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Industrial Development Bank of India (IDBI)
BUY
Current Market Price (INR) 161
Target Price (INR) 215
Upside Potential 33%
We rate IDBI bank a BUY. The Industrial Development Bank of India Limited (IDBI) is
one of India's leading public sector banks and 4th largest Bank in overall ratings. It is
currently 10th largest development bank in the world in terms of reach with 1228
ATMs, 750 branches and 490 centers. Established in 1964 as a development financial
Institution, IDBI’s role was facilitating the industrial and economic development of the
country through project finance. It also pioneered the capital market development by
setting up agencies like NSE, NSDL, CARE and SHCIL and equity holding in these
institutions form a part of banks strategic investments. Post the recent capital infusion of
more than INR 3000 cr (at INR 120 per share) through preferential capital, the stake of
Govt has increased from 52.7% to 65.2%.
Investment rationale
Restructuring of the asset profile to improve fundamentals going forward
The bank’s loan book has grown at a CAGR of 27.2% over the last 5 years, which is well above the
average industry growth rate. However the new management is more focused on reducing the
share of low yielding, high volume industrial y g g assets from its books, which may impact their loan
book growth in the next 9-12 months (19.6% CAGR over FY10-13 V/S 27.2% CAGR over FY06-
10). We believe this would act as a positive for the bank as it is expected to increase its RoE from
10% in FY10 to 15.6% by FY13 and RoA from 0.44% to 0.71% by FY13. With a CAR of 14.2% (as
on Sep’10) post INR 30 Bn capital infusion from government and additional room to raise INR 60
Bn of Tier-1 and Tier-2 capital gives the bank sufficient headroom for loan growth in future.
Growth in CASA & strong branch expansion plans to boost deposit growth
The bank’s deposits have also grown at a scorching pace , 59.4% (CAGR for last 5 years), but most
of the growth has been led by term deposits. Through the merger with IDBI, IDBI bank has got
some legacy book which is much similar to a DFI. Although bulk borrowing were replaced by
bulk deposits which are usually high cost deposits, it effects banks NIMs quite hard (one of the
lowest among PSBs). With more focus on augmenting retail base (adding over 300 branches in next
12 to 18 months), rolling off term deposits, we expect CASA to grow at a CAGR of 31.2% over
FY10-13.
Margin is expected to improve
Net interest margin is expected to improve by 83bps by FY13. However, the management is confident
of maintaining margins at 1.75-2% on the back of re-pricing of high cost deposits and pick up in
business growth. We expect 300 retail branch addition to boost the retail base and augment the low
cost CASA base from the current 14.6% to 19.5% by FY13, which would impact the NIMs positively.
Asset Quality can put up negative surprises in near term – however may peak out in FY11.
With recent negative news flows regarding MFIs, telecom sector and real estate, where the bank has
on an average 2-4% exposure, we may see some negative surprises in one or two quarters going
forward. However we believe the asset quality concerns will peak out in FY11 on the back of strong
focus on recoveries and shedding off its legacy loan book .
Capital adequacy well above prudential norms
The capital adequacy at 14.2% is more than adequate for a 18%+ credit growth for the bank. The Tier-1
capital ratio stood at 9% at the end of FY10. Additional room to raise INR 60 Bn of Tier-1 and Tier-2
capital gives the bank sufficient headroom from loan growth in future.
Fee Income growth encouraging
The fee income of the bank grew by 22% YoY almost in line with growth in advances. For the
half year the growth was as high as 34% and the bank expects that it will maintain this growth for
FY11E. This has also helped in absorbing cost pressure and has maintained the Cost to Income
Ratio to less than 40%. At present the bank’s CMS penetration is just 30% and leaves a lot to be
explored. Another positive observation is that the share of trading income (market driven) to
other income is on the decline.
Investment book
IDBI Bank’s investment book is less volatile as almost 75% of the book as on Sep’10, is HTM(held till
maturity) and 85% of this is in Government securities. The AFS portfolio in Govt securities stood at
7.5% of the total Govt. Securities held, which makes the investment book less volatile in case of
increasing bond yield scenario.
Valuation & Recommendation
At CMP, the stock is trading at 1.1x of its FY13E ABV. We value the standalone business at 1.25x of its
FY13E Adjusted Book Value (ABV) at INR 195 while we ascribe per share value of 19.56 for its
investments thus arriving at a SOTP based target price of 215 per share. We recommend a BUY on this
stockwith a time horizon of 12months.
A new management team, re-structuring of the asset profile, improving CASA and improving asset
quality are expected to help the bank in improving its financial going forward.
Our target price has revised lower from INR 235 earlier to INR 215 on the back of increase in equity
base due to the recent capital infusion from government. All other valuation parameters are same as
before. More than INR 3000 cr (at INR 120 per share) got infused through preferential capital, the stake
of Govt has increased from 52.7% to 65.2%.
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