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IDBI Bank: Constrained for capital - Views on News from Equitymaster

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IDBI Bank: Constrained for capital

Apr 30, 2009

Performance summary
  • Interest income grows by 45% YoY in FY09, on the back of 26% YoY growth in advances.
  • Capital adequacy ratio at 11.6% at the end of March 2009.
  • Net NPA to advances reduce from 1.3% in FY08 to 0.9% in FY09.
  • Cost to income ratio expands from 42% in FY08 to 49% in FY09.
  • Net profit margins drop by 1.5% in FY09 despite lower provisioning costs.
  • Declared dividend of Rs 2.5 per share for FY09 (dividend yield of 3.9%)

Standalone numbers
Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest income 22,554 32,622 44.6% 80,408 116,316 44.7%
Interest expense 20,137 27,808 38.1% 73,644 103,057 39.9%
Net Interest Income 2,417 4,814 99.2% 6,764 13,259 96.0%
Net interest margin (%)       0.6% 0.6%  
Other Income 3,915 4,723 20.6% 15,817 13,899 -12.1%
Other Expense 3,094 4,697 51.8% 9,588 13,379 39.5%
Provisions and contingencies 465 1,117 140.1% 4,767 3,923 -17.7%
Profit before tax 2,773 3,724 34.3% 8,226 9,856 19.8%
Tax 323 586 81.4% 932 1,271 36.4%
Effective tax rate 11.6% 15.7%   11.3% 12.9%  
Profit after tax/ (loss) 2,450 3,138 28.1% 7,294 8,585 17.7%
Net profit margin (%) 10.9% 9.6%   9.1% 7.4%  
No. of shares (m)       724.8 724.8  
Book value per share (Rs)*         102.3  
P/BV (x)         0.6  
* (Book value as on 31st March 2009)

What has driven performance in 4QFY09?
  • Despite shortage of capital as compared to its peers in the public sector, IDBI Bank continued to grow its advance book in FY09 largely on the back of high cost term deposits. Although falling short of low cost deposits to fund the same the bank grew its advances by nearly 26% YoY; while the deposits grew by 54% YoY. The bank has not made much headway in terms of improving its net interest margins that continue to languish below 1%. While IDBI has contained its aggressiveness in growing its retail advance portfolio in the past quarter, there was also a fall in CASA proportion.

    High cost growth
    (Rs m) FY08 % of total FY09 % of total Change
    Advances 822,130   1,034,280   25.8%
    Retail 131,541 16.0% 162,382 15.7% 23.4%
    Corporate 690,589 84.0% 871,898 84.3% 26.3%
    Deposits 729,980   1,124,010   54.0%
    CASA 154,756 21.2% 168,602 15.0% 8.9%
    Term deposits 575,224 78.8% 955,409 85.0% 66.1%
    Credit deposit ratio 112.6%   92.0%    

  • IDBI’s other income that was higher last year due to profit on sale of stake in NSE has fallen by nearly 12% YoY in FY09 despite 79% YoY growth in fee income. The bank’s fee income constituted 33% of total income in FY09 as against 22% of total income in FY08. While this is certainly appreciable, it needs to be kept in mind that the bank’s earnings from assets (NIMs) are the lowest in the sector. The high fee income can also be attributed to the bank’s extended retail operations and the life insurance venture with Federal Bank and Fortis Insurance International (in which IDBI has 48% stake).

  • IDBI managed to control the slippages in its advance book during the last quarter and marginally bring down its net NPA level. The bank’s provision coverage, despite rising from 35% in FY05 to 55% in FY09, lies way below that of its peers. Also, the lower provisioning booked this quarter and higher operating cost (49% in FY09) signals risks for the sustenance of asset quality in future. The higher operating costs have led to IDBI lose the cost advantage due to its lean structure.

  • In order to address its capital adequacy requirement (take it above 12% as required by RBI), the bank has decided to merge its housing finance subsidiary with itself. This would bear well for the bank in terms of reduction in capital requirement for the subsidiary as well as focus on centralised control over asset quality.

What to expect?
At the current price of Rs 64, the stock is trading at 0.6 times our estimated FY11 adjusted book value. Although the capital adequacy ratio of the bank at 11.6% in FY09 is inadequate to sustain the current growth rates, we see the merger of home finance subsidiary being a positive move. Having said that, while we are enthused by the bank’s efforts to accelerate non-fund income growth, inability to improve net interest margins is a cause of concern.

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Mar 18, 2019 (Close)


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