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IDBI Bank: Capital constrained - Views on News from Equitymaster
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IDBI Bank: Capital constrained
May 14, 2010

IDBI Bank declared its FY10 results. The bank has reported 32% YoY and 20% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 83% YoY in FY10, on the back of 34% YoY growth in advances.
  • Capital adequacy ratio at 11.3% at the end of FY10.
  • Net interest margins higher at 1.3% from 1% in FY09 despite lower CASA proportion.
  • Net NPA to advances higher at 1.04% in FY10 from 0.9% in FY09.
  • Cost to income ratio shrinks from 49% in FY09 to 40% in FY10.
  • Net profit margins drop by 0.6% YoY in FY10 due to higher provisioning costs.


Standalone numbers
Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Interest income 32,982 40,814 23.7% 115,451 152,726 32.3%
Interest expense 27,808 33,212 19.4% 103,057 130,052 26.2%
Net Interest Income 5,174 7,602 46.9% 12,394 22,674 82.9%
Net interest margin (%)       1.0% 1.3%  
Other Income 4,362 5,470 25.4% 14,764 22,909 55.2%
Other Expense 4,697 6,133 30.6% 13,379 18,314 36.9%
Provisions and contingencies 1,116 5,424 386.0% 3,922 16,822 328.9%
Profit before tax 3,723 1,515 -59.3% 9,857 10,447 6.0%
Tax 586 (1,669)   1,271 136  
Effective tax rate 15.7%     12.9% 1.3%  
Profit after tax/ (loss) 3,137 3,184 1.5% 8,586 10,311 20.1%
Net profit margin (%) 9.5% 7.8%   7.4% 6.8%  
No. of shares (m)         724.8  
Book value per share (Rs)*         113.1  
P/BV (x)         1.0  
* (Book value as on 31st March 2010)

What has driven performance in FY10?
  • Despite the handicap of lower capital adequacy, IDBI Bank has managed to outperform the sector average by clocking nearly 34% YoY growth in advances in FY10. Further, in doing so, the bank has paid heed to margins which have improved over the quarters, albeit marginally. IDBI has indeed been particularly aggressive in growing its retail advance portfolio, which has grown at a faster clip than that in most PSU banks, although on a lower base.

  • The fall in the proportion of CASA (current and savings account) from 15.2% in FY09 to 14.6% in FY10 is a little disappointing, particularly since the CASA base of the bank is very small. However, the downward re-pricing of liabilities has facilitated the improvement in NIMs for the bank. The advance growth and NIMs have come in marginally higher than our estimates.

    High cost growth
    (Rs m) FY09 % of total FY10 % of total Change
    Advances 1,031,358   1,382,020   34.0%
    Retail 165,017 16.0% 216,977 15.7% 31.5%
    Corporate 866,341 84.0% 1,165,043 84.3% 34.5%
    Deposits 1,125,282   1,676,670   49.0%
    CASA 171,043 15.2% 244,794 14.6% 43.1%
    Tem deposits 954,239 84.8% 1,431,876 85.4% 50.1%
    Credit deposit ratio 91.7%   82.4%    

  • IDBIís other income grew by 55% in FY10 bringing the non- interest income to 50% of total income in FY10 from 54% in FY09. The proportion of fees to total income, however, remained at 31%. This can be attributed to the bankís extended retail operations and the life insurance venture with Federal Bank and Fortis Insurance International (in which IDBI has 48% stake).

  • Our biggest concern for IDBI Bank so far had been its poor provisioning policy. The same has now been addressed and will be benign to the bankís performance at a time when its margins are on an upward trend. IDBI Bankís net NPAs have sequentially increased in the past three to four quarters to 1.0% in FY10. The bankís provision coverage, has however, gone up from 40% in FY09 to 75% in FY10. This makes it compliant with RBIís mandate of 70% coverage by 1HFY11. Going forward this will reduce the provisioning requirement of the bank and fetch it the cost advantage due to its lean structure.

  • With cost to income ratio at 40% in FY10 from 49% in FY09, the bank has the potential to leverage its lean cost structure and improve its provisioning policy as well as grow its asset base.

What to expect?
At the current price of Rs 118, the stock is trading at 0.8 times our estimated FY12 adjusted book value. As the capital adequacy ratio of the bank at 11.3% in FY10 is inadequate to sustain the current growth rates, we see the same being unsustainable going forward. Nonetheless, growth led by equity dilution cannot be ruled out. Having said that, we are enthused by the bankís efforts to accelerate non-fund income growth and sustained asset re-pricing ability. We reiterate our long term positive outlook on the bank.

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