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IDBI 1QFY07 results: Our view - Views on News from Equitymaster
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IDBI 1QFY07 results: Our view
Jul 20, 2006

Performance summary
IDBI reported a sedate performance in the declaration of its 1QFY07 results late yesterday. While the bank has appreciably controlled its funding costs, the growth in bottomline is largely due to cost cutting and lower provisioning. In terms of advance growth and margins, the bank continues to lag its peers in the sector while the fee income growth has shown signs of improvement.

Rs (m) 1QFY06 1QFY07 Change
Income from operations 13,318 13,837 4%
Other Income 2,688 2,846 6%
Interest Expense 12,412 12,866 4%
Net Interest Income 906 971 7%
Net interest margin (%)      
Other Expense 2,011 1,899 -6%
Provisions and contingencies 486 292 -40%
Profit before tax 1,097 1,626 48%
Tax 12 121 908%
Profit after tax/ (loss) 1,085 1,505 39%
Net profit margin (%) 8.1% 10.9%  
No. of shares (m) 723.0 723.8  
Diluted earnings per share (Rs)* 6.0 6.8  
P/E (x)   7.2  
* (12 months trailing)

Sleeping giant
Merger of IDBI and IDBI Bank was largely anticipated to be a win-win situation for both the entities. The erstwhile IDBI Bank, given its clean assets and impressive fundamentals, has offered valuable growth prospects, access to low cost deposits and extended reach, which in future will enable the consolidated entity to seek a better spread on its infrastructure funding. Post the merger with IDBI Bank, the government holding in IDBI stands at 58%. The bank is currently functioning with two SBUs handling the development finance and banking businesses separately. It currently has two subsidiaries namely IDBI Housing Finance Ltd. and IDBI Capital Services Ltd. Although the merged entity is in the league of the largest banks in the country in terms of asset size, its lackadaisical rate of growth leaves it way behind its peers in terms of performance.

What has driven performance in 1QFY07?
Retail credit – saving grace: Retail credit, which has been the focus of IDBI, ever since it converted into a banking entity, continued to be the saving grace for the bank in 1QFY07. The segment registered a growth of 63% YoY (albeit on a lower base) and far outpaced the corporate segment (up 3.4%). The deposit growth that was much healthier in this quarter (73% YoY) brought down the C/D ratio to 181% from 283% in 1QFY06. Nevertheless, the lower proportion of CASA (from 32% in 1QFY06 to 28% in 1QFY07) suggests that the incremental deposits were largely high-cost term deposits. What, however, is enthusing is the fact that IDBI managed to grow the incremental assets with negligible rise in funding costs, despite rising interest rates. This has been achieved by paying off the high cost debts. It may be recalled that the bank repaid debts to the tune of Rs 200 bn in FY06, of which Rs 160 bn were high cost ones (with interest rates of 12% per annum and above).

Retail advances lead the way…
(Rs m) 1Q06 % of total 1Q07 % of total Change
Advances 476,390   526,370   10.5%
Retail 56,935 12.0% 92,700 17.6% 62.8%
Corporate 419,455 88.0% 433,670 82.4% 3.4%
Deposits 168,510   290,960   72.7%
Credit deposit ratio 282.7%   180.9%    

The NIMs of 0.5% in FY06 are not only the lowest in the sector but also lower than the bank’s previous quarters’. We believe that NIMs have bottomed out. Of the Rs 90 bn SASF, cases worth Rs 44 bn (settlement amount Rs 51 bn) have been resolved until FY06. Of this, Rs 2 bn and Rs 8 bn were recovered in FY05 and FY06 respectively, while Rs 15 bn is expected in FY07.

Fees catching up: Of the other income (up 6% YoY), profit from sale of investments (up 22% YoY) contributed 52%, while the fee income contributed 32% during this quarter (fee income to total income 20% in 1QFY07). The bank also entered into a life insurance venture with Federal Bank and Fortis Insurance International this quarter, in which IDBI will have 48% stake. Also, it is contemplating to start an asset management company. These initiatives will, however, contribute meaningfully only in the longer term.

Conservative on costs: Lowering the cost to income ratio from 56% in 1QFY06 to 50% in 1QFY07 has aided the bank’s operating margins. However, once the bank increases its branch franchise sizeably, we see the same hardening again. Also, write back of provisioning may not augur well for the bank in a rising interest rate scenario, as the risk of higher delinquencies loom large.

Quality retained: Despite the relatively faster pick up in retail disbursals, the bank has been able to cap the net NPAs in this portfolio at 0.2% (of advances). Also, post SASF, we do not see the overall average net NPA levels shooting higher than the current levels of 1% of advances. With the current NPA levels (gross NPA at 2%), IDBI’s asset quality can be pegged as one of the best amongst PSU banks.

What to expect?
IDBI’s performance in the last quarter has been in line with our estimates. Although the bank has shown some resilience to rise in interest rates, in terms of growth in treasury profits and lower hit on margins, one must understand that the same is on a very small base. We do not see the bank achieving NIMs of 1% until FY08. Nevertheless, investors with a long-term perspective (3 to 4 years) can definitely hold on to the stock. After the recent correction, at the current price of Rs 51, the stock is very attractively valued at 0.6 times our estimated FY08 adjusted book value. To that extent, the downside hereon is very limited.

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