IDBI Bank: Profits dip on higher provisions - Views on News from Equitymaster

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IDBI Bank: Profits dip on higher provisions

Nov 8, 2012

IDBI Bank declared its results for the second quarter of the financial year 2012-13 (2QFY13). The bank has reported 6% YoY growth in interest income and a 6% dip in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) remains muted at 11.3 % YoY in 2QFY12, with a muted 7% YoY growth in advances. For the half year, the NII increased by 11%.
  • Capital adequacy ratio currently stands at 13.91% at the end of 1HFY13 from 13.34% at the end of 1HFY12.
  • Net interest margin comes in slightly higher at 2.1% compared to 2% in 1HFY12.
  • Net NPA (non-performing assets) to advances comes in higher at 2.04% in 1HFY13 from 1.57% in 1HFY12.
  • Cost to income ratio increased from 36% in 1HFY12 to 38% in 1HFY13 on higher employee costs and branch additions.
  • Net profit falls by 6.3% YoY in 2QFY13, on account of higher provisioning for NPAs and slower NII growth.

Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 58,123 61,972 6.6% 114,413 124,670 9.0%
Interest expense 46,903 49,479 5.5% 91,668 99,471 8.5%
Net Interest Income 11,220 12,493 11.3% 22,745 25,199 10.8%
Net interest margin (%)       2.0% 2.1%  
Other Income 4,706 6,828 45.1% 8,931 12,028 34.7%
Other Expense 5,947 7,525 26.5% 11,472 14,111 23.0%
Provisions and contingencies 3,120 4,946 58.5% 7,293 10,044 37.7%
Profit before tax 6,859 6,850 -0.1% 12,910 13,072 1.3%
Tax 1,700 2,015 18.5% 4,400 3,964 -9.9%
Effective tax rate 24.8% 29.4%   34.1% 30.3%  
Profit after tax/ (loss) 5,159 4,835 -6.3% 8,510 9,109 7.0%
Net profit margin (%) 8.9% 7.8%   7.4% 7.3%  
No. of shares (m)         1278.4  
Book value per share (Rs)*         144.4  
P/BV (x)         0.7  
* (Book value as on 30th September 2012)

What has driven performance in 1HFY13?
  • IDBI Bank has underperformed the sector average by clocking in 7% YoY in advances in 1HFY13. However the bank expects this to improve to around 12-13% growth by March 2013. However, the bank has paid heed to margins which have improved slightly over the period. It has increased from 2.0% at the end of 1HFY12 to 2.1% currently in 1HFY13. IDBI has been particularly aggressive in growing its retail advance portfolio, which has grown at a fast clip. However, its SME portfolio saw a major dip in the first half.

  • The rise in the proportion of CASA (current and savings account) from 19.2% in 1HFY12 to 21.9% in 1HFY13 is 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 25-27% in the future. Waiving off charges on these accounts has helped in low cost deposit accretion. However as the balance sheet grows towards the end of the year, the bank may have to once again resort to costly bulk deposits.

    SME advances see a major fall...
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Advances 1,554,750   1,663,700   7.0%
    Retail 272,340 17.5% 319,300 19.2% 17.2%
    Corporate 1,072,170 69.0% 1,185,480 71.3% 10.6%
    Agri 108,150 7.0% 114,840 6.9% 6.2%
    SME 102,090 6.6% 44,080 2.6% -56.8%
    Deposits 1,744,410   1,800,870   3.2%
    CASA 334,810 19.2% 395,070 21.9% 18.0%
    Tem deposits 1,409,600 80.8% 1,405,800 78.1% -0.3%
    Credit deposit ratio 89.1%   92.4%    

  • IDBI's other income increased by 35% in 1HFY13 and by 45% in 2QFY13 due to a sharp increase in fee based income. However, Rs 1 bn-1.25 bn of this accretion was due to a one off transaction which may not be repeated in the future. The proportion of non-interest income increased to 32% of total income in 1HFY13 from 28% in 1HFY12. The proportion of fees to total income, also increased from around 22%, to 26% at the end of 1HFY13.

  • IDBI Bank's net NPAs have increased to 2.04% in 1HFY13, from 1.57% earlier. The bank's provision coverage ratio decreased from 70.05% in 1HFY12 to 65.81% currently. The bank saw increased provisioning due to higher NPAs. However around 18% of its restructured accounts have turned NPA. The bank's restructured loan portfolio increased to Rs 125 bn in September 2012 from Rs 109 bn in June 2012. Asset quality remains to be an issue for this bank. The bank also has the second largest exposure (Rs 20 bn) to Suzlon Energy which has recently been referred to the CDR (corporate debt restructuring) cell.

  • IDBI's cost to income ratio has increased to 38% in 1HFY13 from 36% in 1HFY12. 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. However the bank plans on added a new branches and employees this year.

  • Broking and custodial services outfit Stock Holding Corporation of India Ltd (SHCIL) is set to merge with IDBI Bank. The bank will absorb 227 offices, 1,300 employees and give it access to 800,000 high net worth customers. It will be a non-cash share swap deal and is expected to be completed by March '13 subject to approvals.

  • The bank also purchased Rs 2 bn worth of loans from SKS Microfinance through a securitisation deal. This will help the bank meet its priority sector lending (PSL) targets which it is still struggling to meet.

What to expect?
At the current price of Rs 103.7, the stock is valued at an attractive 0.6 times its FY15 adjusted book value. The bank's improved capital adequacy ratio at 13.9% in 2QFY13 is adequate to sustain the current growth rates in the medium term. It has a modest target of growing its loan book at 12-13%, which we believe fits in with the current economic climate. However having a large proportion of bulk deposits and a relatively lower CASA share impacted NII growth. Despite this fact, the bank was still able to hold onto its margins. If the monetary easing continues, the bank may see less pressure on the same going forward, it expects NIMs to remain in the 2% range.

IDBI Bank is strategically trying to focus on growing its balance sheet at a relatively slow pace. It plans to focus on building up capacity on the priority sector front, to meet Reserve Bank of India (RBI) guidelines. It has also gone for securitization transactions in order to shore up the same. We believe that IDBI's slower advance growth target fits in with the current economic climate and the rate environment. We are also enthused by the bank's efforts to bring in efficiency in operations, increase its CASA base, and sustain margins. A few concerns are increased slippages and restructured accounts in risky sectors; and some more pain is expected on this front. 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. We maintain our Buy rating (as per our September 2012 performance review) on the stock.

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