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IDBI: All left to the merger

Nov 10, 2004

Performance Summary
IDBI, the largest developmental finance company, had reported its full year FY04 (extended to 18 months) results yesterday. The bank's performance is not comparable with its FY03 results, however higher provisioning and stable operating margins have been the main highlights of the bank in the 18 month period ending September 2004, compared to FY03. On the other hand IDBI's topline saw sustained pressure as its September quarter results indicate. While topline fell by over 11% in the September quarter, bottomline has fallen by a smaller 6%.

(Rs m) Quarter ended
September 30 2003
Quarter ended
September 30 2004
Change FY03 FY04
(18 months)
Income from Operations 17,200 15,290 -11.1% 73,370 97,040 32.3%
Other Income 230 290 26.1% 1440 2110 46.5%
Interest Expenses 11,880 11,880 0.0% 54,340 70,800 30.3%
Net interest income 5,320 3,410 -35.9% 19,030 26,240 37.9%
Other Expenses 790 860 8.9% 2830 4390 55.1%
Operating Profit 4,530 2,550 -43.7% 16,200 21,850 34.9%
Operating Profit Margin (%) 26.3% 16.7%   22.1% 22.5%  
Provisions and Contingencies 3,500 1,670 -52.3% 13,090 19,340 47.7%
Profit before Tax 1,260 1,170 -7.1% 4,550 4,620 1.5%
Tax 10 0 - 540 -30 -
Profit after Tax/(Loss) 1,250 1,170 -6.4% 4,010 4,650 16.0%
Net Profit Margin (%) 7.3% 7.7%   5.5% 4.8%  
No. of Shares (m) 653 653   653 653  
Diluted Earnings per share* 7.7 7.2   6.1 7.1  
P/E Ratio         12.1  
** The year ending has been extended by 6 months to September 2004

The largest developmental finance institution
Industrial Development Bank of India (IDBI) was established in 1964. It was the largest development finance institution (DFI's) in the country and it has now been converted in to a bank. For many years it played an active role in the creation of institutions like SEBI, Export- Import Bank of India, the National Stock Exchange of India, and Credit Analysis and Research Ltd (CARE). Now with the impending merger with subsidiary IDBI Bank, IDBI is set to become one of the largest banks in the country. The bank is set to retain its development finance character, as well as cater to the retail segment of the market.

What has driven the performance in FY04?
Sales:  The financial institution (FI) has reported a 29% fall in disbursements on a like to like 12 month basis, even though the sanctions were up by nearly 25%. This fall in advances is surprising, and looking at the sanctions even more so, indicating that the company is taking time to disburse loans. The institution does not seem to be managing competition from banks too well. Also, falling yields continue to take a toll on the topline growth.

Operating margins:  IDBI, however, continues to reduce its interest costs and has managed to reduce the incremental cost of its Rupee borrowings to 6.3% in year ending September 2004 from 8.4% in FY03. This has however not prevented the fall in net interest income as while incremental costs are low the company has a legacy of high cost borrowings that account for a major outflow in terms of interest expenses. The interest costs of the bank are still very high compared to the banking sector. Since the bank has not started its retail operations it is not able to tap in to the low cost deposit segment. The bank's profitability is likely to improve once it is able to garner low cost deposits.

Net Profits:  There has been a significant rise in provisioning and this has led to the low growth in bottomline. the bank has made excess provisioning for impairment of assets in order to meet any contingency post merger with its subsidiary, IDBI Bank. The bank has also used part of the Rs 90 bn stressed asset stabilization fund for transferring part of its impaired assets to the asset reconstruction company. this has helped the bank to bring down its net NPA to advances ratio to 2.4% compared to over 14% in FY03.

What to expect?
At Rs 86, the stock is trading at a P/E multiple of 12x its FY04 (18 months) earnings. IDBI, despite aggressive steps to tackle the issue of NPAs, seems to be plagued by falling disbursals, which is likely to impact its long-term growth prospects. However the bank has been able to bring down its NPAs significantly due to the government's Rs 90 bn bailout package. Also, the reverse merger with IDBI Bank is likely to change the fundamentals of IDBI. We would like to reiterate again, the benefits of a merger will only accrue in the long-term and hence investors have to be patient with their investment.

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