IDBI Bank: Stellar performance -- Alchemy

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Stellar performance
IDBI Bank’s stellar performance for Q2FY11 was driven by a) improvement in
margins led by improvement in earnings yields, b) continued growth in fee
income and c) lower provisions led by stable asset quality, The business growth
declined by 4.1% for Q2FY11 as management consciously runs off low margin
business. The margins posted a positive surprise at 2.27%, up 30bps QoQ, aided
by sharp improvement in yields on advances by 100bps QoQ to 10.2% and
decline in cost of funds by ~8bps QoQ to 6.65%. Operating performance was
muted on account of one time provisions. The net performance was muted on
account of a) high employee related expenses, b) relatively higher provisions
and rising tax payout. Led by strong core performance and renewed
management focus on margins we raise our FY11E and FY12E earnings by 23%
and 26% respectively. We maintain our BUY rating with target price of `216.


Being selective on business: NIM surprised up
The business growth for IDBI Bank declined by 4.1% for Q2FY11. The loan growth stood
at 24% YoY but declined by 4% QoQ to `1.3trn. The calculated yield on advances has
improved by 100bps QoQ to 10.22%, amongst sharpest movement in industry. The
deposit growth stood at 19% YoY, but declined by 3% QoQ to `1.3trn. The CASA
deposits have expanded by 15% QoQ to `235bn and the proportion of the CASA
deposits have risen impressively by 230bps QoQ to 15.3%. The cost of funds has
remained stable QoQ to 6.65%. Led by the improvement in yields and slower business
growth the reported NIM surprised up at 2.27%. We estimate the average NIM for
FY11E to be at 1.75% and 1.8% for FY12E.

Fee income on strong footing: high employee expenses mutes net performance
Despite muted originations the fee income at `3.9bn expanded by 14% YoY and 24%
QoQ. The recent launch of schemes forgoing most of the charges on the savings and
current account would marginally impact the fee income in near future, but will aid the
bank’s liability mix. Operating expenses were higher by 30% QoQ, on account of wage
hike and ~`900mn of employee related provisions, leading us to build a higher operating
cost by 7% for FY11E, from earlier estimates.

Asset quality improves
Posts write off of `3bn, the gross NPA declined by 6.4% QoQ to 1.9% of advances. The
NPA related provisions are lower at 0.25% of the advances. The NPA coverage is at 37%
and accounting for AUCA is at 74%. The incremental slippage is at 1% of the advances
and the restructured loans are lower by `500mn QoQ due to upgradations.