IDBI -Return ratios remain poor : Macquarie

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IDBI
Return ratios remain poor
Event
􀂃 IDBI reported 2Q11 net profit of Rs4.3bn, up 69% YoY and 46% ahead of our
estimate, the surprise mainly being driven by higher margins. Management
held an analyst meeting where they signalled their intention to improve the
poor operating metrics of the bank on a sustainable basis.
􀂃 Retain Underperform. We believe that while the initial incremental
improvements may be easier to achieve, the task to bring return ratios on par
with peers is likely to be a long winded one. We believe valuations have run
ahead of fundamentals for the stock and while we increase our earnings and
TP to Rs155 from Rs105, we retain our Underperform on the stock.
Impact
􀂃 Loan book continues to shrink. After growing at 34% in FY10, the bank
under new CMD has signalled a more measured approach. Accordingly, its
loan book has declined 6% in 1H over FY10, growing 24% YoY. While this
would help in improving margins, it should also negatively impact fees.
Management is looking for 18–20% loan growth in FY11E, which would mean
a significant acceleration in 2H11.
􀂃 Current NIMs not sustainable. NIMs for the quarter were 2.27%, up 53bp
QoQ and much higher than our expectation. This has been achieved through
1) retirement of higher cost deposits, 2) increase in the lending rates,
3) availability of free equity from government, and 4) shrinking the loan book.
Going forward, the bulk of the resources to fund the accelerated loan growth
in 2H11 would have to come from term deposits and borrowings, pushing up
the cost. CASA still remains poor at 15% and while this should go up under
the more focused approach of management, it is likely to be a slow and
sedate increase.
􀂃 However, we do expect the bank to sustain ~1.5-1.6% NIM (vs 1% NIM
earlier) on the back of its focus on retail and SME lending and improvement in
CASA. Accordingly we have increased our NIM estimates.
􀂃 High provisioning. Credit costs continue to be high at 1% of loans. The bank
had Rs4bn of writeoffs this quarter, signalling continued asset quality issues.
Earnings and target price revision
􀂃 We increase our EPS estimates by 17–30% on the back of expectations of
higher NIMs partially offset by higher provisioning as asset quality
improvements are taking longer to come by. Higher NIMs have also increased
our ROE and target multiple. Our TP increases to Rs155 from Rs105 earlier.
Price catalyst
􀂃 12-month price target: Rs155.00 based on a Sum of Parts methodology.
􀂃 Catalyst: Reduction in margins on higher cost of fund in 2H11E.
Action and recommendation
􀂃 The ROA of the bank at 0.7%, even under higher NIM assumptions, remains
the poorest in our coverage. ROEs of ~ 15% are misleading because of
stretched leverage. Accordingly, we find current valuations of 1.5x adjusted
FY12E BVPS rich. Maintain UP. Our TP values the bank at 1.2x FY12E
adjusted BVPS with additional Rs13 for key holdings.