• JULY 31, 2002

IDBI Bank: Capital concerns

IDBI Bank has reported a steep decline in firs quarter profits due to higher operating costs and a decline in fee based income. The bank's net interest income however, grew at a strong rate of 56% backed by improvement in core interest income and reduction in average cost of funds. IDBI Bank's cost of deposits declined to 6.4%, which is one of the lowest in the banking sector.

(Rs m)1QFY021QFY03Change
Income from operations 1,195 1,415 18.4%
Other Income 449 314 -30.0%
Interest expense 908 968 6.6%
Net interest income 287 447 55.7%
Other expenses 272 447 64.1%
Operating Profit 15 - -
Operating Profit Margin (%)1.2%0.0% 
Provisions and contingencies 160 138-13.9%
Profit before Tax 303 176 -41.9%
Tax 121 65 -46.4%
Profit after Tax/(Loss) 182 111-38.9%
Net profit margin (%)15.3%7.9% 
No. of Shares (m) 140.0 140.0  
Diluted Earnings per share*5.23.2 
P/E Ratio 8.2 

The bank's fee based income declined by 30% due to a 68% fall in money market income (trading gains from investments in G-Sec). Non-trading fee income however, increased at a strong rate of 56%. The contribution of non-interest income to total income is likely to decline to 20% in FY03 from 24% in FY02.

Interest income break-up
(Rs m)1QFY021QFY03Change
Interest on advances 523 817 56.3%
Income on investments 629 540 -14.1%
Interest on bal with RBI 41 32 -23.5%
Others 1 26 1735.7%
Total 1,195 1,415 18.4%

Its cost to income ratio jumped to 59% in June quarter (54% in FY02) due to lower other income and higher operating expenses. IDBI Bank's network expansion drive has lead to a sharp rise in this ratio. The bank is now operating in 63 cities with 84 branches and 247 ATMs. It has over 60% of its network across Tier - II cities, which on an incremental basis contributed 75% of savings deposits. The bank aims to focus on these cities (with less competition from other private sector banks) as part of its retail strategy to increase its revenue base. During the quarter, the bank acquired 0.1 m customers taking the total to 0.6 m. Its proactive initiatives led to retail deposits accounting for 56% of total deposits and low cost funds contributed 24% of total deposits.

The bank's asset growth in the June quarter was constrained by its low capital adequacy ratio (9% as June 2002). Its total assets grew by only 2.5% from March 31, 2002 to Rs 68 bn as on June 30, 2002. IDBI Bank continued its aggressive foray into the home loan market, which pushed up its retail assets by 185%. Home loans grew by YoY 250%, accounting for 67% of total retail assets (retail assets accounts for 12% of the bank's total loan assets). A YoY 35% growth in corporate loans was also healthy, considering capital constraints. The banks' overall advances increased by 46%, YoY.

At the current market price of Rs 26, IDBI Bank is trading at a P/E of 8x 1QFY03 annualised earnings and adjusted price to book value ratio of 1.7x (based on book value for FY02). The bank's valuations are hit by its delay in capital raising program. Once this is finalised, stock could get some direction based on its expected growth plans and business strategies.

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