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IDBI Bank 2QFY11: Strong core performance; Growth moderates QoQ; Asset quality improves; Neutral
IDBI Bank's (IDBI IN, Mkt Cap US$4b, CMP Rs180, Neutral) 2QFY11 PAT grew 69% YoY and 71% QoQ led by NII growth of 152% YoY and 37% QoQ. IDBI’s core operating performance has been consistently improving. Asset quality improved with GNPA down 6% QoQ and 34% YoY. Restructured accounts are ~7.2% of loan book.
Key highlights
- NII grew by 152% YoY and 37% QoQ as margins improved substantially by 122bp YoY and 63 bp QoQ to 2.27%.
- Loan book grew 24% YoY (but declined 4% QoQ).
- Fee income (including forex) grew ~18% YoY to Rs.4.8b. Total non-interest income declined 14% YoY due to lower treasury gains.
- During the quarter, bank received capital infusion from government by way of preferential equity of Rs31.2b.
- CASA ratio improved 230bp QoQ (up 50bp YoY) to 15.3%. Savings deposits grew 54% YoY and 6% QoQ.
- GNPA in absolute amount decreased 6.4% to Rs24.7b. Improvement in asset quality is a positive surprise considering industry trend of higher net additions to GNPAs. PCR (Cal) declined to 37.3% v/s 39.2% in 1QFY11. Including technical write-offs, provision coverage stood at 74.5%.
- Restructuring of balance sheet and slower growth augurs well for IDBI Bank. The structural transformation from DFI to a profitable bank has picked up momentum in recent years.
- We expect the bank to report FY10-12E NII CAGR of 54% and PAT CAGR of 36%. We expect RoA to improve to 0.7% by FY12E and RoE to 14-15% despite recent equity infusion by government.
- The stock trades at 1.1x FY12E BV and 7.8x FY12E EPS. Maintain Neutral.
Business growth
- Loan book grew 24% YoY but declined 4% QoQ. Subdued industry growth trend and IDBI’s focus to consolidate business growth led to sequential drop in loan book.
- Deposits were up 18% YoY but down 2% QoQ. CASA ratio improved by 230 bp QoQ (up 50bp YoY) to 15.3%. Savings deposits grew 54% YoY and 6% QoQ. It expects to improve CASA ratio to 17% by FY11 and 20%+ by FY12 by (1) waiver of minimum balance and service charges for savings deposits (2) leveraging on its large corporate and SME relationships and (3) better contribution from new branches.
- On the lending side, it targets to grow high yielding retail and SME segments and reduce its exposure towards bulk business.
Strong margin expansion YoY and QoQ
- NIM for 2QFY11 improved to 2.27% (v/s 1.05% in 2QFY10 and 1.64% in 1QFY11) driven by repricing of high cost deposits and improvement in yield on loans.
- With base rate implementation, low yielding loans are either being repaid or re-priced at higher rate leading to higher yields on earning assets by 64bp QoQ to 9.3%.
- Going forward, with focus on CASA deposits and lending to high yielding segments, NIMs are expected to remain strong. Deployment of funds received via capital raising will also aid margin improvement in FY11.
Steady growth in fee income
- Non interest income declined by 14% YoY due to lower contribution from treasury gains (Rs200m vs Rs1.7b in 2QFY10).
- Fee income (including forex) increased by 18% YoY to Rs4.4b.
- Recoveries from written off accounts was at Rs190m vs 300m in 1QFY11 and Rs270m in 2QFY10.
- Led by upward revision of rates on some fee generating streams (to bring it in sync with the industry standard) and leveraging strong corporate relationship, IDBI Bank posted robust fee income growth. Management is guiding for fee income growth of 20% for FY11.
Core CI ratio at 39% vs 46% in 2QFY10
- Operating expenses grew 59% YoY to Rs6.3b, employee expenses were up 99% YoY. We don’t have the exact data as regards provisions towards gratuity and pension, but management had earlier guided for liability of ~Rs1b towards gratuity and ~Rs1.2b towards pension.
- Core cost to income ratio declined to 39% in 2QFY11 vs 46% in 2QFY10, but was up compared to 37% for 1QFY11.
Asset quality improved; but restructured book still high at ~7% of total book
- GNPA in absolute amount declined 6% QoQ to Rs25b.
- Provision coverage ratio at the end of 2QFY11 was 37% vs 39% in 1QFY11. Including technical write-off provision coverage was higher at 74.5%.
- Gross NPA ratio declined to 1.9% (drop of 6bp QoQ) despite sequential drop in loan book. Net NPA ratio was stable at 1.2%.
- Outstanding restructured book at the end of 2QFY11 stood at Rs93.6b (still high at 7.2% of loan book).
- In FY11, management expects slippages to remain high (emanating largely from agri and SME loans), but with focus on recoveries and loan book growth, it expects to contain GNPA under ~1.9%.
Valuation and view
- Restructuring of balance sheet and slower growth augurs well for IDBI Bank. The transformation from DFI to profitable bank has picked up momentum in recent years.
- We expect IDBI to report FY10-12 NII CAGR of 54% and PAT CAGR of 36%. RoA will improve to 0.7% by FY12 and RoE to 14-15% despite recent equity dilution.
- IDBI Bank also has few strategic investments which we value at Rs28 per share; adjusted for this, stock would be trading at 1x FY12 BV. Maintain Neutral.
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