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IDBI Bank: Loan quality a big dampener
May 2, 2013

IDBI Bank declared its results for the fourth quarter and financial year 2012-13 (FY13).The bank has reported a 18% YoY growth in net interest income in FY13 while net profits have fallen by 7% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) increases by 18% YoY in FY13 on the back of 9% YoY growth in advances.
  • Capital adequacy ratio currently stands at 13.1% at the end of 4QFY13 from 14.5% at the end of 4QFY12.
  • Net interest margin comes in at 2.1% compared to 2.0% in FY12.
  • Net NPA (non-performing assets) to advances remained stable at 1.6% as was the case in FY12.
  • Cost to income ratio drops from 39% in FY12 to 36% in FY13.
  • Net profits fall by 7.4% YoY in FY13, on account of higher provisioning and increased tax outlay, despite an increase in other income and NII.
  • Declares dividend of Rs 3.5 per share for FY13 (dividend yield 4%).

Rs (m) 4QFY12 4QFY13 Change FY12 FY13 Change
Income from operations 60,794 63,968 5.2% 233,699 250,643 7.3%
Interest expense 48,685 49,569 1.8% 188,250 196,911 4.6%
Net Interest Income 12,109 14,399 18.9% 45,449 53,732 18.2%
Net interest margin       2.0% 2.1%  
Other Income 7,865 11,468 45.8% 21,121 32,195 52.4%
Other Expense 7,932 9,927 25.2% 26,074 31,343 20.2%
Provisions and contingencies 2,833 8,691 206.8% 14,198 28,364 99.8%
Profit before tax 9,209 7,249 -21.3% 26,298 26,220 -0.3%
Tax 1,500 1,705 13.7% 5,980 7,397 23.7%
Profit after tax/ (loss) 7,709 5,544 -28.1% 20,318 18,823 -7.4%
Net profit margin (%) 12.7% 8.7%   8.7% 7.5%  
No. of shares (m)         1,332.7  
Book value per share (Rs)*         145.9  
Price to book value (x)*         0.6  
* Book value as on 31st March 2013

What has driven performance in FY13?
  • IDBI Bank has underperformed the sector average by clocking in 8.7% YoY in advances in FY13. The management of the bank has been keen to keep advance growth moderated and concentrate on its priority sector book instead. The bank expects credit growth to move up to 13-14% YoY in FY14. However, the bank has paid heed to maintaining its margins which have remained in line with the situation last year. It has increased slightly to 2.1% at the end of FY13 from 2% earlier in FY12. IDBI has been particularly aggressive in growing its retail advance portfolio, which has grown at a fast clip. However, its SME portfolio saw a 50% dip in the nine month period. The company is trying to grow its priority sector book in order to meet regulatory guidelines.

  • The rise in the proportion of CASA (current and savings account) from 19.7% in FY12 to 26% in FY13 is encouraging. This is along with the focused strategy of the bank to increase its retail client base, and improve profitability and margins. It plans to increase its CASA levels to around 30% in the future. However, despite the higher interest rates offered on savings accounts, the fight for CASA over the next few quarters may be tough with many banks competing for the same.

    Retail led growth on full steam...
    (Rs m) FY12 % of total FY13 % of total Change
    Advances 1,805,720   1,963,060   8.7%
    Deposits 2,104,930   2,271,160   7.9%
    CASA 414,671 19.7% 590,502 26.0% 42.4%
    Term deposits 1,690,259 80.3% 1,680,658 74.0% -0.6%
    Credit deposit ratio 85.8%   86.4%    

  • IDBI's other income increased by 52% in FY13 due to higher profits on investments and on forex, bringing the non-interest income to 35% of total income in FY13 from 28% in FY12. However, this included a one-off of Rs 1.8 bn on account of the sale of a stake in credit rating agency, CARE. The proportion of fees to total income however increased from 23%, to 26% at the end of FY13. The bank has been doing well on the fee income front, and expects to sustain the momentum going forward.

  • IDBI Bank's net NPAs have remained unchanged at around 1.6% in FY13, gross NPAs at 3.2% of advances. The bank's provision coverage ratio currently stands at 69.2%, from 69.1% in the same quarter last year. The bank's provisions expenses increased by 207% YoY in 4QFY13, and by 100% YoY in FY13. This increase during the quarter was on account of the RBI increasing provisioning on restructured assets to 2.75% from 2% earlier. The provision coverage ratio however was at 53.6%, lower than most of its peers (41.1% in FY12).

  • The bank's restructured loan portfolio increased to Rs 625 bn in March 2013 from Rs 125 bn in September 2012. These currently stand at 8.2% of the total advances. IDBI's restructured assets are mainly in troubled sectors such electricity, air transport, textiles and infra, which may be prone to turning NPAs. Around 12.2% of its restructured accounts have turned NPA. In this quarter the big restructuring that took place was Suzlon energy, Rs 11.5 bn, other restructurings took place in the power, telecom and metals segment.

What to expect?
At the current price of Rs 88, the stock is valued at 0.6 times our estimated FY15 adjusted book value. While the valuations seem adequately discounted for near term risks, one cannot the impact of provisioning and slippage risks on the bank's profitability.

IDBI Bank has a large proportion of bulk deposits and a relatively lower CASA share. While the core performance was good, the bank continues to see stress on the asset quality front, with higher restructurings seen this quarter, and there seem to be more in the pipeline. The bank was still able to hold onto its margins and with monetary easing expected from the RBI, it may see less pressure on the same going forward as bulk deposit rates come off (with a lower CASA base the bank has a higher proportion of such high cost deposits). The bank is strategically trying to focus on growing its balance sheet at a relatively slow pace. It plans to focus on building up capacity on the priority sector front, to meet RBI guidelines. We believe that this slower target fits in with the current economic climate, however significant accretion to the priority sector lending book may impact margins as such loans have lower yields.

We are enthused by the bank's efforts to bring in efficiency in operations, increase its CASA base, and sustain its margins. However, notwithstanding these, the concern over spike in slippage ratio is overwhelming. The bank's exposure to restructured assets is unreasonably high and shows no signs of coming down. Hence despite our comfort with the bank's valuations, we would recommend investors to not buy any more of the stock, until there is more clarity. Investors who have the stock in their portfolio can hold on to the same

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