The bank's financial performance gives the impression of a very run of the mill PSU enterprise
The evolution of a development bank
IDBI Bank was originally germinated as a development bank, otherwise called a development financial institution (DFI) - as opposed to a commercial bank. Christened as The Industrial Development Bank of India it was created by an act of Parliament as far back as 1964. A 100% central government owned company to boot; its primary task was in the refinancing of loans advanced to the industrial sector by other lenders. It also lent monies, but that was secondary to its main objective. Such financing involved long gestation periods and involved a distinct risk, but with no particular return profile. That was roughly the bank's exalted duty from 1964 to 2004. It was also given an income tax free status for decades, given its very noble intentions. It grew to be a colossus in what was its charter, and the perceived aura of the bank's chairman exceeded that of the chairman of the country's largest commercial bank by far, the very venerable State Bank Of India (SBI).
In 2004 it was converted into a limited company as per the provisions of the Companies Act to undertake the entire gamut of banking activities. It also lost its tax free status along the way. The bank changed its nomenclature to the present avatar in 2005 after its merger with its midget creation the IDBI Bank Ltd. Today the bank is but a pale shadow of the king maker that it once used to be. It is just another lacklustre PSU bank, period. As a government mandated bank and in the command economy that it functioned in, it laboured to refinance loans across the board and also to lend funds across the board. The point is that it takes time for a bank to make good on the many loans that it had to stand guard over in this manner. In terms of branches also the bank is a mere pidgin compared to SBI, with 815 domestic branches and an odd overseas branch or two (Dubai). For the matter of record the government currently owns 65% of the outstanding equity of Rs 9.9 bn. This is however more than matched by reserves and surplus of Rs 136 bn (including share premium reserves of Rs 46 bn). This capital base, on the face of it, appears to be grossly out of sync with the total size of its operational base. This is inspite of the fact that the government had infused additional capital to the tune of Rs 31.2 bn at a premium of Rs 110.2 per share during the year. The paid up capital however moved up more mundanely from Rs 7.2 bn previously.
A humungous operation
For sure it is still a humungous operation. (It is humungous in other respects too. The annual report runs into 212 pages of written matter and data). It has total assets of Rs 2,534 bn at year end. This comprised among other assets, investments of the value of Rs 683 bn, and advances to the tune of Rs 1,571 bn. Other assets include cash and balances with the Reserve Bank Of India (RBI), worth Rs 196 bn. The fixed assets and other assets account for the balance. On the liabilities side this was balanced by a paid up capital of Rs 9.8 bn, reserves and surplus of Rs 136 bn, and deposits & borrowings of Rs 2,321 bn. The total amount of deposits and borrowings rose by 7.7%, while its investment profile consisting of investments and advances was up 6.5%.
It boasts a medley of delightful statistical data. But first take a dekko at its operations. The bank classifies its revenue streams under three segments-wholesale banking, retail banking and treasury services. On a segmental assets basis however, the operations are divided under four heads of account. The additional classification in this schedule is that of 'Other banking operations'-whatever that is. This line appears to be some sort of a dummy activity from what one can understand. The bread and butter on revenue account are provided by wholesale banking activities. This contributed close to 63% of all revenues at Rs 192 bn. It was followed by Retail Banking with 36% at 111 bn. The rear was brought in by Treasury operations which contributed a very miniscule 1% or so. What's with treasury operations? Is it moribund, or is this the industry norm? This segmental equation is before factoring in a deduction of Rs 99 bn on account of inter-segmental revenues.
A medley of bizarre statistics
The segmental profits on the other hand have no bearing with the revenue streams. It is totally skewed in every sense of the word. Wholesale/Corporate banking brought in a slice over 82% of the segmental profit. Retail banking on the other hand was a laggard here accounting for a mere 12% of segmental profits. The big winner here is the treasury operations accounting for 5.6% of segmental profits. On a percentage return basis, corporate banking brought in a return of 9.8%, the second a meagre 2.5%, and the last mentioned a whopping return of 44.4%. This statistic now brings us to the question why there is not more traction on the treasury operations front. One may also note that wholesale banking accounted for 67% of all segmental assets. Thus for each rupee of segmental assets in wholesale banking, the bank earned a revenue stream of only Rs 0.11. In retail banking it was marginally better. The bank earned a revenue stream of Rs 0.14 for each buck of segmental assets. In treasury operations it was even more meagre. It had a revenue stream of Rs 0.07 for each rupee of segmental assets. And, apparently, 'other banking operations' does not generate any revenues or some such. Why then is a separate classification given for this line of business in the segmental assets schedule? (One may add here that these are very rough estimates based as they are on year end base figures-but it is still a pointer). None of the equations featured here add up to anything. That is to say each performance measure used gives a different return statistic.
Its operational performance
The company earned an operational income of Rs 206.8 bn against Rs 175.6 bn previously. This consisted of Interest income of Rs 186 bn and Other Income of Rs 20.8 bn. That is to say the gross income was generated in the ratio of 90% and 10%. The interest income came in the form of Interest, discounting income, income on investments, interest on balances with RBI and from an item classified as 'others'. (The total amount of assets at year end which created such interest income amounted to Rs 2,461 bn against Rs 2,261 bn previously. The interest received on a very rough basis would have amounted to an average of 7.9% on the average of the balances for the two years. (One is faced with severe limitations in calculating the percentage interest earned, or even paid out for that matter, as the balance sheet figures represent only year - end data).The other income that it ponied up has a much broader stream, inspite of significantly smaller numbers. The largest constituent in this was 'commission' which alone accounted for 71% of all other income. Other dribblings included profit on derivative exchange transactions, loss on sale of revaluation of investments, profit on sale of investments, recoveries of dues written of, dividend receipts from subsidiary companies, and miscellaneous income. (The reversal of write-offs should logically be stated below the line and not above the line - but let that be). As is fairly evident, about 25% of 'other income' consists of receipts and book entries which cannot be counted on for a repeat performance and is basically a factor of the luck of the draw. That is only one material consideration in the intriguing profit factor.
The other revelation is that the net profit for the year of Rs 16.5 bn is marginally lower than the other income of Rs 20.8 bn. That is to say extraneous income by and large was responsible for the bank recording a profit at the end of the year. (Extraneous income, by the way, does not generate any revenue expenditure). It would appear that it makes not a dime in its primary role as a borrower and lender of monies. (This seems to be the trait among the large PSU banks whose performance sheet has been analysed). Why this is so has not been explained in the directors' report.
Deposits and investments
The total deposits on hand at year end rose 7.6% during the year to Rs 1,805 bn. Demand deposits which are the most profitable deposits from the banks point of view as there is no interest charge on such deposits constituted 13.2% of all deposits against a much lower 9.3% previously. But this favourable change in fortunes does not seem to have helped matters one bit from the profitability angle. Savings bank deposits constituted another 7.7% against 5.2% previously. Totally, the low interest bearing deposits amounted to 20.9 % of all deposits against 14.6% previously. (The other caveat here is that demand deposits and savings bank deposits can be pulled out at a moment's notice, and banks therefore do not have much leeway in lending long term against such deposits). Term deposits hogged the bulk of the deposits, accounting for 79% of all deposits or Rs 1,428 bn. As the bank has made a minor foray outside India, foreign deposits made a start with receipts of Rs 4 bn.
Besides these deposits, the bank has total borrowings of Rs 515.7 bn. Such borrowings rose 8% over that of the preceding year. The largest sum by far of Rs 261 bn came from a source called 'Others'. It is as simple as that. Talk about corporate disclosures. Next in line is the issue of bonds, guaranteed or otherwise, which accounts for another Rs 161 bn. Borrowings from outside India came to Rs 86 bn. The balance amount was accounted for by borrowings from other banks. Thus the total deposits, plus borrowings, added up to Rs 2,321 bn-up from Rs 2,154 bn previously. The total interest payout for the year was Rs 142.7 bn. This payout, on an average of deposits and borrowings at year end for the two years, would have very roughly worked out to 6.4%.
Thus on a rough basis the difference in the spread between what the bank earned-7.9%and what it paid out - 6.4%would have amounted to 1.5%. The trick of course is to generate even more capital of every hue, so that even though the spread is limited, the volumes that are rolled out bring in the positive cash flow from operations. Banks per se have to put extra efforts to generate more and more capital in a very competitive market to get the better of rising costs. The employee costs of IDBI Bank for example rose sharply by 36% to Rs 10.3 bn during the year.
Its subsidiary minnows
IDBI Bank also boasts of a few measly sidekicks in the form of subsidiaries and one joint venture. The four subsidiaries currently extant are IDBI Intech, IDBI Capital Market Services, IDBI Assets Management Company and IDBI MF Trustee Company. (The latter two were incorporated in 2010 and their financials pertain to the first working results. Both these ventures appear to be very late entrants in the copy cat game, but let that be). Two other wholly owned subsidiaries were merged with the parent during the year. The sole joint venture is IDBI Federal Life Insurance Company Ltd, in which it has a 48% holding, amounting to Rs 3.4 bn. Of the four only one company has negative reserves. IDBI Asset Management Company on a capital base of Rs 500 m and had negative reserves of Rs 265 m. Only two of the four paid out any dividend, but the less said about the dividend payouts, the better. The largest of the four in revenue generation terms was IDBI Intech, the software sibling, which on a turnover of Rs 1.4 bn scraped through with a pre-tax bottom-line of Rs 70 m. (Why IDBI is dabbling in software is not very clear). Next in line is IDBI Capital Market Services which on a turnover of Rs 631 m ponied up a pre-tax profit of Rs 56 m. The asset management company will take time to get on the road. On revenues of Rs 35 m it was in awash in a sea of red ink to the tune of Rs 233 m. These four siblings companies are small entities in the overall scheme of things, and may continue to be so for eons to come.
That leaves us with the insurance JV. It will take some time for this new venture to come on even keel too. This venture too is a new entrant to the business of insurance and will take quite some doing to get off the ground. The banks interest in the income and profit of the venture shows that it boasted a total income of Rs 71 m, while ratting up a loss of Rs 585 m.
All in all it is a very uninspiring performance at the end of the day.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.