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IDBI Bank: Interest costs take toll

Oct 20, 2011

IDBI Bank declared its results for the second quarter of the financial year 2011-12 (2QFY12). The bank has reported 28% YoY and 20% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) remains stagnant % YoY in 2QFY12, despite a 20% YoY growth in advances. However for the half year, the NII increased by 16%.
  • Capital adequacy ratio currently stands at 13.34% at the end of 1HFY12 from 14.17% at the end of 1HFY11.
  • Net interest margin comes in slightly higher at 2% compared to 1.9% in 1HFY11.
  • Net NPA (non-performing assets) to advances slightly higher at 1.57% in 1HFY12 from 1.19% in 1HFY11.
  • Cost to income ratio shrinks from 38% in 1HFY11 to 36% in 1HFY12.
  • Net profit grows by 25% YoY in 1HFY12, on account of higher NII and a reversal of provisioning, despite higher tax outlays and lower other income.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 45,341 58,123 28.2% 88,163 114,413 29.8%
Interest expense 34,092 46,903 37.6% 68,470 91,668 33.9%
Net Interest Income 11,249 11,220 -0.3% 19,692 22,745 15.5%
Net interest margin (%)       1.9% 2.0%  
Other Income 5,352 4,791 -10.5% 10,080 9,100 -9.7%
Other Expense 6,345 5,947 -6.3% 11,207 11,472 2.4%
Provisions and contingencies 4,414 3,206 -27.4% 9,430 7,463 -20.9%
Profit before tax 5,841 6,859 17.4% 9,135 12,910 41.3%
Tax 1,550 1,700 9.7% 2,335 4,400 88.4%
Effective tax rate 26.5% 24.8%   25.6% 34.1%  
Profit after tax/ (loss) 4,291 5,159 20.2% 6,800 8,510 25.2%
Net profit margin (%) 9.5% 8.9%   7.7% 7.4%  
No. of shares (m)         984.6  
Book value per share (Rs)*         137.0  
P/BV (x)         0.8  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • IDBI Bank has performed in line with the sector average by clocking in 20% YoY growth in advances in 1HFY12. However the bank expects this to correct to around 15% growth by March 2012. The bank has paid heed to margins which have improved slightly over the six months period. It has increased from 1.9% at the end of 1HFY11 to 2% currently in 1HFY12. IDBI has been particularly aggressive in growing its retail advance portfolio, which has grown at a fast clip. However, its SME portfolio saw a dip in the first half.

  • The rise in the proportion of CASA (current and savings account) from 15.3% in 1HFY11 to 19.2% in 1HFY12 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 25% in the future.

    SME advances see a dip...
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 1,302,130   1,559,170   19.7%
    Retail 212,660 16.3% 272,340 17.5% 28.1%
    Corporate 894,020 68.7% 1,097,900 70.4% 22.8%
    SME 114,790 8.8% 96,460 6.2% -16.0%
    Deposits 1,543,050   1,744,410   13.0%
    CASA 235,460 15.3% 376,780 21.6% 60.0%
    Tem deposits 1,307,590 84.7% 1,409,600 80.8% 7.8%
    Credit deposit ratio 84.4%   89.4%    

  • IDBI's other income fell by 10% in 1HFY12 due to lower commission and brokerage, and losses on revaluation of investments, bringing the non-interest income to 22% of total income in 1HFY12 from 29% in 1HFY11. The proportion of fees to total income, however fell from around 29%, to 21% at the end of 1HFY12.

  • 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. The bank actually reported a write back of provisioning which helped improve profits. IDBI Bank's net NPAs have increased slightly to 1.6% in 1HFY12, from 1.19% earlier. The bank's provision coverage ratio is in compliance with RBI's mandate of 70% coverage. It currently stands at 70%, from 74% in the previous quarter. The bank was able to reduce its provisioning expenses by 20% on account of the increased buffer it had kept earlier. However around 17% of its restructured accounts have turned NPA. Its restructured assets is mainly in troubled sectors such electricity, air transport and textiles, which may be prone to turning further NPAs.

  • IDBI has also contained the rise in its cost to income ratio which has been lowered to 36% in 1HFY12 from 38% in 1HFY11. 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 105, the stock is valued at an attractive 0.6 times our estimated FY14 adjusted book value. The banks provisioning policy helped stand it in good stead, as it was able to reverse some of its provisions and thus improve its profitability. Although the bank grew its loan book by 20% in the first half of the year, it plans to rationalize this growth to a more modest 15% by the end of the fiscal. We believe this target fits in with the current economic climate and high interest rate environment. We are also enthused by the bank's efforts to bring in efficiency in operations, increase its CASA base, and sustain its margins. A few concerns are the increased slippages and the current rising interest rate cycle, and the restructured accounts in risky sectors. 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.

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