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IDBI: Recouping lost ground - Views on News from Equitymaster
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IDBI: Recouping lost ground
Aug 17, 2005

Performance Summary
Steady growth in assets and improvement in asset quality has led to IDBI posting a decent net profit margin of 8% during 1QFY06. The results are, however, not comparable to that of 1QFY05 as the merger (of IDBI Bank with IDBI) was effected from 3QFY05. The bank’s net interest margins, however, continue to languish despite the (interest) cost cutting efforts. The bank is also contemplating ambitious growth targets for FY06 so as to counter competition from the other banking majors.

Rs (m) 1QFY06
Income from operations 13,318
Other Income 2,688
Interest Expense 12,412
Net Interest Income 906
Other Expense 2,010
Net interest margin (%) 0.4%
Provisions and contingencies 486
Profit before tax 1,098
Tax 13
Profit after tax/ (loss) 1,085
Net profit margin (%) 8.1%
No. of shares (m) 722.6
Diluted earnings per share (Rs)* 6.0
P/E (x) 18.6
* (annualised)  

A force to reckon…
Merger of IDBI Bank with IDBI is largely anticipated to be a win-win situation for both the entities in the longer term. The erstwhile IDBI Bank, given its clean assets and impressive fundamentals, has offered valuable growth prospects, access to low cost deposits and extended reach, which in future will enable the consolidated entity to seek a better spread on its infrastructure funding. The merged entity has total employee strength of over 5,000 people and network of 134 branches and 339 ATMs. It is also expected to rationalize its manpower size and post better efficiency ratios in the coming quarters.

What has driven performance in 1QFY06?
Asset growth chugging along: During 1QFY06, IDBI’s aggregate assets increased by 1.6% over 4QFY05. Although the retail portfolio is a minor proportion of its current advance base, the bank has tried to expand this base by growing its housing loans by 18% over 4QFY05. Also, deposits increased 12% YoY over 1QFY05 and the bank's total business stood at around Rs. 1,350 bn. However, the bank’s liability side continues to be ‘borrowing heavy’ with the deposit to borrowing ratio standing at 35%. During the period under review, a combination of renewed emphasis on reducing interest expenses and access to low-cost deposits resulted in a significant reduction in overall cost of funds. Cost of funds (including Tier-II bonds) reduced from 8.6% in 1QFY05 to 7.1% in 1QFY06. However, the interest costs of the bank are still very high compared to sector average (5.5%) due to its legacy of high cost borrowings. Going forward, the bank's profitability is likely to improve once it is able to garner a sizeable share of low cost deposits. Also, as was divulged during our research meeting with the bank, 80% of its high cost borrowings will go off the bank’s books in FY06, thus visibly paring its cost of funds.

(Rs m) 1QFY06 % of total
Wholesale banking 14,670 73.1%
Retail banking 2,750 13.7%
Treasury 2,640 13.2%
Total 20,060  
Wholesale banking 920 83.6%
Retail banking 170 15.5%
Treasury 10 0.9%
Total 1,100  
*Profits before provisions and taxes    

Improvement in asset quality: Thanks to the erstwhile IDBI Bank’s clean asset book and the subsequent NPA recovery efforts, the asset quality of the merged entity stands relatively cleaner with net NPA to advances ratio of 1.5% as against 2.4% (before merger). Also, IDBI’s capital adequacy ratio (CAR) stands at 16.2% with Tier-I CAR of 12.5%, which is sufficient to sustain the credit growth momentum in the medium term.

SASF: IDBI has transferred assets worth Rs 130 bn to SASF (Stressed Assets Stabilisation Fund) at Rs 90 bn (net of provisioning). SASF is a bailout package (given in September 2004) in the form of a `cash neutral assistance' from the Union Government. The package is in the form of special interest-free G-Secs with 20 years maturity, which IDBI will have to redeem as and when the loans are recovered. The package has not yet been fully utilised and will continue to aid the merged entity in purging the NPA legacy of IDBI. Till FY05, IDBI had resolved 60 cases of NPAs and had recovered Rs 1.5 bn.

Going forward: IDBI expects its aggregate asset size to cross the Rs 900 bn mark (Rs 827 bn in 1QFY06) by FY06 on the back of robust credit pick up (especially in the retail segment). The bank is also targeting a total business growth (defined as growth in advances and deposits) of 15% YoY in FY06, aided by 50% growth in branch network.

What to expect?
At the current price of Rs 111, the stock is trading at a price to book value of 1.6 times its adjusted FY05 book value, which makes it fairly valued. Although the fundamentals of the merged entity position it on a better ground than before, the concerns regarding its adaptability to the competitive environment in the banking sector and ability to clean up it asset book, diminish the comfort factor. The risk profile will continue to be on the higher side for the stock until it proves its mettle.

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