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IDBI Bank: Mere balance sheet growth - Views on News from Equitymaster
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IDBI Bank: Mere balance sheet growth
Nov 14, 2008

Performance summary
  • Interest income grows by 38% YoY in 1HFY09, on the back of 40% YoY growth in advances.
  • Capital adequacy ratio at 11.6% at the end of 1HFY09.
  • Net NPA to advances increase from 1.1% in 1HFY08 to 1.3% in 1HFY09.
  • Cost to income ratio expands from 42% in 1HFY08 to 49% in 1HFY09.
  • Net profit margins drop by 2% despite lower provisioning costs.


Standalone numbers

Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 19,059 26,972 41.5% 37,010 51,221 38.4%
Interest expense 17,564 24,683 40.5% 34,863 47,939 37.5%
Net Interest Income 1,495 2,289 53.1% 2,147 3,282 52.9%
Net interest margin (%)       0.6% 0.6%  
Other Income 4,312 3,200 -25.8% 8,240 6,514 -20.9%
Other Expense 2,291 2,646 15.5% 4,348 4,764 9.6%
Provisions and contingencies 1,753 1,000 -43.0% 2,557 1,369 -46.5%
Profit before tax 1,763 1,843 4.5% 3,482 3,663 5.2%
Tax 210 220 4.8% 395 440 11.4%
Effective tax rate 11.9% 11.9%   11.3% 12.0%  
Profit after tax/ (loss) 1,553 1,623 4.5% 3,087 3,223 4.4%
Net profit margin (%) 8.1% 6.0%   8.3% 6.3%  
No. of shares (m)       724.5 724.8  
Book value per share (Rs)*         93.4  
P/BV (x)         0.7  
* (Book value as on 31st March 2008)

What has driven performance in 2QFY09?
  • IDBI Bank has managed to outperform the sector average by clocking nearly 40% YoY growth in advances in 1HFY09. However, in doing so, the bank has not paid any heed to margins and asset quality. It has indeed been particularly aggressive in growing its retail advance portfolio, which has grown at a faster clip than that in most PSU banks, albeit on a lower base.

    The fall in the proportion of CASA (current and savings account) from 31% in 1HFY08 to 21% in 1HFY09 is also very disappointing, suggesting that the bank is targeting growth at the cost of margins.

    High cost growth

    (Rs m) 1HFY08 % of total 1HFY09 % of total Change
    Advances 623,530   871,190   39.7%
    Retail 99,765 16.0% 136,777 15.7% 37.1%
    Corporate 523,765 84.0% 734,413 84.3% 40.2%
               
    Deposits 500,002   794,450   58.9%
    CASA 156,001 31.2% 166,835 21.0% 6.9%
    Tem deposits 344,001 68.8% 627,616 79.0% 82.4%
    Credit deposit ratio 124.7%   109.7%    

  • IDBI’s other income that was higher last year due to profit on sale of stake in NSE has fallen by nearly 21% YoY in 2QFY09 despite an appreciable growth in fee income. The bank’s fee income has grown by 69% YoY constituting 20% of total income in 1HFY09 from 12% in 1HFY08. This can be attributed to the bank’s extended retail operations and the life insurance venture with Federal Bank and Fortis Insurance International (in which IDBI has 48% stake).

  • After successfully reducing its net NPAs that had gone up due to UWB merger, the same have sequentially increased in the past three to four quarters to 1.3% in 1HFY09. IDBI’s provision coverage, despite rising from 35% in FY05 to 50% in FY08, lies way below that of its peers. Also, the lower provisioning booked this quarter and higher operating cost (49% in 2QFY09) signals risks for the sustenance of asset quality in future. The higher operating costs have led to IDBI lose the cost advantage due to its lean structure.

What to expect?
At the current price of Rs 67, the stock is trading at 0.5 times our estimated FY11 adjusted book value. As the capital adequacy ratio of the bank at 11.6% in 1HFY09 is inadequate to sustain the current growth rates, we see the same being unsustainable going forward. Having said that, while we are enthused by the bank’s efforts to accelerate non-fund income growth, inability to improve margins is a cause of concern.

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