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IDBI Bank: Wafer thin margins in FY15 - Views on News from Equitymaster

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IDBI Bank: Wafer thin margins in FY15
Jun 4, 2015

IDBI Bank declared its results for the fourth quarter of the financial year 2014-15 (4QFY15). The bank has reported 10.4% YoY growth in interest income and 5% YoY increase in net profits for the quarter. In FY15, the net profits fell by 22% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grew by 5.4% YoY in 4QFY15, but declined by 4.5% YoY in FY15 on the back of a sluggish 5% rise in advances.
  • Net profit increased by 5.3% YoY in 4QFY14 helped by a steep jump in other income that offset the impact of higher provisioning and tax incidence. However for FY15, net profits
  • were down by 22% due to higher cost-to-income ratio.
  • Net interest margin, therefore, fell to 1.9% during FY15 from 2.2% a year ago.
  • Cost to income ratio reduced to 31.4% in 4QFY15 from 32.0% in 4QFY14.
  • Net NPA (non-performing assets) to advances declined to 2.88% in 4QFY15 from 3.05% in 3QFY13.
  • Capital adequacy ratio currently stands at 11.8% at the end of 4QFY15 as per BASEL III norms.

Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Interest income 67,156 74,121 10.4% 265,975 281,540 5.9%
Interest expense 51,411 57,518 11.9% 205,760 224,061 8.9%
Net Interest Income 15,745 16,603 5.4% 60,215 57,479 -4.5%
Net interest margin (%) 2.20% 2.10%   2.17% 1.90%  
Other Income 11,509 19,703 71.2% 29,788 40,076 34.5%
Other Expense 8,749 11,414 30.5% 33,188 40,274 21.4%
Provisions and contingencies 11,985 17,179 43.3% 39,403 44,408 12.7%
Profit before tax 6,520 7,713 18.3% 17,411 12,873 -26.1%
Tax 1,338 2,253 68.5% 6,197 4,139 -33.2%
Effective tax rate 20.5% 29.2%   35.6% 32.2%  
Profit after tax/ (loss) 5,182 5,459 5.3% 11,214 8,734 -22.1%
Net profit margin (%) 7.7% 7.4%   4.2% 3.1%  
No. of shares (m)         1,604.0  
Book value per share (Rs)*         151.6  
P/BV (x)         0.5  
* (Book value as on 31st March 2015)

What has driven performance in 4QFY15?
  • IDBI Bank has been able to stem the falling profitability in the March 2015 quarter. Although the growth in advances remained muted, the company has maintained net interest margin (NIM) at 2% for the quarter. The impact of higher provisioning on account of slippages and restructuring was offset by a 71% jump in other income arising out of profits from the sale of investments and fall in cost to income ratio. The cost to income ratio fell to 31.4% as compared to 32% in the year-ago quarter. Resultantly the net profits were up by 5% in March 2014 quarter. The net profit margin of the bank, in low single digits, was however, amongst the lowest in the industry.

  • The bank's asset quality has witnessed a slight improvement sequentially due to better recoveries even as slippages and restructuring have increased. The net NPAs as a % of total advances improved to 2.88% in March 2015 quarter as compared to 3.05% in December 2014 quarter.

    Retail advances on an uptrend but credit offtake sluggish
    (Rs m) FY14 % of total FY15 % of total Change
    Advances 1,976,860   2,083,770   5.4%
    Retail 533,752 27.0% 687,644 33.0% 28.8%
    Corporate 1,265,190 64.0% 1,166,911 56.0% -7.8%
    Overseas Corp 177,917 9.0% 229,215 11.0% 28.8%
    Deposits 2,357,740   2,598,360   10.2%
    CASA 533,520 22.6% 651,170 25.1% 22.1%
    Tem deposits 1,824,220 77.4% 1,947,190 74.9% 6.7%
    Credit deposit ratio 83.8%   80.2%    

  • The magnitude of bulky term deposits has come down whereas that of CASA has gone up in the past one year. As at the end of March 2015, the proportion of CASA in total deposits improved to 25% as compared to 23% in the year-ago quarter.

  • The capital adequacy for the bank stands at 11.8% as per BASEL III norms. With profitability trending lower and assets getting weaker, the current capital may soon prove insufficient.
What to expect?

At the current price, the stock is valued at 0.67 times its estimated FY17 adjusted book value.

The bank has witnessed some improvement in the asset quality. Its earnings were getting impacted by the priority sector lending requirements and the Rural Infrastructure Development Fund (RIDF) yielding significantly lesser returns. The redeeming factor is that the bank has already reached its priority sector lending target of 37.2% in FY15 and going ahead there will be no impediment to profit growth from this front. The investments made in RIDF will continue to stay on the bank's books for two years but their redemption will aid in recovery in asset quality.

IDBI's operating financials have still not recovered completely. Hence we recommend investors to not consider buying the stock despite the attractiveness in valuations.

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