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IDBI: Research meet extracts
Jun 27, 2005

In our first research meet with Industrial Development Bank of India (IDBI) after its merger with IDBI Bank, we got several insights into the business dynamics of the entity and the potential going forward. Following are key excerpts of the same. Merger synergies: The merger of IDBI Bank with IDBI was effective from October 1, 2004 wherein the merged entity had total employee strength of over 5,000 people and network of 234 branches and 334 ATMs. The government (holding a 58% stake) has allotted the PSU bank a dual role of carrying on consumer banking operations and retaining the role of a DFI (development finance institution). For this the management has taken a conscious decision to segregate the business of the DFI (IDBI) and consumer banking (erstwhile IDBI Bank) into two distinct business units. The synergies that the bank is envisaging post merger include:

  • Lowering the cost of funds by garnering a significant proportion of low cost deposits (just 12% of total deposits in FY05, compared to an average of 40% for other banks)

  • Garnering fee income through its additional branches

  • Benefiting from the technology support of erstwhile IDBI Bank

The bank also acknowledges the fact that pure term lending (as in the case of DFIs) is no longer a profitable and sustainable business option and thus diversifying into other banking operations is inevitable for the longer term.

Asset growth: The consolidated advances of the bank are estimated to have grown by 15% YoY during the six months of operation (October’04 to March’05). The average duration of the same is 4 years and the average yield being derived on the same is 10%. Although just 11% of the bank’s credit portfolio consists of retail assets at present, the bank hopes to optimally utilise its extended network to grow the retail portion by 60% over the next 2 to 3 years. On the corporate side however the growth rate envisaged is at a lower 20%.

NIMs to improve: IDBI has borrowings to the tune of Rs 5,200 bn that have been inherited from its erstwhile DFI business. Out of this, Rs 700 bn has been borrowed from overseas markets and is linked to the Libor. The remaining Rs 4,500 bn has been raised in 3 equal tranches of Rs 1,500 bn each, of which

  1. Rs 1,500 bn are low cost deposits,

  2. Rs 1,500 bn are high cost ‘restructured debt’, and

  3. Rs 1,500 bn are outstanding high cost debt.

While the deposits are not very heavy on the bank’s pocket, the excess liability on the ‘restructured debt’ portion is to be reimbursed by the government. These are the high cost borrowings of the bank on which the liable rate of interest has been brought down to 8.5% for IDBI. The difference between the designated coupon rate (ranging between 11% to 15%) and 8.5% will be paid by the government as and when such amount gets due. The only baggage now is the outstanding high cost borrowing of Rs 1,500 bn that carries interest liabilities ranging between coupon rates of 9% to 15%. However since 80% of these high cost borrowings will go off the bank’s books in FY06, the cost of funds for the bank is set to get visibly pared going forward.

On the asset side (advances), most of the high yielding loans have already got re-priced and will not reduce the bank’s yields any further. Such loans were earlier ‘restructured’ under the CDR (Corporate Debt Restructuring) mechanism. Considering the above facts, even if interest rates keep an upward bias, the bank’s net interest margins (0.5% in FY05; one of the lowest in the sector) will only improve going forward.

SASF: The bank has transferred stressed assets worth Rs 130 bn in 2QFY05 to a SPV named ‘stressed asset stabilisation fund’ (SASF) for Rs 90 bn (net of provisioning). Against this, it has received interest free G Secs of 20 years tenure from the government. The bank thus needs to recover the stressed loans in the given tenure and redeem the G Secs as when possible. The bank believes that it will be able to successfully do so in the next 3 to 4 years and thus improve its liquidity position.

What to expect?
At the current price of Rs 107, IDBI’s stock is trading at 1.5 times its FY05 adjusted book value. While the above analysis clearly outlines the fact that the bank has several upsides due in the longer term, most of the upsides in the medium term seem to be already factored in into the prices. Also, given the fact that IDBI, now being a PSU bank, will have considerable government say in its operational decisions (like statutory priority sector lending and SLR norms) the rationalisation of operational parameters might also witness several encumbrances.

While we continue to be optimistic on the bank from a long-term perspective, we believe that there are better plays in the sector that are more comfortable for investors on the risk-return matrix.

Company background
Established in 1964, by passing of the IDBI Act, Industrial Development Bank of India (IDBI) had a special role of Development Financial Institution (DFI) for taking India’s industrial development to the next level. Repeal of the IDBI Act by the Parliament on September 27, 2004 endorsed the much awaited transformation of IDBI into a bank. Post merger with IDBI Bank, the government holding stands at 58% of the total equity as on March FY05 of the expanded capital of Rs 7.2 bn. The bank is currently functioning with two SBUs handling the DFI and banking business separately. It currently has two subsidiaries namely IDBI Housing Finance Ltd and IDBI Capital Services Ltd.

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