Motilal Oswal: IDBI BANK: Management Meet update

IDBI BANK: Management Meet update: Consolidation to improve balance sheet profile and profitability; Neutral

We met with the management of IDBI Bank (IDBI IN, Mkt Cap US$3.5b, CMP Rs162, Neutral) to get an update on the business growth, asset quality and profitability outlook. The focus is to grow inline with industry and improve core operating profitability. IDBI Bank targets to improve margins to 2.2% by FY12 and achieve ROA of 1% (from 0.5% in FY10) in next 2-2.5 years. Key highlights:

-          Over next two years, focus will be on restructuring balance sheet by improving share of high yielding retail and SME loans on asset side and higher share of CASA and retail term deposits on liability side.

-          It is targeting CASA ratio of 20% in next 2 years (from 13% reported in 1QFY11) and NIMs of 2.2% (from 1.64% in 1QFY11).

-          After strong fee income CAGR of 67% over FY08-10, expects fee income to grow inline with the loan growth

-          Asset quality will under pressure on account of higher slippages for next couple of quarters, but GNPA is expected to be contained below 2% for FY11.

Consolidating Growth to improve balance sheet profile

-          IDBI has always had a higher proportion of borrowings in its liabilities than its peers due its earlier role as a DFI. Post merger, the bank had replaced borrowings with bulk deposits, which also kept margins lower. Currently of the total deposits 55% are bulk deposits. This will reduce as the focus is on CASA and retail deposits.

-          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.

-          Bank is in process of merging IDBI Home finance with itself and post merger, IDBI Home Finance branches would be converted as hubs to garner retail business.