May 22, 2001|
IDBI Bank: Will retail thrust succeed?
IDBI Bank's FY01 profits dropped by 68% on the back of a huge 7 time jump in provisions for non-performing assets. The bank's net NPA ratio as a percentage of net customer assets rose to 3.1% (1.3% in FY00). Its operating margins in FY01 too slipped by about 270 basis points due to the high cost of funds.
|Operating Profit (EBDIT)
|Operating Profit Margin (%)
|Profit before Tax
|Provisions & Contingencies
|Profit after Tax/(Loss)
|Net profit margin (%)
|No. of Shares (eoy)
|Diluted Earnings per share*
|P/E (at current price)
IDBI Bank's cost of funds are comparatively high (9.5%) due to more proportion of corporate liabilities (77% of the total). On the asset side too, 95% of its total assets (loans) are in favour of corporates. The bank however, expects to bring down the cost of funds by around 75 to 100 basis points by FY03 through its aggressive retail initiatives.
The bank has drawn up a detailed road map for its retail focus. It plans to increase the proportion of retail assets to 25% of total assets base (5% in FY01) and retail liabilities to 50% of total deposit base (34% in FY01) by FY03. To achieve this target, it is focusing on rural and semi-urban areas by opening up more centres. Apart from its retail loan products, IDBI Bank also plans to foray into insurance, internet banking, retail broking and credit/debit card businesses in the next three years. Its distribution network include 50 branches and 77 ATMs (plans to increase to 200 by FY02) across 35 cities. The bank expects, its current customer base of 0.3 m to double by FY02 driven by its retail strategies.
Although, IDBI Bank seem to be moving on the right track, its operating cost are unlikely to come down in the near future considering the fact that its new initiatives requires a lot of marketing efforts. Also, it will be a challenge for the bank to move swiftly considering the increasing competition from other private sector and foreign banks.
The bank's capital adequacy ratio of 11.7% is well above the statutory requirement of 9%. However, it may not support the fast growth plans of the bank. It is very likely that the bank will have to raise the further capital in the next six months (at the current high cost of funds).
During the year, the bank has spent Rs 350 m on technology improvement and plans to spend Rs 550 m further in the current fiscal. It has chosen 'Finacle', the e-banking platform from Infosys to drive its business growth. The contribution of tech spend in other expenses increased to 21% from 8% in the previous year. The bank's other expenses as a result jumped by 64% to Rs 1 bn. Nevertheless, the bank plans to bring down its cost to income ratio (which stood at 59% in FY01) to 50% by FY02. This will be achieved through cost control measures. Considering the retail promotional expenses incurred by the bank currently to acquire customers by creating brand identity and investments in human resources & technology, it will be a tough task for the bank to reduce its operating expenses in the near term.
At the current market price of Rs 20 IDBI Bank is trading at a P/E of 18 times and Price/Book value ratio of 1x. The reason for bank's lower valuations are its comparatively high NPA ratio.
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