IDBI Bank 1QFY04 net up 101%

IDBI Bank, one of the fastest growing retail banks in the country has reported strong performance for its June quarter. On a YoY basis, the bank has reported a strong 14% growth in topline, with an even better 101% rise in its bottomline. There has been a significant improvement in operating profits, mainly due to falling interest expenses and significant topline growth. A strong growth in other income has further aided bottomline growth.

(Rs m)	1QFY03	1QFY04	Change
Income from Operations	1,415	1,618	14.4%
Other Income	314	428	36.4%
Interest Expenses	968	952	-1.6%
Net interest income	447	666	49.0%
Other Expenses	447	581	30.0%
Operating Profit	-	85
Operating Profit Margin (%)	0.0%	5.2%
Provisions and Contingencies	138	164	19.3%
Profit before Tax	176	349	97.7%
Tax	65	125	92.8%
Profit after Tax/(Loss)	111	224	100.6%
Net Profit Margin (%)	7.9%	13.8%
No. of Shares (m)	140.0	140.0
Diluted Earnings per share*	3.2	6.4
P/E Ratio		5.0
*(annualised)

Topline growth of the bank seems to have mainly come about due to a strong growth in advances (especially in retail segment) in the June quarter. IDBI Bank is one of the most aggressive players in the home loans market, though it still has a small base. The total customer assets of the bank grew by 26% in FY03 with retail assets forming 32% (10% in FY02) of the total assets of the bank. Due to its aggressiveness, home loans accounted for 73% of total retail assets.

What is commendable about the bank's performance in 1QFY04, is the strong growth in net interest income. The bank has had good amount of success as far as reducing its average deposit costs are concerned. For instance, IDBI Bank had reported an average deposit cost of 5.9% in FY03, compared to 7.5% in FY02. This is one of the lowest in the industry. It has managed to reduce its interest costs by aggressively tapping the retail deposits market. The bank seems to have further reduced deposit costs in the June quarter, which has led to the fall in interest expenses.

Since the bank is in an expansionary phase, operating expenses have risen significantly in 1QFY04 compared to the same period last year. However, despite this the bank has been able to report a positive operating margin mainly on account of strong improvement in net interest income. Cost to income ratio for 1QFY04 stood at 53% (59% In 1QFY03).

Apart from improvement in topline and net interest margins, the bottomline of the bank has been significantly aided by growth in other income. IDBI Bank had shown a similar growth in other income in 4QFY03, which was aided mainly by growth in fee based income rather than treasury gains. We believe that in 1QFY04 too growth in other income has been primarily on account of strong growth in fee based income.

The stock is currently trading at Rs 32, at a P/E multiple of 5x its annualised 1QFY04 earnings. The bank has reported strength in its performance despite capital constraints. In order to remedy capital constraints the bank has decided on a rights issue. The rights issue will entail issuance of equity shares in the ratio of 1 equity share for every 2 equity shares held at a price of Rs 22 per share. This will go a long way in improving the capital adequacy of the bank, as the management has indicated that once the exercise is carried capital adequacy will improve to between 11.0%-11.5%. While the growth initiative and potential of the bank is intact, uncertainty (probable merger with parent, IDBI) regarding its future has induced certain amount of volatility in the stock.