IDBI Bank: A stunner result but… - Views on News from Equitymaster

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IDBI Bank: A stunner result but…

Nov 13, 2001

IDBI Bank reported sparkling second quarter performance, led by a sharp rise in other income and interest margins. The bank's profits in first half of the fiscal year increased to Rs 330 m from Rs 18 m in the corresponding period of the previous year.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Interest Income 1,284 1,301 1.3% 2,537 2,496 -1.6%
Other Income 85 226 167.2% 329 675 105.2%
Interest Expenditure 1,139 860 -24.5% 2,148 1,768 -17.7%
Operating Profit 145 441 204.1% 389 728 87.3%
Operating profit margin (%) 11.3% 33.9%   15.3% 29.2%  
Other Expenditure 235 318 35.3% 429 591 37.5%
Profit before Tax -5 349   288 812 181.9%
Provisions & contingencies 135 142 5.3% 270 302 11.6%
Tax (39) 60   - 181  
Profit after Tax/(Loss) (101) 147   18 330 1730.6%
Net profit margin (%) -7.9% 11.3%   0.7% 13.2%  
No. of Shares (eoy) 140.0 140.0   140.0 140.0  
Diluted Earnings per share* -2.9 4.2   0.3 4.7  
P/E (at current price)   5     4  

The bank's successful attempt in achieving a steep reduction in average cost of deposits to 8% in the current quarter (from 8.6% in the previous quarter) led to over 200% rise in operating profits. Its continuous focus on growing low cost retail deposits resulted in lower cost of funds. Retail deposits witnessed a YoY growth of 27% and formed 39% of total deposits.

As part of its retail initiatives, IDBI Bank launched tele banking, Internet banking and mobile banking services. The bank currently has 100 ATMs and 64 branches, which it aims to expand to 350 and 100 respectively by FY02. The bank has 370,000 retail customers and it is adding 15,000 accounts every month. The rapid addition in number of clients is on the back of its 'Project Speed', which was launched in the beginning of second quarter. As per this project, bank accounts would be opened instantly along with services including phone banking, Internet banking, ATM card and a cheque book. Its other new launches include non-life insurance products (tie-up with Tata-AIG), loan against NSCs (tie-up with India Post), purchase of NSCs on Internet and installing ATMs at select India Post sites. These efforts are likely to increase the bank's retail reach considerably in the coming quarters.

On the asset side too the growth was healthy. IDBI Bank's total customer assets witnessed a QoQ growth of 19% in 2QFY02. Primary driver for this growth was aggressive marketing of tailor made corporate asset products to top tier customers. 79% of its total assets and 92% of incremetal assets are now 'A' rated. To improve the credit quality further, the bank provided higher amount for loan losses in the first half. It has also shifted NPA classification and provisioning norms to 90 days, which will actually come into effect from FY04 (currently 180 days). Consequently, its NPA coverage ratio increased to 47% from 36% as on FY01. These efforts have also reduced the bank's net NPA to net customer asset ratio to 2.8% in the September quarter from 3.8% in the previous quarter. Retail assets however, forms just 5% of total assets with home loan accounting for about 60% of total retail assets. With the establishment of proper sales and service infrastructure, the retail asset growth is expected to get momentum in the second half of the current year.

Apart from concentration on expanding core business income, the bank is also focusing on increasing its other income. During 1HFY02, the figure doubled due to a three fold increase in forex earnings. Non-fund based banking activity and money market trading income too contributed to this rise. Other income accounted for 21% to total income from 12% in 1HFY01. An aggressive focus on non fund based activities helped the bank in the first half to compensate for a decline in its core business income. However, an excessive reliance on this volatile stream of revenues could impact the bank's earnings in the coming quarters.

At the current market price of Rs 19 IDBI Bank is trading at a P/E of 4x and Price/Book value ratio of 0.9x its 1HFY02 annualised earnings. IDBI Bank's parent has resulted in lower valuations for the bank, despite its relentless efforts in improving financial performance. IDBI holds 55% stake in the bank and aims to merge with it to become a universal bank. IDBI's financial health is much weaker than the bank. This would affect IDBI Bank's asset quality and consequently profitability if both the entities are merged. Amidst uncertainty of this merger the stock is lacking buying interest.

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