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IDBI Bank: No looking back

Oct 23, 2003

IDBI Bank, one of the new generation private sector banks, has announced robust results for the September quarter. The bank has reported a strong bottomline growth of 125% on the back of a 20% rise in topline in the September quarter on a YoY basis. The performance of the bank in 1HFY04 is similar, with strong growth reported both in topline as well as the bottomline. Bottomline growth has been mainly aided by a fall in interest expenses as well as a strong growth in other income.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Income from Operations 1,453 1,747 20.2% 2,867 3,364 17.3%
Other Income 314 655 108.5% 628 1,083 72.4%
Interest Expenses 1,001 987 -1.3% 1,968 1,939 -1.5%
Net interest income 452 759 67.8% 899 1,425 58.5%
Other Expenses 483 616 27.6% 930 1,197 28.8%
Operating Profit (30) 143 (30) 228
Operating Profit Margin (%)-2.1%8.2%-1.1%6.8%
Provisions and Contingencies 51 207307.5% 189 372 97.0%
Profit before Tax 233 591 153.7% 409 939 129.6%
Tax 72 229217.9% 137 354 158.6%
Profit after Tax/(Loss) 161 362 124.9% 272 585 115.0%
Net Profit Margin (%)11.1%20.7%9.5%17.4%
No. of Shares (m) 140.0 140.0 140 140
Diluted Earnings per share*4.610.33.98.4
P/E Ratio3.8
*(annualised)

IDBI Bank's strong topline growth has been mainly achieved by strong growth in its loan portfolio. The bank continues to focus on the retail segment and it has shown very strong results in the same. Retail advances now constitute 37% of total customer assets and have grown by 258% in the period ending September 30th, 2003 compared to the same period last year. Overall customer assets have grown by 42% in the same period. IDBI Bank, being one of the smaller private sector banks, has managed well to grow its advances despite strong competition. However, IDBI Bank, like all banks, has not been able to grow its corportate advances well in this period. This is mainly due to inadequate demand from India Inc. for credit. The bank continues to grow its branch and ATM network in order to maintain this strong growth in advances. However, the bank continues to be constrained by capital and in order to remedy this, the bank has come out with a rights issue that will significantly augment its capital adequacy requirements.

While the bank has managed to strongly grow its advances, especially retail, it continues to leverage on low cost retail deposits to consistently reduce deposit costs and consequently improve net interest margins. The bank has reduced its average deposit cost to 4.5% (6.3%) thus consequently improving its net interest margins to 3.1% (2.7%). Improvement in cost to income ratio to 44% (63%) suggests that the bank has been able to significantly control operational costs, thus further aiding bottomline growth.

Apart from the improvement in operational efficiencies, IDBI Bank continues to maintain strong quality of assets. The net NPA to advances ratio stands at 0.5% compared to 1.6% in the same period last year. The bank has significantly increased its provisioning for NPAs and one must keep in mind that bottomline growth has been achieved despite the higher provisioning. Another key highlight of IDBI Bank's performance in the September quarter is the strong growth in other income (109%) primarily driven by core fee income rather than profits from sale of investments. This indicates that the bank's other income quality is good and its impact on the bottomline can be assessed more accurately.

The stock is currently trading at Rs 32, a price to book ratio of 1.2x. IDBI Bank continues to maintain its strong growth momentum despite capital constraints as well as turmoil in the top management. Based on price to book ratio, we believe that the stock may be relatively undervalued at this point, which could be primarily on account of uncertainty over the fate of the bank in the long-term. While the bank may continue to grow at a blistering pace, investors are likely to remain cautious due to the uncertainty over its future.

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