Please refer to important disclosures at the end of this report 1 Particulars ( ` cr) 1QFY14 4QFY13 % chg (qoq) 1QFY13 % chg (yoy) NII 1,475 1,440 2.4 1271 16.1 Pre-prov. profit 1,317 1,594 (17.4) 1132 16.3 PAT 307 554 (44.6) 427 (28.2) Sou rce: Comp any, Ang el Research IDBI Bank delivered a weak set of numbers for 1QFY2014, dragged by asset quality challenges. While the NII grew by 16.1% yoy, non-interest income grew by37.9% yoy, leading to operating income and pre-provisioning profit growth of 22.4% and 16.3% yoy, respectively. The bank witnessed sequential asset qualitydeterioration, as its absolute Gross NPA levels increased by 23.4% sequentially, on an already large base. The bank increased provisioning by 62.7% yoy, which resulted in 28.2% yoy earnings de-growth. NIM declines qoq; Slippages spike to 3.4%: During the quarter, the bank’s loan book grew at a subdued pace of 7.1% yoy (declined by 8.8% qoq). Going forward, the Management has guided for advances growth of ~10-12% for FY2014, with primary focus on increasing PSL share in the overall loan book. Savings deposits grew by 25.8% yoy, while current deposits declined by 8.6% yoy. CASA deposits grew by 8.9% yoy, which considering a decline of 4.4% yoy in overall deposits (due to shedding of bulk deposits), aided a 251bp yoyimprovement in CASA ratio to 20.6% (454bp lower sequentially on back of 53.2% qoq de-growth in volatile current deposits). NIMs declined by 7bp qoq to 2.12%, as 37bp qoq decline in cost of funds was more than offset by 63bp sequential fall in yield on assets. Aided by strong growth in income from the forex/derivatives segment (which more than trebled on a yoy basis), the non-interest income (excluding treasury) grew by 21.1% yoy. The bank faced asset quality pressures, as slippages ballooned to `1,685cr, as compared to `907cr in 4QFY2013. Of the slippages during the quarter, `663cr came from 4-5 chunky accounts. Annualized slippage ratio spiked to 3.4%, as against 2.0% in 4QFY2013. Recoveries/upgrades during the quarter came in lower sequentially at `174cr compared to `486cr in 4QFY2013. PCR (incl. technical write-offs) came off by286bp qoq to 68.0%. During the quarter, the bank restructured advances worth ~ `650cr. Going forward, the Management guided that a textile exposure could slip into NPA category in the next few quarters, while the restructuring pipeline for the bank stands at ~ `500cr. Outlook and valuation: At the CMP, the bank is trading at a valuation of 0.4x FY2015E P/ABV, (0.5x adjusting for the SASF). Considering the recent macro- economic developments, the pace of asset quality improvement is likely to be much slower than earlier anticipated. Hence, we recommend a Neutral rating on the stock. Key financials (standalone)Y/E March ( ` cr) FY2012 FY2013 FY2014E FY2015E NII 4,545 5,373 6,321 7,158 % chg 6.5 18.2 17.6 13.2 Net Profit 2,032 1,882 2,065 2,945 % chg 23.1 -7.4 9.7 42.6 NIM (%) 1.7 1.8 1.9 2.0 EPS ( ` ) 15.9 14.1 15.5 22.1 P/E (x) 4.4 4.9 4.5 3.2 P/ABV (x) # 0.5 0.5 0.5 0.4 RoA (%) 0.7 0.6 0.6 0.8 RoE (%) 13.4 10.2 10.2 13.3 Source: Compa ny, Angel Research; Note: # without adjusting for SASF NEUTRAL CMP `70 Target Price -Investment Period - Stock Info Sector Bloomberg Code Shareholding Pattern (%) Promoters 71.7 MF / Banks / Indian Fls 13.6 FII / NRIs / OCBs 3.8 Indian Public / Others 10.8 Abs. (%) 3m 1yr 3yr Sensex 6.0 16.6 12.4 IDBI Bank (19.0) (25.5) (43.1) Banking Market Cap ( `cr) 9,309 Beta 1.2 52 Week High / Low 118/66 Avg. D aily Volume 237,831 Face Value ( `) 10 BSE Sensex 20,150 Nifty 6,029 Reuters Code IDBI.BO IDBI@IN Vaibhav Agrawal 022 – 3935 7800 Ext: 6808 [email protected]Sourabh Taparia 022 – 3935 7800 Ext: 6872 [email protected]Harshal Patkar 022 – 3935 7800 Ext: 6847 [email protected]IDBI Bank Performance Highlights 1QFY2014 Result Update | Banking July 19, 2013
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IDBI Bank delivered a weak set of numbers for 1QFY2014, dragged by assetquality challenges. While the NII grew by 16.1% yoy, non-interest income grew by 37.9% yoy, leading to operating income and pre-provisioning profit growth of22.4% and 16.3% yoy, respectively. The bank witnessed sequential asset quality deterioration, as its absolute Gross NPA levels increased by 23.4% sequentially,
on an already large base. The bank increased provisioning by 62.7% yoy, whichresulted in 28.2% yoy earnings de-growth.
NIM declines qoq; Slippages spike to 3.4%: During the quarter, the bank’s loanbook grew at a subdued pace of 7.1% yoy (declined by 8.8% qoq). Goingforward, the Management has guided for advances growth of ~10-12% forFY2014, with primary focus on increasing PSL share in the overall loan book.Savings deposits grew by 25.8% yoy, while current deposits declined by 8.6% yoy.CASA deposits grew by 8.9% yoy, which considering a decline of 4.4% yoy inoverall deposits (due to shedding of bulk deposits), aided a 251bp yoy improvement in CASA ratio to 20.6% (454bp lower sequentially on back of 53.2%qoq de-growth in volatile current deposits). NIMs declined by 7bp qoq to 2.12%,as 37bp qoq decline in cost of funds was more than offset by 63bp sequential fall
in yield on assets. Aided by strong growth in income from the forex/derivativessegment (which more than trebled on a yoy basis), the non-interest income(excluding treasury) grew by 21.1% yoy. The bank faced asset quality pressures,as slippages ballooned to ` 1,685cr, as compared to ` 907cr in 4QFY2013. Ofthe slippages during the quarter, ` 663cr came from 4-5 chunky accounts. Annualized slippage ratio spiked to 3.4%, as against 2.0% in 4QFY2013.Recoveries/upgrades during the quarter came in lower sequentially at ` 174crcompared to ` 486cr in 4QFY2013. PCR (incl. technical write-offs) came off by 286bp qoq to 68.0%. During the quarter, the bank restructured advances worth~ ` 650cr. Going forward, the Management guided that a textile exposure couldslip into NPA category in the next few quarters, while the restructuring pipeline forthe bank stands at ~ ` 500cr.
Outlook and valuation: At the CMP, the bank is trading at a valuation of 0.4x
FY2015E P/ABV, (0.5x adjusting for the SASF). Considering the recent macro-economic developments, the pace of asset quality improvement is likely to bemuch slower than earlier anticipated. Hence, we recommend a Neutral rating onthe stock.
Key financials (standalone)
Y/E March (` cr) FY2012 FY2013 FY2014E FY2015E
NII 4,545 5,373 6,321 7,158
% chg 6.5 18.2 17.6 13.2
Net Profit 2,032 1,882 2,065 2,945
% chg 23.1 -7.4 9.7 42.6
NIM (%) 1.7 1.8 1.9 2.0
EPS (`) 15.9 14.1 15.5 22.1
P/E (x) 4.4 4.9 4.5 3.2
P/ABV (x) # 0.5 0.5 0.5 0.4
RoA (%) 0.7 0.6 0.6 0.8
RoE (%) 13.4 10.2 10.2 13.3
Source: Company, Angel Research; Note: # without adjusting for SASF
Other inc excl. treasury 573 1,005 (43.0) 473 21.1
Source: Company, Angel Research
Asset quality faces pressure; Slippages spiked to 3.4% in
1QFY2014
On the asset quality front, the bank faced pressure as slippages for the quarterballooned to ` 1,685cr, as compared to ` 907cr in 4QFY2013 and ` 1,043cr
witnessed in 1QFY2013. Of the slippages during the quarter, ` 663cr came from
4-5 chunky accounts, the highest of which was ` 300cr coming from a textile sector
account. The Annualized slippage ratio spiked to 3.4%, as compared to 2.0% in
4QFY2013 and 2.3% in 1QFY2013. Recoveries/upgrades during the quarter
came in lower at ` 174cr compared to ` 486cr in 4QFY2013 and ` 93cr in
1QFY2013. On an absolute basis, Gross and Net NPA levels increased by
23.4% and 24.9% qoq, respectively. The PCR (including technical write-offs)
for the bank came off by 286bp qoq to 68.0%.
During the quarter, the bank restructured advances worth ~ ` 650cr. As of1QFY2014, the restructured book of the bank stood at ` 14,251cr, out of
which ` 11,987cr are standard restructured advances. Going forward, the
Management guided that a textile exposure could slip into NPA category in the
next few quarters, while the restructuring pipeline for the bank stands at
around ` 500cr.
Exhibit 9: NPA ratios increase sharply qoq...
Source: Company, Angel Research
Exhibit 10: ...as slippages spiked to 3.4% in 1QFY2014
Merger with Stock Holding Corporation of India (SHCIL) on hold IDBI Bank had sought approval from the finance ministry to merge SHCIL (one of
the largest custodians of securities and a leading depository participant) with itself.
SHCIL’s current major shareholding includes IDBI (19% holding), IFCI (34%), GIC
(17%) and LIC (15%). As per media reports, the finance ministry is of the view that
IDBI Bank does not have enough capital/retained earnings to effect the merger on
its own and the ministry isn’t comfortable with the share swap arrangement (that
the bank had proposed) as that would effectively result in a dilution of Government
shareholding. Meanwhile, IFCI (which has the largest shareholding in SHCIL) is
also learnt to have opposed the merger.
If at all the merger gets through, it is likely to be a share swap deal, which would
be based on valuation of both. SHCIL is an unlisted company, but in the past one
year there was a stake sale in the company (by ICICI Bank to IFCI), which was
priced at ` 818 per share, thereby valuing the company at 3.8x FY2012 BV. IDBI
bank currently trades at 0.4x FY2015 ABV. If the swap ratio is priced using the last
reported/traded valuations mentioned above, it would significantly dilute the book
and earnings for the existing shareholders.
The merger will augment the branch network of the bank by 23% with an addition
of 227 branches (assuming RBI sanctions conversion of SHCIL branches into
bank’s branches). The retail client base would increase by 10%, with an addition of~8lakh customers, to whom the bank can cross sell. However, the extent of benefit
that the bank can reap out of higher branches/customers cannot be ascertained
(considering lack of clarity regarding the profile of these branches/customers).
Investment Arguments
Strong branch expansion and relatively healthy fee income
IDBI Bank enjoys the advantage of a modern, 100% CBS branch network, which is
growing organically at a much faster rate than other PSU banks (17–18% CAGR
post the FY2007 UWB acquisition). While the present 1,111 branches are
predominantly urban-concentrated (~66%), the bank intends to increase its
presence in semi-urban areas going forward. Steady branch expansion plans of
the Management, in our view, should continue to increase the contribution of retail
deposits in the bank’s funding mix and drive strong CASA market share gains. The
bank’s CASA deposits posted a 31.5% CAGR over FY2007–13, and we have
factored in a 15.7% CAGR over FY2013-15E.Relative to other PSU banks, on account of the bank’s strong corporate
relationships and government mandates, the bank’s fee income at 0.9% is also
reasonably healthy (though going forward, in light of the bank’s move to waive off
charges for retail depositors to attract CASA deposits as well as slower balance
sheet growth and consistent with Management’s guidance, we expect the bank’s
fee income as a proportion of average assets to moderate to 0.8%).
RoA enjoying structural tailwinds, but cyclical headwinds
Historically, IDBI Bank has witnessed the lowest NIM in the industry, majorly on
account of high cost of funding due to the liability mix heavily skewed towards bulkdeposits. Also, since the bank relied heavily on corporate lending to increase its
loan book, yields on assets on an average have been lower than peers. In wake of
lower NIMs, the bank has indicated a strategy of lower advances growth (~10-
12% for FY2014) than the system to concentrate on the increasing percentage of
low-cost CASA deposits and to consciously shift focus from large corporate lending
to retail and MSME lending to bring in higher-yielding loans.
SASF – A burden on the bank’s books
Due to the erstwhile DFI structure being challenged by a number of asset-quality
issues, IDBI Bank at the time of the merger had to set up a stressed assetstabilization fund (SASF) to quarantine defaulted assets. The transfer value of the
SASF was ~ ` 9,000cr, through which the bank has witnessed only ~ ` 3,800cr
worth of cash recoveries (as of FY2012). The possibility of an entire recovery seems
implausible and would lead to full provisioning expenses towards the amount that
remains unrecoverable. The SASF with an outstanding value of ~ ` 5,200cr also
remains a burden on the bank’s investment books due to its special nature of zero
interest securities. Accordingly, we have adjusted 75% of the value of the SASF
against the bank’s net worth to arrive at ABV estimates for valuing the bank.
At the same time, the bank has material stakes in several financial institutions,
including NSE, CARE, NSDL and ARCIL, apart from subsidiaries such as IDBIFederal Life, and the market value of all these investments is estimated to be about
` 2,000cr more than the bank’s investment cost (about ` 15/share, post 25%
holding company discount). Monetization of these investments could partially help
in compensating the decline in the bank’s net worth on account of legacy NPAs,
providing an upside to our estimates.
Outlook and valuation
The bank has been among the fastest-growing banks in terms of CASA deposits
over the past few years (CAGR of ~32% over FY2007-13) even when compared to
private banks and now has a market share of 2.5% (as of FY2013).
At the CMP, the bank is trading at a valuation of 0.4x FY2015E P/ABV, (0.5x
adjusting for the SASF). Considering the recent macro-economic developments, the
IDBI Bank is the sixth largest PSU bank in India, with a branch network of ~1,100branches and a balance sheet size of over ` 2.8lakh cr. IDBI was incorporated in
1964 as a development financial institution; but in October 2004, it was
transformed into a banking company with the reverse merger of IDBI and its
subsidiary IDBI Bank. The bank now offers an array of wholesale and retail
banking products, apart from providing long-term finance for industrial
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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Disclosure of Interest Statement IDBI Bank
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
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