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IDBI: Scaling up! - Views on News from Equitymaster
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IDBI: Scaling up!
Oct 19, 2006

Performance summary
IDBI declared results for the second quarter and half year ended September 2006. While the bank has appreciably controlled its funding costs, the growth in bottomline is largely due to cost cutting and lower provisioning. In terms of advance growth and margins, the bank continues to lag its peers in the sector while the fee income growth has shown no signs of improvement. The impact of the UWB merger will be visible in the next quarter.

Standalone numbers
Rs (m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Income from operations 12,233 14,486 18% 25,551 28,337 11%
Other Income 3,449 1,926 -44% 6,137 4,759 -22%
Interest Expense 12,682 13,137 4% 25,094 26,003 4%
Net Interest Income (449) 1,349   457 2,334 410%
Net interest margin (%)       0.4% 0.5%  
Other Expense 1,752 1,943 11% 3,763 3,843 2%
Provisions and contingencies (24) (164)   461 127 -72%
Profit before tax 1,272 1,496 18% 2,370 3,123 32%
Tax (46) 102 -322% (33) 223 -776%
Profit after tax/ (loss) 1,318 1,394 6% 2,403 2,900 21%
Net profit margin (%) 10.8% 9.6%   9.4% 10.2%  
No. of shares (m)       723.0 724.1  
Diluted earnings per share (Rs)*       6.6 8.0  
P/E (x)         9.9  
* (12 months trailing)

Sleeping giant
Merger of IDBI and IDBI Bank was largely anticipated to be a win-win situation for both the entities. 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. Post the merger with IDBI Bank, the government holding in IDBI stands at 58%. The bank is currently functioning with two SBUs handling the development finance and banking businesses separately. It currently has two subsidiaries namely IDBI Housing Finance Ltd. and IDBI Capital Services Ltd. Although the merged entity is in the league of the largest banks in the country in terms of asset size, its lackadaisical rate of growth leaves it way behind its peers in terms of performance.

What has driven performance in 2QFY07?
Handicapped growth: The limited franchise of IDBI continued to handicap its advance growth in 2QFY07, which (as was the case in the past three quarters) was primarily led by growth on the retail advances front. Retail credit, which has been the focus of IDBI, ever since it converted into a banking entity, continued to be the saving grace for the bank in 2QFY07, registering 28% YoY growth. The segment, however, comprised only 18% of the bank’s advance book in 1HFY07. The deposit growth that was much healthier in this quarter (71% YoY), albeit on a lower base, brought down the C/D ratio to 176% from 256% in 1HFY06. Nevertheless, the lower proportion of CASA (from 32% in 1HFY06 to 25% in 1HFY07) suggests that the incremental deposits were largely high-cost term deposits. What, however, is enthusing is the fact that IDBI managed to grow the incremental assets and at the same time, paring its average cost of funds by nearly 40 basis points (YoY). This has been largely achieved by retiring the high cost debts.

Advances - Yet to catch up…
(Rs m) 1H06 % of total 1H07 % of total Change
Advances 464,130   543,090   17.0%
Retail 74,261 16.0% 95,000 17.5% 27.9%
Corporate 389,869 84.0% 448,090 82.5% 14.9%
Deposits 181,012   309,530   71.0%
Credit deposit ratio 256.4%   175.5%    

The NIMs of 0.5% in 1HFY07, linger way behind its peers in the sector. However, since the downside is limited, an accretion to franchise and a higher proportion of CASA (post the UWB merger) will only enable the bank to improve upon this. Of the Rs 90 bn SASF, cases worth Rs 44 bn (settlement amount Rs 51 bn) have been resolved until FY06. Of this, Rs 2 bn and Rs 8 bn were recovered in FY05 and FY06 respectively, while Rs 15 bn is expected in FY07.

Fees yet to catch up: The bank’s fee income (18% of total income in 1HFY07) shows little signs of growth. The bank has entered into a life insurance venture with Federal Bank and Fortis Insurance International, in which IDBI will have 48% stake. Also, it is contemplating to start an asset management company. These initiatives will, however, contribute meaningfully only in the longer term.

Conservative on costs: Lowering the cost to income ratio from 57% in 1HFY06 to 54% in 1HFY07 has aided the bank’s operating margins. However, after the branch franchise of UWB comes into IDBI’s books, we see the same hardening again. Also, the write-back of provisioning may not augur well for the bank in a rising interest rate scenario, as the risk of higher delinquencies loom large.

Quality retained: Despite the relatively faster pick up in retail disbursals, the bank has been able to halve the gross NPAs in this portfolio from 4% (of advances) in 1HFY06 to 2% in 1HFY07. Also, post SASF, we do not see the overall average net NPA levels shooting higher than the current levels of 1% of advances. With the current NPA levels, IDBI’s asset quality can be pegged as one of the best amongst PSU banks.

What to expect?
At the current price of Rs 79, the stock is valued at 0.7 times our estimated FY08 adjusted book value. IDBI’s performance in the last quarter has been in line with our estimates. Although the bank has shown some resilience to rise in interest rates, in terms of controlling funding costs and lower hit on margins, one must understand that the same is on a very small base. Nevertheless, given its prospects post the UWB merger, investors with a long-term perspective (3 to 4 years) can definitely hold on to the stock.

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