IDBI Bank: Other income fuels growth

IDBI Bank reported an outstanding performance for the quarter ended June '01. The bank's profits jumped by 53% despite a 5% drop in interest income. A rise of over 450 basis points in operating margins and 84% increase in other income, pushed the profit growth of the bank.

During the quarter, the bank's cost of deposits declined by 59 basis points to 8.6%. Low cost deposits witnessed a rise of 61% to Rs 8.7 bn and now contributes 25% to total deposits. The bank's retail initiatives enabled it to increase the proportion of retail deposits to 38% of total deposits (34% in FY01).

IDBI Bank's profit growth was largely driven by other income growth. As the bank has large exposure to corporate clients (95% of total assets as on FY01), a slowdown in the economic activity was reflected in its dismal interest income growth. Other income of IDBI Bank, which relates to income from non-fund based banking activities such as fees and commission, forex and money-market trading income jumped by 84% and now forms 27% of total income (from 16% in 1QFY01). Change in other income growth due to competitive factors could lead to a volatility in earnings going forward.

The bank has made a significant progress in the first quarter in migrating to new technology platforms. It has implemented a core-banking system 'Finacle' from Infosys in record time. This helped the bank in bringing down the cost to income ratio to 37% from 40% in 1QFY01.

Although, the bank's exposure to sensitive sectors comprising real estate, capital markets and commodities is a marginal 2.2%, it has increased the provisioning amount in the current quarter by 18%. Its net NPA ratio as a percentage of net customer assets stood at 3.1% as on March '01.

At the current market price of Rs 19, IDBI Bank is trading at a P/E multiple of 4x and Price/Book value ratio of 1x, 1QFY02 annualised earnings. The reasons for its low valuations are high cost of funds, higher exposure to corporate clients, parentage of IDBI (which is facing tough times) and interest income facing competitive pressures.