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IDBI Bank: Balance sheet growth slows - Views on News from Equitymaster
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IDBI Bank: Balance sheet growth slows
Aug 6, 2012

IDBI Bank declared its results for the first quarter of the financial year 2012-13 (1QFY13). The bank has reported 11% YoY and 27.5% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 11% YoY in 1QFY13, on the back of an 8% YoY growth in advances.
  • Capital adequacy ratio currently stands at 14.4% at the end of 1QFY13 from 13.8% at the end of 1QFY12.
  • Net interest margin is sustained at 2.6%.
  • Net NPA (non-performing assets) to advances increase to 2.07% in 1QFY13 from 1.25% in 1QFY12.
  • Cost to income ratio shrinks increased to 37% in 1QFY13 from 35% in 1QFY12.
  • Net profit grows by 27.5% YoY in 1QFY13, on account of higher other income and lower tax outlays.

Rs (m) 1QFY12 1QFY13 Change
Interest income 56,289 62,698 11.4%
Interest expense 44,765 49,992 11.7%
Net Interest Income 11,524 12,706 10.3%
Net interest margin (%) 2.56% 2.64%  
Other Income 4,309 5,170 20.0%
Other Expense 5,525 6,586 19.2%
Provisions and contingencies 4,257 5,068 19.1%
Profit before tax 6,051 6,222 2.8%
Tax 2,700 1,949 -27.8%
Effective tax rate 44.6% 31.3%  
Profit after tax/ (loss) 3,351 4,273 27.5%
Net profit margin (%) 6.0% 6.8%  
No. of shares (m)   1278.4  
Book value per share (Rs)*   140.6  
P/BV (x)   0.6  
* (Book value as on 31st June 2012)

What has driven performance in 1QFY13?
  • IDBI Bank has underperformed the sector average by clocking in 8% YoY growth in advances in 1QFY13. Its SME portfolio also saw a sharp dip in the twelve month period, falling 61.5% YoY. Its retail book however saw a 21% YoY growth in its retail book. The bank has paid heed to margins which have been maintained at 2.6% over the year.

  • The rise in the proportion of CASA (current and savings account) from 17% in 1QFY12 to 18% in 1QFY13 looks encouraging. However, this has fallen from the 24% levels seen at the end of FY12. This is along with the focused strategy of the bank to increase its retail client base, and thus improve profitability and margins. However deposit growth came in well below the sector average at 9% YoY.

    Disappointing growth well below sector
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 1,550,960   1,677,790   8.2%
    Retail 279,060 18.0% 338,780 20.2% 21.4%
    Corporate 774,550 49.9% 808,690 48.2% 4.4%
    SME 126,550 8.2% 48,700 2.9% -61.5%
    Deposits 1,762,820   1,917,470   8.8%
    CASA 304,770 17.3% 346,430 18.1% 13.7%
    Tem deposits 1,458,050 82.7% 1,571,040 81.9% 7.7%
    Credit deposit ratio 88.0%   87.5%    

  • IDBI's other income rose by 20% YoY in 1QFY13 due to commission and brokerage, and profit on revaluation of investments, bringing the non-interest income to 29% of total income in 1QFY13 from 27% in 1QFY12. The proportion of fee income to total income, however increased from around 21%, to 23% at the end of 1QFY13.

  • IDBI Bank's net NPAs have increased to 2.07% in 1QFY13, from 1.25% earlier. Its provisioning coverage ratio currently stands at 65.5%, from 74% previously. Accounts in the infra space, metal, telecom space slipped into the restructured category. Since 4QFY12, the bank's restructured loan portfolio increased to Rs 100 bn to Rs 109 bn in June 2012.

  • IDBI's cost to income ratio increased to 37% in 1QFY13 from 35% in 1QFY12. 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 87, the stock is valued at an attractive 0.6 times its trailing twelve months book value. The bank's improved capital adequacy ratio at 14.4% in 1QFY13 is reasonably adequate to sustain the current growth rates in the medium term. It has a modest target of growing its loan book at 15%, which we believe fits in with the current economic climate. However having a large proportion of bulk deposits and a relatively lower CASA share impacted NII growth. Despite this fact, the bank was still able to hold onto its margins. If the monetary easing continues, the bank may see less pressure on the same going forward, it expects NIMs to remain in the 2% range.

IDBI Bank is strategically trying to focus on growing its balance sheet at a relatively slow pace. It plans to focus on building up capacity on the priority sector front, to meet Reserve Bank of India (RBI) guidelines. We believe that this slower target fits in with the current economic climate and the rate environment. We are also enthused by the bank's efforts to bring in efficiency in operations, increase its CASA base, and sustain margins. A few concerns are increased slippages and restructured accounts in risky sectors; however the bank does not expect much further pain on this front. Irrespective, we expect the company to take this in its stride and we reiterate our long term positive view on the bank on account of its reasonable valuations. We maintain our Buy rating (as per our June 2012 performance review) on the stock.

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