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IDBI: Faltering on its way

May 2, 2005

Performance Summary
IDBI has announced its maiden consolidated results for six months (October 2004 to March 2005). Though the figures do not stack up very impressively when compared to the standalone performances of both the entities in the previous fiscal (October 2003 to March 2004), the bottomline picture stands untainted. This is primarily because of lower provisioning and tax benefits.

Consolidated performance
Rs (m) Oct'03 - Mar'04 # Oct'04 - Mar'05 Change
Income from operations 39404 26,557 -32.6%
Other Income 1990 6,271 215.1%
Interest Expense 25458 24,679 -3.1%
Net Interest Income 13,946 1,878 -86.5%
Other Expense 2809 4,539 61.6%
Operating profit / (loss) 11,137 (2,661) -123.9%
Operating profit margin (%) 28.3% -10.0%
Provisions and contingencies 10627 725.0 -93.2%
Profit before tax 2,500 2,885 15.4%
Tax 269 (188) -169.9%
Profit after tax/ (loss) 2,231 3,073 37.7%
Net profit margin (%) 5.7% 11.6%  
No. of shares (m)   721.7  
Diluted earnings per share (Rs)*   8.52  
P/E (x)   9.4  
# Summation of erstwhile IDBI and IDBI Bank figures for 3QFY04 and 4QFY04
* EPS annualised

A force to reckon…
Merger of IDBI and IDBI Bank is 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. The merged entity will also be rationalizing its manpower size and posting better efficiency ratios in the coming quarters. Its merger with IDBI has made IDBI Bank a strong contemporary for behemoths like SBI and ICICI Bank.

What has driven performance?
Dent in topline: IDBI's inefficiency in prompt disbursal of the sanctioned loans seems to be taking a toll on the bank's topline growth. Although the bank has clocked an asset growth of 27% YoY during the 6-month period, the ratio of growth in disbursals to that of sanctions stands at less than 10%. The bank seems to have also taken the hit of falling yields on its topline growth, which is a phenomenon being witnessed across the sector. IDBI continues to reduce its interest costs by replacing its high cost borrowings with low cost deposits. This has however not prevented the fall in net interest income (dipped by 87% YoY), as the interest costs of the bank are still very high compared to the banking sector due to its legacy of high cost borrowings. However, going forward, the bank's profitability is likely to improve once it is able to garner a sizeable share of low cost deposits.

Lenient on provisioning: After three quarters of aggressive provisioning, the bank seems to have adopted a lenient approach to provisioning (down 93% YoY). IDBI has drastically pared its incremental provisioning during the 6-month period so as to show a better picture of its bottomline. Its approach, though understandable considering the fact that the merger has noticeably improved its asset quality, does not douse concerns regarding potential slippages.

Improvement in asset quality: Thanks to the erstwhile IDBI Bank's clean asset book, the asset quality of the merged entity stands relatively cleaner with net NPA to advances ratio of 1.7% as against 2.4% (before merger). Also, its capital adequacy ratio (CAR) stands at 15.6% with Tier-I CAR of 12.5%.

SASF: IDBI has been systematically preparing itself for the merger for which it has reduced its non-performing assets by creating a Rs 90 bn ‘Stressed Assets Stabilisation Fund (SASF)'. This bailout package (given in September 2004) was a `cash neutral assistance' flowing from the Union Government to SASF, and not a cash grant by the government. The package is in the form of special interest-free G-Secs with 20 years maturity, which IDBI will have to redeem as and when the loans are recovered. The package has not yet been fully utilised and will continue to aid the merged entity in purging the NPA legacy of IDBI. Till January 2005, IDBI had resolved 60 cases of NPAs and had recovered Rs 1.5 bn.

What to expect?
At the current price of Rs 80, the stock is trading at a price to book value of 1.1 times its adjusted FY05 book value, which makes the stock fairly valued. Although the fundamentals of the merged entity position it on better grounds than before, the concerns regarding its adaptability to the competitive environment in the banking sector and ability to clean up it asset book, diminish the comfort factor. The risk profile will continue to be on the higher side for the stock until it proves its mettle.

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