IDBI Bank's 3QFY11 PAT grew 58% YoY: Motilal Oswal

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IDBI Bank (IDBI IN; Mkt Cap USD3.4b, CMP Rs152, Neutral)

IDBI Bank's 3QFY11 PAT grew 58% YoY and 6% QoQ, driven by higher NII growth and lower opex (up 2% YoY, but down 19% QoQ).   However, pressure on asset quality persists.  

In absolute terms, GNPA increased by 22% QoQ to Rs30b. In percentage terms, GNPA increased 34bp QoQ to 2.2%. NNPA remained stable QoQ in percentage terms, as the bank accelerated provisions during 

the quarter. PCR including technical write-offs improved 100bp to ~76%.

      

Loan growth moderated to 21% YoY and 3% QoQ (v/s 34% in FY10). Deposits were up 5% YoY but declined 3% QoQ (YTD, deposits are down 10%).NIM for 3QFY11 was stable QoQ at 2.28% (but improved 

102bp YoY) on the back of increase in base rate (50bp) and BPLR (75bp).  

Restructuring of balance sheet and slower growth augurs well for IDBI Bank. However, sustained stress on asset quality is a key risk. We expect the bank to report NII CAGR of 38% and PAT CAGR of 28% over 

FY10-13. We expect RoA to improve to 0.7% and RoE to 14-15% by FY13. IDBI Bank has some strategic investments, which we value at Rs28/share; adjusted for this, the stock is trading at 0.9x FY12E BV. 

Maintain Neutral.

Other highlights

 NII grew 68% YoY and 3% QoQ to Rs12b. During the quarter, net interest income

(NII) was boosted by ~Rs600m, being the full benefit of receipt of equity proceeds

during 2QFY11.

 Fee income was muted YoY at Rs3.4b (but declined sharply QoQ; Rs4.4b in 2QFY11).

Moderate loan growth, fewer corporate assignments and waiver of charges during

the quarter led to the sequential decline. Management targets 15% growth in fee

income for FY11.

 The bank restructured loans of ~Rs13b during the quarter, out of which Rs8.9b is

towards airline exposure. Outstanding restructured loans stood at Rs106b (~8% of the

loan book).

 Effective tax rate for IDBI for FY11 would be 22-23%. IDBI has been creating

higher provisions and is creating a deferred tax asset for these.

 For FY11, management targets loan growth of ~10%, implying ~13% QoQ growth in

4QFY11 (higher QoQ growth to be boosted by lending to meet PSL norms). For

FY12, management expects loan growth to be lower than industry average at ~15%.

Relatively low loan growth is in line with the strategy to strengthen the liability franchise

and focus on quality rather than growth. It expects to improve CASA ratio to 17% by

FY11 and 20%+ by FY12.

Company background

IDBI was set up as a non-banking institution to provide

project finance. High funding costs and rising NPLs led to

its operations becoming unviable. The government therefore

restructured it by (a) converting it into a bank, (b) transferring

most of its NPLs to an SPV, (c) re-pricing its high cost

liabilities, and (d) merging it with a private bank. With strong

corporate relationships and increasing branch presence,

IDBI is well poised to capitalize on strong growth

opportunities in the Indian banking space.

Key investment arguments

 The management is focused on improving NIM, led by

a changing liability mix (increase in CASA share),

repayment of high cost borrowings and moderating

business growth.

 IDBI Bank is better placed compared to peers on C/I

ratio. For FY10, core C/I ratio was 48% and for

9MFY11 it was lower at 36%.

 It is adequately capitalized for the next phase of growth.

After the recent capital infusion, the government stake

increased to 65% from 52.7%.

Key investment risks

 IDBI's weak funding franchise, inability to scale-up

operations and legacy issues could continue to pressurize

the bank's earnings.

Recent developments

 IDBI Bank has tied up with US-based environmental

research organization, World Resources Institute (WRI),

for providing consultancy services to its borrowers on

energy cost reduction.

 It has revised its base rate upwards by 50bp to 9%.

Valuation and view

 We expect the bank to report NII CAGR of 38% and

PAT CAGR of 28% over FY10-13. We expect RoA to

improve to 0.7% and RoE to 14-15% by FY13.

 IDBI Bank has some strategic investments, which we

value at Rs28/share; adjusted for this, the stock is trading

at 0.9x FY12E BV. Maintain Neutral.

Sector view

 Loan growth is strong but rising inflation and increasing

interest rates are near-term headwinds for the sector.

 Our economist expects the current tightness in liquidity

to begin to ease in 4QFY11, allaying the pressure of a

significant NIM compression.

 We believe margins will compress gradually. With strong

loan growth and a high CD ratio, there is strong pricing

power with banks.

 Banks with high CASA deposits and a lower proportion

of bulk deposits will be preferred bets.