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IDBI Bank: Margins in good times - Views on News from Equitymaster
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IDBI Bank: Margins in good times
Nov 18, 2010

IDBI Bank declared its 2QFY11 results. The bank has reported 152% YoY and 69% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows by 24% YoY in 1HFY11, on the back of 24% YoY growth in advances.
  • Capital adequacy ratio at 14.2% at the end of September 2010 with the government’s capital infusion to the tune of Rs 31 bn.
  • Net interest margins higher at 2.3% from 1.1% in 1HFY10; CASA proportion higher at 15%.
  • Net NPA to advances stable at 1.2% in 1HFY11, as was the case in 1HFY10.
  • Cost to income ratio moves up from 34% in 1HFY10 to 38% in 1HFY11.
  • Despite fall in other income and higher tax incidence net profits grow by 60% YoY in 1HFY11.

Standalone numbers
Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income 37,122 45,773 23.3% 71,735 88,662 23.6%
Interest expense 32,480 34,092 5.0% 63,949 68,470 7.1%
Net Interest Income 4,642 11,681 151.6% 7,786 20,192 159.3%
Net interest margin (%)       1.1% 2.3%  
Other Income 5,706 4,921 -13.8% 13,281 9,583 -27.8%
Other Expense 3,981 6,345 59.4% 7,140 11,207 57.0%
Provisions and contingencies 3,329 4,415 32.6% 8,932 9,433 5.6%
Profit before tax 3,038 5,842 92.3% 4,995 9,135 82.9%
Tax 500 1,550 210.0% 740 2,335 215.5%
Effective tax rate 16.5% 26.5%   14.8% 25.6%  
Profit after tax/ (loss) 2,538 4,292 69.1% 4,255 6,800 59.8%
Net profit margin (%) 6.8% 9.4%   5.9% 7.7%  
No. of shares (m)         984.0  
Book value per share (Rs)*         141.7  
P/BV (x)         1.3  
* (Book value as on 30th September 2010)

What has driven performance in 2QFY11?
  • Armed with higher capital adequacy after the infusion of funds by the government, IDBI Bank has managed to outperform the sector average by clocking 24% YoY growth in advances in 1HFY11. Further, in doing so, the bank has paid heed to margins which have improved significantly over the past 12 months, albeit on a very low base. IDBI has indeed been particularly aggressive in growing its retail and SME advance portfolios, which have grown at a faster clip than that in most PSU banks, although on a lower base.

    The rise in the proportion of CASA (current and savings account) to around 15% coupled with upward re-pricing of assets has facilitated the improvement in NIMs for the bank. The advance growth and NIMs have come in marginally higher than our estimates.

    Leveraging SME support
    (Rs m) 1HFY10 % of total 1HFY11 % of total Change
    Advances 1,049,930   1,302,130   24.0%
    Retail 147,650 14.1% 213,780 16.4% 44.8%
    Corporate 809,290 77.1% 894,350 68.7% 10.5%
    SME 57,540 5.5% 116,320 8.9% 102.2%
    Deposits 1,306,770   1,543,050   18.1%
    CASA 192,879 14.8% 235,469 15.3% 22.1%
    Tem deposits 1,113,891 85.2% 1,307,581 84.7% 17.4%
    Credit deposit ratio 80.3%   84.4%    

  • IDBI’s other income fell by 28 in 1HFY11 due to lower treasury gains, bringing the non- interest income to 35% of total income in 1HFY11 from 60% in 1HFY10. The proportion of fees to total income, however, remained at 29%. 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).

  • Our biggest concern for IDBI Bank so far had been its poor provisioning policy. The same has now been addressed and will be benign to the bank’s performance at a time when its margins are on an upward trend. IDBI Bank’s net NPAs have remained at 1.2% in 1HFY11. The bank’s provision coverage, has however, gone up from 40% in FY09 to 74% in 1HFY11. This makes it compliant with RBI’s mandate of 70% coverage by 1HFY11. Going forward this will reduce the provisioning requirement of the bank and fetch it the cost advantage due to its lean structure.

  • IDBI’s cost to income ratio has gone up to 38% in 1HFY11 from 34% in 1HFY10, However, the bank still has the potential to leverage its lean cost structure and improve its provisioning policy as well as grow its asset base.

What to expect?
At the current price of Rs 187, the stock is trading at 1.2 times our estimated FY13 adjusted book value (ResearchPro subscribers can view latest updates here). The improved capital adequacy ratio of the bank at 14% in 1HFY11 is reasonably adequate to sustain the current growth rates in the medium term. We are enthused by the bank’s efforts to accelerate non-fund income growth and sustained asset re-pricing ability. We reiterate our long term positive outlook on the bank.

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