Buy IDBI Bank 3QFY11 – Core earnings continue to impress; Anand Rathi

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IDBI Bank
3QFY11 – Core earnings continue to impress; Buy
IDBI Bank’s robust net profit was driven by higher net interest
income growth of 67.5% yoy, despite higher NPA provisions of
188% yoy. We maintain Buy as we expect the Bank’s strong
infrastructure focus and better NIM to boost earnings growth.
Also, government’s capital infusion would support future growth
and capitalization.

 Business growth slows, but margins impress. Advances and
deposits grew 20.9% yoy and 5.2% yoy respectively. Management
expects ~10% yoy growth in FY11 credit and has placed greater
emphasis on profitability than growth. NIM improved 69bps yoy
(flat qoq) to 2.3%, led by cost of funds falling 153bps yoy and
equity infusion of `31.2bn. CASA grew a healthy 20.8% yoy, its
share in total deposits improving 194bps yoy to 15%.
 Asset quality hurts, but coverage adequate. Gross NPAs rose
22.2% qoq and now comprise 2.2% of loans. Slippages of `6.9bn
were largely from SME accounts, with `8.9bn incremental
restructuring from aviation loans. Credit costs remain elevated, at
1.22% of loans in 9MFY11 (annualized). However, NPA coverage
is adequate at 75.6%, with capital adequacy of 14.1%, which is
more than sufficient for IDBI’s modest business growth targets.
 Valuation and risks. We value IDBI Bank (standalone) at `199
(1.2x FY12e BV). Further, we price the investments at book value
(after 20% holding-company discount) of `23, arriving at our
target price of `222/share. Risk: Sharp rise in wholesale
borrowing costs, leading to NIMs being lower than estimated.