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IDBI Bank: Poor show - Views on News from Equitymaster
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IDBI Bank: Poor show
Jul 22, 2008

Performance summary
  • Interest income grows by 35% YoY in 1QFY09, on the back of 31% YoY growth in advances.

  • Capital adequacy ratio at 12.0% at the end of 1QFY09.

  • Net NPA to advances increase from 1.2% and 1.3% in 1QFY08 and 4QFY08 respectively to 1.4% in 1QFY09.

  • Cost to income ratio expands from 44% in 1QFY08 to 51% in 1QFY09.

  • Net profit margins drop by 1.9% despite lower provisioning costs.



Standalone numbers
Rs (m) 1QFY08 1QFY09 Change
Interest income 17,928 24,176 34.9%
Interest expense 17,299 23,256 34.4%
Net Interest Income 629 920 46.3%
Net interest margin (%) 0.6% 0.6%  
Other Income 4,002 3,215 -19.7%
Other Expense 2,057 2,119 3.0%
Provisions and contingencies 857 199 -76.8%
Profit before tax 1,717 1,817 5.8%
Tax 185 220 18.9%
Effective tax rate 10.8% 12.1%  
Profit after tax/ (loss) 1,532 1,597 4.2%
Net profit margin (%) 8.5% 6.6%  
No. of shares (m) 724.4 724.4  
Book value per share (Rs)*   93.4  
P/BV (x)   0.7  
* (Book value as on 31st March 2008)

What has driven performance in 1QFY09?
  • Growth for the sake of growth: While IDBI Bank has managed to outperform the sector average by clocking 32% YoY growth in advances in FY08, in doing so, the bank has not paid any heed to margins and asset quality. It has indeed been particularly aggressive in growing its retail advance portfolio, which has grown at a faster clip than that in most PSU banks, albeit on a lower base.

    While the deposit growth continues to be healthy (55% YoY), the fall in the proportion of CASA (current and savings account) from 31% in 1QFY08 to 21% in 1QFY09 is very disappointing, suggesting that the bank is targeting growth at the cost of margins. We have estimated the bank’s NIMs to remain below 1% until FY10. Further the bank also has the inherent disadvantage of bringing its level of SLR, from the current 15% to 25%, to match that of its banking peers by 1HFY10.

    High cost growth
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 597,720   781,150   30.7%
    Retail 95,635 16.0% 122,641 15.7% 28.2%
    Corporate 502,085 84.0% 658,509 84.3% 31.2%
               
    Deposits 467,570   727,170   55.5%
    CASA 145,882 31.2% 152,706 21.0% 4.7%
    Tem deposits 321,688 68.8% 574,464 79.0% 78.6%
    Credit deposit ratio 127.8%   107.4%    

    Earlier in our research meeting with IDBI Bank, the management had disclosed that the total recovery of NPAs under the SASF until FY08 has been to the tune of Rs 2.5 bn of which Rs 1.5 bn has been recovered in cash. Of the remaining, cases worth Rs 5 bn have been resolved. However, it must be noted that unless the total amount is recovered in cash, the bank will be unable to economically deploy them and continue to lose interest on the same.

  • Fees leave lot to be desired: IDBI’s other income that was higher last year due to profit on sales of stake in NSE (constituting 2% of the latter’s issued and paid up capital, in 1QFY08) has fallen by nearly 20% YoY in 1QFY09 due to poor growth in fee income. The bank’s fee income from the life insurance venture with Federal Bank and Fortis Insurance International (in which IDBI has 48% stake) and the proposed asset management company is yet to reflect in its numbers.

  • Imprudent provisioning: After successfully reducing its net NPAs that had gone up due to UWB merger, the same have sequentially increased in the past three to four quarters to 1.4% in 1QFY09. IDBI’s provision coverage, despite rising from 35% in FY05 to 50% in FY08, lies way below that of its peers. Also, the lower provisioning booked this quarter and higher operating cost (51% in 1QFY09) signals risks for the sustenance of asset quality in future. The higher operating costs have led to IDBI lose the cost advantage due to its lean structure.

What to expect?
At the current price of Rs 76, the stock is trading at 0.6 times our estimated FY10 adjusted book value. While the capital adequacy ratio of the bank at 12% in 1QFY09 is inadequate to sustain the current growth rates, it had floated a US$ 1.5 bn Tier II borrowing programme in FY08 for funding its international banking business. It also plans to open two offshore banking units in Singapore and Bahrain. Having said that, the failure of the bank’s efforts to accelerate non-fund income growth and improve margins is a cause of concern.

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