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IDBI Bank: Tough times ahead - Views on News from Equitymaster

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IDBI Bank: Tough times ahead
Jul 20, 2013

IDBI Bank declared its results for the first quarter of the financial year 2013-14 (1QFY14). The bank has reported 16% YoY growth in interest income, whereas 28% YoY fall in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 16% YoY in 1QFY14, on the back of 7% YoY growth in advances.
  • Net profit declines by 28.2% YoY in 1QFY14, on account of higher operating expenses and higher provisions.
  • Net interest margin remains flat at 2.1%.
  • Cost to income ratio spikes up to 40% in 1QFY14 from 37% in 1QFY13.
  • Net NPA (non-performing assets) to advances increase to 2.16% in 1QFY14 from 2.07% in 1QFY13.
  • Capital adequacy ratio currently stands at 12.6% at the end of 1QFY14 as per BASEL III norms.

Rs (m) 1QFY13 1QFY14 Change
Interest income 62,698 67,284 7.3%
Interest expense 49,992 52,534 5.1%
Net Interest Income 12,706 14,750 16.1%
Net interest margin (%)      
Other Income 5,200 7,170 37.9%
Other Expense 6,586 8,755 32.9%
Provisions and contingencies 5,098 8,297 62.7%
Profit before tax 6,222 4,869 -21.7%
Tax 1,949 1,800 -7.6%
Effective tax rate 31.3% 37.0%  
Profit after tax/ (loss) 4,273 3,069 -28.2%
Net profit margin (%) 6.8% 4.6%  
No. of shares (m)   1,333.0  
Book value per share (Rs)*   148.2  
P/BV (x)   0.5  
* (Book value as on 30th June 2013)

What has driven performance in 1QFY14?
  • The business profile of the bank has weakened over the quarters. While the loan book shrinkage continues, the priority sector target fulfillment remains an overhang. On the other hand, deposits have lagged meaningful growth primarily due to huge proportion of high-cost deposit base. The huge bulk deposit base has made the liability-side adjustments difficult for IDBI Bank. Consequently, the 1QFY14 witnessed mere 7% YoY growth in advances and rather 4% YoY decline in deposit growth. These stood way below the sector averages. Moreover, the credit-deposit ratio at undesirable levels of 98% only indicates impending liquidity pressures. That said, the ongoing MTM borrowing program should keep these pressures in check.

  • As mentioned in our results update for the previous quarter (4QFY13), CASA mobilization continues to remain challenging for the bank. The worry stems from the volatile current accounts which have not witnessed any meaningful traction since quite some time now. Since the average daily savings account balances have marginally gone up, CASA for the first quarter at 21% improved though marginally. Notwithstanding these pressures, seasonal volatility was largely to be blamed for CASA fluctuations. And the management continues to focus on CASA traction.

    Agri+SME advances witness sharp fall
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 1,671,380   1,789,450   7.1%
    Retail 339,377 20.3% 319,471 17.9% -5.9%
    Corporate 802,197 48.0% 870,622 48.7% 8.5%
    Agri+MSE 206,891 12.4% 133,811 7.5% -35.3%
    Deposits 1,917,470   1,832,770   -4.4%
    CASA 346,487 18.1% 377,001 20.6% 8.8%
    Tem deposits 1,570,983 81.9% 1,455,586 79.4% -7.3%
    Credit deposit ratio 87.2%   97.6%    

  • While the profitability for the bank shrunk, the interest income performance improved satisfactorily. This was on account of:
    1. The interest income YoY growth at 7% that stood in-line with the advances growth.
    2. Some treasury gains reported during the quarter
    3. The insignificant increase in interest expenses primarily due to:
    1. Equity infusion that happened in the 4QFY13,
    2. Foreign borrowings that aided in containing costs

  • Further, the yields for the quarter remained steady. Cost of funds declined largely due to shedding of high-cost bulk deposits. This coupled with marginal uptick in CASA base led to margins sustaining at 2% levels. The management expects to maintain margins at these levels due to re-pricing of bulk deposits in the remaining part of the year. Additionally, the bank intends to seize the opportunity in terms of lower pricing through the dollar-denominated MTM borrowing program during the year. While this will aid margins sustenance at 2% levels, they stand below the peer levels.

  • Notably, the other income performance stood exceptionally well for IDBI bank. The whopping 38% YoY growth during the quarter came primarily from higher treasury and forex gains. The RBI mandate to move certain proportions of HTM to AFS book boosted the treasury gains for the quarter. The core fee-income of 4% YoY contributed though marginally to the overall strong non-interest income performance during 1QFY14. Moreover, the proportion of fee-income to total non-interest income at 17% has been coming down. Therefore, the above facts indicate that the non-interest income growth is unsustainable and IDBI bank may not witness such healthy performance going ahead.

  • Operating expenses spiked 33% YoY on account of increased employee number and new branch additions, wage arrears and revisions in pension liabilities (during March 2013) for 1QFY13. Consequently, the cost-income ratio shot up to 40% levels and remains one of the highest in the industry.

  • IDBI Bank's gross NPAs have risen to 4.3% during 1QFY14 from 3.2% in 1QFY13. The provisioning coverage ratio currently stands at 68%. The bank witnessed highest NPAs at 7% coming from the agri portfolio. Besides, textiles, iron and steel, engineering, shipping, pharma among others contributed to the top large NPAs accounts for the bank. Slippages stood at Rs 16.8 bn for the quarter. Corporate portfolio contributed as high as 64% to the total slippages, followed by 20% coming from Agri and SME portfolio. With increased slippages and poor prospects of upgradations and recoveries, the asset quality of IDBI bank is in bad shape. This was further exacerbated with the heavy restructuring book that stood at Rs 142510 mn as on June 30, 2013. Moreover, 16% of the restructured book has slipped into NPA category.

  • Provisions and contingencies that jumped as high as 68% during the quarter, proved to be the major deterrent to the profitability of the bank. Higher slippages during the quarter led to higher provisions. Further, the other major components that led to spike in provisions were the MTM provisions on equity shares of Kingfisher airlines, enhanced provisioning on standard restructured assets and the FITL provisions to the tune of Rs 8740 mn. In short, the ageing NPAs have led to higher provisioning for IDBI bank.

What to expect?
At the current price of Rs 70, the stock is valued at 0.4 times the FY15 adjusted book value. The apparent mouth-watering valuations may be tempting, but it only reflects the weak fundamental story of IDBI bank.

IDBI bank is walking on a tough path today with every quarter the balance sheet getting weaker. With Tier I at 7% and significantly higher proportion of risk-weighted assets, the bank is treading on the risky path. The return ratios on account of equity infusion that happened during the last quarter of FY13 already stand depressed and one of the lowest in the industry.

Additionally, the business prospects stand weak too. The bank is targeting 12% growth in advances and definitely lower growth in deposits for the current fiscal. Higher bulk deposits and the priority sector targets have affected the liability and the asset side adjustments respectively for IDBI bank.

Further, the bank needs to gear up with its branch expansion strategy as well. The incremental branch network is expected to add to the CASA base and the PSL target fulfillment. However, at present, the new branches added will only be able to contribute to the business in 9 months to 1 year period. Moreover, while the bank continues to be occupied with augmenting priority sector loans; the business traction or balance sheet growth would be limited. This implies the going is getting tougher for IDBI bank in the forthcoming quarters.

This coupled with higher exposure to risky corporate assets and troubled sectors of the economy makes us believe that IDBI bank may not be able to deliver satisfactory earnings performance for the next one to two years. We expect the earnings CAGR to drop further, depressing the return ratios in the medium term.

In this backdrop and given the fact that IDBI bank is standing on a weak footing today, we recommend investors to SELL the stock. Investors looking for rewards in the form of dividend yields may continue to hold the stock (dividend yield on our original recommendation price is in excess of 3%). Nonetheless, the above-mentioned concerns cannot be dismissed.

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