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IDBI Bank: Temporary setback - Views on News from Equitymaster
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  • Oct 30, 2004

    IDBI Bank: Temporary setback

    Performance Summary
    IDBI Bank, one of the fastest growing new generation private sector banks, has continued to show strong growth in its core operating numbers for the September quarter. While the bank's topline has risen by over 30%, its bottomline has improved by a marginal 4%. Due to significant provisioning for depreciation in the value of investments and fall in other income, the bottomline growth of the bank has been negatively affected. At the same time, strong growth in topline and less than proportionate rise in interest expenses, ahs led to strong improvement in the bank's net interest income and subsequently operating margins.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Income from Operations 1,747 2,262 29.5% 3,364 4,450 32.3%
    Other Income 655 610 -6.9% 1,083 1,027 -5.2%
    Interest Expenses 987 1,204 21.9% 1,939 2,411 24.4%
    Net interest income 759 1,058 39.4% 1,425 2,038 43.0%
    Other Expenses 616 767 24.5% 1,197 1,479 23.5%
    Operating Profit 143 291   228 560  
    Operating Profit Margin (%) 8.2% 12.9%   6.8% 12.6%  
    Provisions and Contingencies 207 298 43.7% 372 411 10.7%
    Profit before Tax 591 603 2.0% 939 1,175 25.1%
    Tax 229 226 -1.4% 354 431 21.8%
    Profit after Tax/(Loss) 362 377 4.1% 585 744 27.1%
    Net Profit Margin (%) 20.7% 16.7%   17.4% 16.7%  
    No. of Shares (m) 140.2 216.7   140.2 216.7  
    Diluted Earnings per share* 6.7 7.0   8.4 6.9  
    P/E Ratio         6.4  

    New generation private sector bank
    IDBI Bank, promoted by India's largest financial institution IDBI (soon to be converted in to a bank), is one of the fastest growing banks in India. IDBI Bank, has got a strong focus on the retail segment, especially the housing loans segment. Retail assets constituted close to 40% of total advances in FY04. IDBI Bank's quality of assets is one of the best in the industry and is comparable with the likes of HDFC Bank. IDBI Bank is going to be merged with IDBI by the end of FY05.

    What has driven the performance in 1QFY05?
    Growth momentum intactThe rise in the bank's topline can be mainly attributed to the continued strong growth in its assets. The bank has reported a 43% rise in its customer assets and this has been the main reason for the rise in its topline. Retail advances of the bank have risen by 77% and constitute 45% of the total advances of the bank. On the other hand IDBI Bank's corporate assets have risen by 22%. The bank continues to focus on the retail segment to drive growth and this has yielded results for it over the last few years.

    Operating margins: The bank has reported a marginal dip in net interest margins (NIM) despite the growth seen in the net interest income. This indicates that the yield on its assets is falling faster than its cost of deposits. While the bank has managed to reduce the cost of deposit to 3.7% (one of the lowest in the sector) from 4.5% last year, the yield on assets seems to have fallen at a faster pace leading to the lower NIM. NIM has fallen to 3.0% from 3.1% in the same period last year. We believe that the bank may not be able to further reduce its deposit costs and hence we may see a further erosion in NIM going forward. Operating costs on the other hand have been under control as indicated by the strong improvement in operating margins. The bank continues to leverage on low cost deposits to bring down its interest expenses. There has been a strong growth in both savings and current deposits and low cost deposits now account for nearly 44% (41% last year) of all deposits.

    Net Profits:There has been a decline in the other income of the bank. This can be mainly attributed to a negative incidence of trading income. Core fee based income on the other hand has risen by 25% and has almost compensated for the fall in trading income. Provisioning on the other hand has risen and this can be attributed to the higher provisioning on account of depreciation in the investment (mainly G-Sec) portfolio of the bank. We believe that this additional provisioning is a not likely in the coming quarters (unless the interest rate scenario changes drastically) and hence the performance of the bank will be driven primarily by core operations. Net NPAs as a percentage of net advances have fallen to 0.1% from 0.3% last year. This indicates the strong quality of assets the bank has on its books.

    What to expect?
    The stock is currently trading at Rs 44, a price to adjusted book value ratio of 1.4 times. While IDBI Bank has taken a hit on its bottomline in the September quarter, we believe that the banks' core operations continue to exhibit improvement. Going forward as the dependence on treasury income declines and the same shifts to core lending operations, we are likely to see strong growth in IDBI Bank's earnings going forward. There has been an improvement in the bank's CAR and it has improved to 10.1% (8.2% last year) While the CAR has improved we still feel that the company may have to further raise capital in order to maintain its growth momentum. Having said that we would like to indicate that IDBI Bank's merger with its parent IDBI is likely to go a long way in helping the bank shore up its CAR. Overall the proposed merger is likely to benefit both the entities.



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