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IDBI Bank: Asset quality under pressure - Views on News from Equitymaster
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IDBI Bank: Asset quality under pressure
Aug 4, 2011

IDBI Bank declared its results for the first quarter of the financial year 2011-12 (1QFY12). The bank has reported 22% YoY and 60% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 37% YoY in 1QFY12, on the back of a 15% YoY growth in advances.
  • Capital adequacy ratio currently stands at 13.8% at the end of 1QFY12 from 11.9% at the end of 1QFY11.
  • Net interest margin comes in higher at 2.1% as compared to 1.6% in 1QFY11.
  • Net NPA (non-performing assets) to advances slightly higher at 1.25% in 1QFY12 from 1.19% in 1QFY11.
  • Cost to income ratio shrinks from 37% in 1QFY11 to 35% in 1QFY12.
  • Net profit grows by 34% YoY in 1QFY12, on account of higher NII and a reversal of provisioning, despite higher tax outlays and lower other income.


Rs (m) 1QFY11 1QFY12 Change
Interest income 42,822 56,289 31.5%
Interest expense 34,378 44,765 30.2%
Net Interest Income 8,444 11,524 36.5%
Net interest margin (%) 1.61% 2.07%  
Other Income 4,729 4,309 -8.9%
Other Expense 4,862 5,525 13.6%
Provisions and contingencies 5,016 4,257 -15.1%
Profit before tax 3,294 6,051 83.7%
Tax 785 2,700  
Effective tax rate 23.8% 44.6%  
Profit after tax/ (loss) 2,509 3,351 33.6%
Net profit margin (%) 5.9% 6.0%  
No. of shares (m)   984.6  
Book value per share (Rs)*   131.8  
P/BV (x)   0.9  
* (Book value as on 31st June 2011)

What has driven performance in 1QFY12?
  • IDBI Bank has armed itself with a higher capital adequacy ratio, post the government’s preferential issue. It has however underperformed the sector average by clocking in 15% YoY growth in advances in 1QFY12. Nevertheless, the bank has paid heed to margins which have improved over the year. The NIMs increased from 1.6% at the end of 1QFY11 to 2.1% currently in 1QFY12. IDBI plans to sustain its NIMs at around 2.1-2.2% in FY12. The bank has been particularly aggressive in growing its retail advance and SME portfolio, which has grown at a fast clip. The target is to sustain a 15% growth rate in loans for the year.

  • The rise in the proportion of CASA (current and savings account) from 13% in 1QFY11 to 17% in 1QFY12 is also very encouraging. This is along with the focused strategy of the bank to increase its retail client base, and thus improve profitability and margins. It plans to increase its CASA levels to around 22% by the end of FY12.

    Increased focus on retail
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 1,353,290   1,549,840   14.5%
    Retail 198,840 14.7% 297,870 19.2% 49.8%
    Corporate 966,420 71.4% 1,032,950 66.6% 6.9%
    SME 107,370 7.9% 126,550 8.2% 17.9%
    Deposits 1,572,040   1,762,820   12.1%
    CASA 204,290 13.0% 376,780 21.4% 84.4%
    Tem deposits 1,367,750 87.0% 1,458,050 82.7% 6.6%
    Credit deposit ratio 86.1%   87.9%    

  • IDBI's other income fell by 9% in 1QFY12 due to commission and brokerage, and losses on revaluation of investments, bringing the non-interest income to 27% of total income in 1QFY12 from 36% in 1QFY11. The proportion of fees to total income, however fell from around 29%, to 21% at the end of 1QFY12.

  • Our biggest concern for IDBI Bank so far had been its poor provisioning policy. The same has now been addressed and will be benign to the bank's performance at a time when its margins are on an upward trend. IDBI Bank's net NPAs have increased slightly to 1.25% in 1QFY12, from 1.19% earlier. However, from 1.06% levels seen in FY11, the asset quality has deteriorated. The bank's provision coverage ratio is now in compliance with RBI's mandate of 70% coverage. It currently stands at 74%. Despite the RBI's new mandates for increased provisioning, the bank was able to reduce its provisioning expenses by 15%. This was on account of a reversal in investment provision.

  • IDBI has also contained the rise in its cost to income ratio which has been lowered to 35% in 1QFY12 from 37% in 1QFY11. Thus the bank still has the potential to leverage its lean cost structure and improve its provisioning policy as well as grow its asset base. The bank uses its technology very effectively, and has the lowest employee base, with less than 14,000 employees. Since most of its operations have been centralized, and pushed to the back office, the branches can work on garnering more business.

What to expect?
    At the current price of Rs 125, the stock is valued at an attractive 0.7 times our estimated FY13 adjusted book value. The bank's improved capital adequacy ratio at 13.8% in 1QFY12 is reasonably adequate to sustain the current growth rates in the medium term. The bank also prefers focusing on asset quality, and increasing its priority sector lending exposure to 40% rather than aggressively increasing its loan book. It has a modest target of growing its loan book at 15%, which we believe fits in with the current economic climate. It wants to focus more on increasing profitability in a sustainable manner, and improve its NIMs. We are enthused by the bank's efforts to bring in efficiency in operations, increase its CASA base, and thus improve its margins. A few concerns are the increased slippages and the current rising interest rate cycle. The bank expects some stress on its SME account, with customers seeing issues in repaying high interest costs. Irrespective, we expect the entity to take this in its stride and we reiterate our long term positive view on the bank.

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