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IDBI: Poor development! - Views on News from Equitymaster
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IDBI: Poor development!
Oct 20, 2005

Introduction to results
IDBI has announced its consolidated results for quarter ended September 2005. While the figures are not comparable to that of the standalone entities (IDBI and IDBI Bank) in 2QFY05, what is evident is that the bank has been a non-performer in terms of asset growth and margin improvement, even on a sequential basis (QoQ). Despite lower provisioning and tax benefits, due to poor performance in this quarter, the bank could not prevent its half yearly figures from getting tainted.

Rs (m) 2QFY06 1HFY06
Income from operations 12,233 25,551
Other Income 3,449 6,137
Interest Expense 12,682 25,094
Net Interest Income (449) 457
Net interest margin (%)   0.4%
Other Expense 1,752 3,763
Provisions and contingencies (25) 461
Profit before tax 1,273 2,370
Tax (46) (33)
Profit after tax/ (loss) 1,319 2,403
Net profit margin (%) 10.8% 9.4%
No. of shares (m) 723.0 723.0
Diluted earnings per share (Rs)* 7.3 6.6
P/E (x)   14.4
* (annualised)    

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 2QFY06?
Expenses superceding income: IDBI has not only had a very bad quarter in terms of asset growth but the bank also failed to improve its margins (NIMs of 0.4% in 1HFY06) despite the offload of some high cost debts. The bank’s advances (not comparable to that of 2QFY05) remained flat over 4QFY05 and repricing of assets seem to be weighing heavy on the bank’s net interest margins. Deposit growth, however, has been an impressive 40% over 4QFY05, albeit on a lower base. Also, low cost deposits now comprise 36% of total deposits (31% in 1QFY06), which shows that the bank’s retail foray is paying off on the funding side. The bank’s only baggage now is the outstanding high cost borrowing of Rs 1,500 bn that carries interest liabilities ranging between coupon rates of 9% to 15%. However, since 80% of these high cost borrowings will go off the bank’s books in FY06, the cost of funds for the bank is set to get visibly pared going forward. All said, the fact that the bank’s interest expended is superceding the interest earned is a matter of serious concern.

Lower net NPAs pare provisions: Although the bank has been able to pare its net NPA levels from 1.7% in FY05 to 1.2% in 2QFY06, the leniency in provisioning is unwarranted, as the bank seems to be unable to arrest the incremental delinquencies. The gross NPA levels of the bank have increased from 2.5% in 4QFY05 to 4.4% in 2QFY06. The same is even more of a concern given that the fresh slippage is despite the marginal growth in assets.

This bank received a bailout package (in September 2004) as a ‘cash neutral assistance’ from the Union Government in the form of to SASF (stressed asset stabilisation fund). 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. Although the bank has not divulged the latest figures for NPA recovery on this front (till January 2005, IDBI had resolved 60 cases of NPAs and had recovered Rs 1.5 bn) a faster recovery from SASF will provide sufficient liquidity to the bank.

Capital rich: IDBI has sufficient capital and its capital adequacy ratio (CAR) stood at 16% in 1HFY06. Besides investing its retail foray the bank is also embarking on several plans for its subsidiaries.

  • It is at the advanced stage of negotiations for launching the Insurance joint venture.

  • It has initiated steps to reposition the IT subsidiary IDBI Intech Ltd.

  • It is planning to incorporate an AMC for entry into Mutual Fund business through its wholly owned subsidiary IDBI Caps.

It, however, remains to be seen as to what is the time period within which the benefits of such investments start filtering into the bank’s valuations.

What to expect?
At the current price of Rs 92 per share, IDBI’s stock is trading at 1.1 times its 1HFY06 adjusted book value. 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. Also, given the fact that IDBI, now being a PSU bank, will have considerable government say in its operational decisions (like statutory priority sector lending and SLR norms) the rationalisation of operational parameters might also witness several encumbrances.

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