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IDBI Bank: Growth in limbo

Nov 1, 2002

Lack of capital continues to have a big impact on IDBI Bank's growth prospects. While revenues have grown at a brisk rate, operating margins have suffered significantly on the back of ongoing expansion of network of the bank. Revenues have failed to rise commensurately with the rise in operating expenses, which has affected the bank's performance at the operating level.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Income from operations 1,290 1,453 12.6% 2,496 2,857 14.5%
Other Income 226 314 38.8% 675 628 -6.9%
Interest expense 849 1,001 17.8% 1,768 1,957 10.7%
Net interest income 441 452 2.6% 728 899 23.5%
Other expenses 318 483 51.7% 591 930 57.4%
Operating Profit 123 (30)- 137 (30)-
Operating Profit Margin (%)9.5%-2.1% 5.5%-1.1% 
Provisions and contingencies 142 51-64.1% 302 189-37.4%
Profit before Tax 207 233 12.3% 511 409 -19.9%
Tax 60 72 19.8% 181 137 -24.4%
Profit after Tax/(Loss) 147 1619.2% 330 272-17.4%
Net profit margin (%)11.4%11.1% 13.2%9.5% 
No. of Shares (m) 140.0 140.0   140.0 140.0  
Diluted Earnings per share*4.24.6 4.73.9 
P/E (x)    5.1 

Advances have increased at an impressive rate of 49% in 2QFY03 primarily due to higher contribution from retail assets in the form of higher disbursement towards housing loans. If one were to look at the gross segmental break-up, retail segment contributed to 25% of total revenues in 2QFY03 (24% for 1HFY03). IDBI Bank's home loan portfolio has crossed Rs 3.5 bn which translates into a 350% growth on YoY basis. Since spreads are higher in retail assets, banks have been focusing on increasing contribution from this particular segment. With interest rates expected to soften further in the near term, retail loan portfolio is expected to increase sharply. IDBI Bank has targeted atleast 5% of incremental disbursements from housing loans.

IDBI Bank's average cost of funds has been on the decline in the last few quarters. In 2QFY03, the bank has managed to bring down costs even further to 6.2%, which is one of the lowest in the sector. Cost of deposits have fallen on various counts. While total deposits of the bank grew at a stellar rate of 50% to Rs 59 bn in the last one year, the share of low-cost deposits (i.e. current and saving accounts) has touched 26%. The bank is also increased its cash management business and as a result current account deposits touched Rs 8.4 bn (82% YoY growth) thus lowering the average cost of deposits. But contribution from such deposits is still lower when compared with other banks like UTI Bank and SBI. One has also got to keep in mind that growth in deposits is on the higher side when compared with other private sector banks, as it is only in the last one and half years that IDBI Bank has been aggressive at the retail end. Going forward, as the bank expands its presence in the retail segment (depending on availability of capital), we expect deposit mix to shift more in favour of the bank. The bank expects cost of deposits to remain in the range of 6%-6.5%.

Interest income break-up...
(Rs m)1QFY021QFY03Change
Interest on advances 615 913 48.6%
Income on investments 608 500 -17.7%
Interest on balances with the RBI 23 19 -19.5%
Others 45 21 -52.8%
Total 1,290 1,453 12.6%

The decline in operating margins is due to a sharp spurt in cost to income ratio both in 2QFY03 and 1HFY03. The ratio in 2QFY03 and 1HFY03 stood at 63% and 61% respectively against 54% in FY02. The ratio is adversely impacted due to lower other income and a less than commensurate rise in revenues in relation to higher operating expenses (towards expanding infrastructure and distribution). IDBI Bank’s distribution now extends to 63 cities, spread across 90 outlets and 252 ATMs. IDBI Bank's growth strategy revolves around expanding presence in Tier-II cities. The bank increased its presence in 10 cities during 1HFY03.

The bank's Net NPAs to customer assets stand at 1.5% with provision cover at 63%, which is commendable. While the performance of the bank in 2QFY03 has to be viewed in light of inadequate capital, woes continue unabated. Capital adequacy ratio stands at 9% in 1HFY03 that offers no room for growth in the near term. The bank, in its press release, has stated that "Despite definitive commitments from world-class private equity players, lack of clarity on promoter related issues is holding back IDBI Bank’s capital infusion plans. With timely availability of capital, IDBI Bank would have been able to enhance the value of its franchise and enhance return on its investments even faster. We expect that delay in capital infusion is likely to impact earnings over the next two quarters".

At the current market price of Rs 20, IDBI Bank is trading at a P/E of 5x 1HFY03 annualised earnings and adjusted price to book value ratio of 1.4x (based on book value for FY02). As mentioned above, uncertainty over IDBI's stake dilution and lack of capital will continue to have negative impact on the stock price in the near-term.

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