -31.9%
Others 72 36 -49.9% 120 104 -13.1%
Total 1,330 1,562 17.4% 5,093 5,981 17.4%

What is commendable about the bank's performance in 4QFY03 and FY03 however, is the strong growth in net interest income. The bank has had good amount of successes as far as reducing its average deposit costs are concerned. IDBI Bank has reported an average deposit cost of 5.9% compared to 7.5% in the same period last year. This is one of the lowest in the industry. It has managed to reduce its interest costs by aggressively tapping the retail deposits market. IDBI Bank has reported a 15% growth in total deposits, while its savings deposits have grown by 53% albeit on a lower base. As a result of all these measures, the net interest margin of the bank has improved by 25 basis points to 2.75% in FY03 compared to the same period last year.

Since the bank is in an expansionary phase, the operating expenses have risen significantly in FY03. However, looking at the 4QFY03 numbers, the operating expense growth has slowed down and this may be indicative that the bank has gone slow on its expansion drive and seems to be deriving increased business from its existing infrastructure. Cost to income ratio for 4QFY03 stood at 58% (72% IN 4QFY02) and for FY03 it stood at 56% (54% in FY02).

Apart from improvement in the topline and net interest margins, the bottomline of the bank has been significantly aided by growth in other income. But what is noteworthy is the fact that this growth in other income has been aided mainly by growth in fee based income rather than treasury gains. To put this in perspective, the bank's trading income for FY03 fell by nearly 16% while its core fee based income rose by 76%.

The stock is currently trading at Rs 24 at a P/E multiple of 5x its FY03 earnings. While IDBI Bank has done well to maintain the quality of its assets (net NPAs are 0.9% of total customer assets), low capital adequacy ratio still remains a cause of concern. So much so that the management has itself cautioned that the growth going forward may be impeded due to this reason. IDBI Bank has almost stretched its limits to raise further tier 2 capital and in this condition further capital infusion through sale of equity stake is imperative. IDBI Bank compares favourably on all counts compared to its private sector peers but the speculation regarding its merger with parent IDBI makes it a risky proposition.

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