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IDBI Bank: Well-defined growth trajectory - Views on News from Equitymaster
 
 
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  • Dec 8, 2004

    IDBI Bank: Well-defined growth trajectory

    Known for optimizing its retail franchise as a bulwark for high quality growth, IDBI Bank is now poised to embark on an aggressive expansion path. Besides expanding its retail network across 15 new cities, the bank is envisaging two strategic business units, post its merger with IDBI. While one SBU (erstwhile IDBI) will focus on development finance (corporate banking), the other SBU (the current IDBI Bank folio) will cater to commercial banking needs, the stress being on retail.

    Through its conservative provisioning norms and focus on low cost deposits (low cost deposits as a percentage of total deposits was 43.3% in FY04, as against 34.9% in FY03), the bank has sketched an enviable growth route over the past few years. With a combination of clean portfolio of advances and a well spread branch network, the bank has achieved a CAGR of 33% on its Net Interest Income (NII) over the last 5 years.

    The spurt in the number of primary market issues in the last few years has also contributed to the bank’s profitability. It has become one of the largest collecting bankers to IPOs and made significant strides in IPO Finance.

    The impending merger with parent company IDBI raises several issues regarding IDBI Bank’s operational efficiency and valuations. A look at the bank’s performance across various parameters over the last 5 years answers this and more…

      FY01 FY02 FY03 FY04 FY05E
    Mkt. Price (Rs) (as on Dec 1) 22.8 18.4 25.0 32.7 47.6
    P/E (x) 16.3 5.0 4.9 5.2 4.9
    P/ Adj BV (x) 1.8 1.1 1.2 1.2 1.4
    ROA 0.4% 0.9% 0.8% 1.3% 1.4%
    Credit / Deposit Ratio 49.1% 59.2% 71.7% 73.6% 79.9%
    NPA to advances 5.2% 2.2% 1.2% 0.8% 0.1%
    Business/employee (Rs m) 68.0 69.0 71.3 108.0 134.3
    Business / branch (Rs m) 992.2 1,111.2 1,035.7 1,517.1 1,704.4
    Profits/employee (Rs m) 0.3 0.4 0.5 0.8 1.1
    NIM 2.3% 2.7% 3.0% 3.3% 3.1%
    Div. Yield 2.8% 3.3% 4.5% 2.8% 2.4%

    Source: Annual reports

    The bank has achieved a commendable feat of augmenting its Credit - Deposit ratio (Advances/ Deposits) at a CAGR of 10% over the last 5 years, at the same time bringing its Net NPA /Advance ratio close to that of industry benchmarks like HDFC Bank. This can be attributed to the bank’s rigorous assessment of asset quality and appropriate provisioning for the same.

    Given the fact that the proposed merger will be beneficial to both the entities (IDBI will have access to low cost deposits and retail network, and the combined entity will now claim to be the 2nd largest bank replacing ICICI Bank), what remains to be seen is the all decisive “merger ratio”.

    At the current price of Rs 52, IDBI Bank is trading at a price to book value of 1.6 times its FY05 expected numbers, while at a price of Rs 97, IDBI is trading at a price to book value of 0.8 times its FY05 expected numbers. While it is difficult to pinpoint on the merger ratio between the two, the facts in the table given below, are indicating that the merger ratio may be in favour of IDBI.

    A comparitive study...
    (Rs bn) IDBI IDBI Bank
    Advances 451.1 74.0
    Investments 98.8 39.1
    Deposits 49.8 100.5
    Net NPA to advances 2.5% 0.1%
    No. of branches 101 92
    ATMs NA 298
    No. of employees 1,400 1,700
    No. of shares outstd. 652.8 214.2
    Stake held by IDBI in IDBI Bank 56.2% -
    No. of shares held by IDBI in IDBI Bank 120.4 -
    *Figures pertain to FY04. For IDBI the numbers are reasonable estimates for 18 month period ending September 2004

    Let’s also not forget the fact that IDBI Bank is a 56% subsidiary of IDBI. But please note, that this is just a direction and the ultimate result may differ than the actual.

     

     

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