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IDBI Bank: Momentum intact

Jul 21, 2004

Introduction to results
IDBI Bank, one of the new generation private sector banks, has continued to show strong quarterly performance in the June quarter. While the bank's topline has risen by over 35%, its bottomline has improved by a better 64%. Its strong growth momentum has been mainly led by strong growth in its advances (aiding topline growth). While IDBI Bank's other income has shown a marginal dip, operating margins have shown a sharp improvement. This has led to the robust bottomline growth.

(Rs m) 1QFY04 1QFY05 Change
Income from Operations 1,618 2,188 35.3%
Other Income 428 417 -2.6%
Interest Expenses 952 1,208 26.9%
Net interest income 666 980 47.2%
Other Expenses 581 712 22.5%
Operating Profit 85 269  
Operating Profit Margin (%) 5.2% 12.3%  
Provisions and Contingencies 164 113 -31.1%
Profit before Tax 349 572 64.1%
Tax 125 205 64.1%
Profit after Tax/(Loss) 224 367 64.2%
Net Profit Margin (%) 13.8% 16.8%  
No. of Shares (m) 140.2 216.2  
Diluted Earnings per share* 4.1 6.8  
P/E Ratio   6.8  
*(annualised)      

What is the company's business?
IDBI Bank, promoted by India's largest financial institution IDBI (soon to be converted in to a bank), is one of the fastest growing banks in India. IDBI Bank, has got a strong focus on the retail segment, especially the housing loans segment. Retail assets constituted close to 40% of total advances in FY04. IDBI Bank's quality of assets is one of the best in the industry and is comparable with the likes of HDFC Bank. While IDBI Bank has been operating as an independent entity, the restructuring of IDBI has fueled speculation that there may be a reverse merger between the bank and its parent IDBI.

What has driven the performance in 1QFY05?
Sales: The rise in the bank's topline can be mainly attributed to the continued strong growth in its assets. The company has reported a 47% rise in its customer assets and this has been the main reason for the rise in its topline. Retail advances of the bank have risen by 94% and constitute 45% of the total advances of the bank. The bank continues to focus on the retail segment to drive growth and this has yielded results for it over the last few years.

Operating margins: The bank has reported a dip in net interest margins (NIM) despite the growth seen in the net interest income. This indicates that the yield on its assets is falling faster than its cost of deposits. While the bank has managed to reduce the cost of deposit to 3.9% from 4.9% last year, the yield on assets seems to have fallen at a faster pace leading to the lower NIM. NIM has fallen to 2.9% from 3.1% in the same period last year. Operating costs on the other hand have been under control as indicated by the strong improvement in operating margins. While most of the improvement in the operating margins has been due to the improvement in net interest income, the lower cost to income ratio indicates the contribution of better management of operating expenses. Cost to income ratio has fallen to 51% in 1QFY05 from 53% last year.

Net Profits: There has been a decline in the other income of the bank. This can be mainly attributed to a negative incidence of trading income. Core fee based income on the other hand has risen by 30% and has almost compensated for the fall in trading income. Provisioning for NPAs has also fallen in the June quarter, however net NPAs as a percentage of net advances have fallen to 0.2% from 0.4% last year. This indicates the strong quality of assets the bank has on its books. All these factors have contributed to the string growth in the bank's bottomline.

What to expect?
The stock is currently trading at Rs 46, a price to earnings ratio of 7x its annualised 1QFY05 earnings. While IDBI Bank has managed to post strong results for the June quarter, it has come at the price of its Capital Adequacy Ratio (CAR). The bank's CAR has fallen to 9.9% from 10.4% in FY04, indicating that the company may have to further raise capital in order to shore up its CAR. A higher CAR is important if the bank wants to maintain its growth momentum. A further dilution in the equity capital of the bank cannot be ruled out. However considering that the bank has managed to grow earnings despite dilution in its equity in the past, we remain confident on the ability of the management to maintain the current growth momentum.

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