Macquarie Research: IDBI -Very poor results

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


IDBI -Very poor results
Event
 IDBI’s 3Q11 results were marked by asset-quality shock, stagnating loan
growth and fees. PAT of Rs4.5bn was boosted by a deferred tax writeback of
Rs2.8bn. Excluding that, PAT was down 39%YoY. We are cutting our TP from
Rs155 to Rs120 while retaining our Underperform rating on the stock.

Impact
 Bank disappoints again on asset quality, delinquencies shoot up. Gross
NPLs increased 22% QoQ. Management attributes this largely to delinquencies
from the SME portfolio. We believe the aggressive growth of the loan book in a
slow environment is hurting the bank – the SME loan book grew ~60% YoY in
3Q11. Much of the growth happened in the past quarters (QoQ the growth is
only 2.3%). Even though management seems to have decided to slow down,
the delinquencies are likely to continue in the next few quarters.
 CASA not growing fast enough … While savings deposits have grown 6%
QoQ, we believe this growth it is not fast enough. The CASA ratio remained
flat QoQ at 15%, the poorest in our coverage. CASA growth is likely to face
further headwinds in a rising deposit rate environment. This leaves the NIMs
highly susceptible to a tightening rate cycle.
 … while loan growth stagnates. Loan growth was up only 3% YoY. Much of
the growth came from retail, on which management is trying to focus, and agri
loans, for which the bank has to meet priority sector lending targets. The
corporate loan book (68% of total loans) grew only 1.7% QoQ. The slower
loan growth, we believe, has negatively impacted credit-related fees as well,
with fees declining 2% YoY in the quarter.
 Several earnings headwinds. The bank is likely to face multiple earnings
headwinds. NIMs are likely to compress in a rising rate environment given the
poor CASA franchise. At the same time, provisioning expenses are likely to
remain high, although lower than currently. Loan and fees growth should also
be lower.
Earnings and target price revision
 We have cut our FY12E and FY13E earnings by ~22% on lower loan growth,
higher provisions and fees assumption. This is partially offset by better
margins. We are cutting our TP to Rs120 from Rs155.
Price catalyst
 12-month price target: Rs120.00 based on a Sum of Parts methodology.
 Catalyst: Margin compression in 4Q11.
Action and recommendation
 In our view, the process of turning around the bank is likely to be a long,
drawn-out one. Return ratios in the medium term are likely to remain poor. We
maintain our UP rating with a reduced TP. Our TP values the core bank at
0.9x FY12E BVPS plus another Rs13 for major investments


Valuation
We value IDBI using a two-stage Gordon Growth model for the bank and adding value for major
holdings. We are reducing our TP for the bank by 23% from Rs155 to Rs120. This is primarily driven
by a reduction in sustainable ROE from 14.5% to 13% based on higher provisions and lower fee
assumptions. This has led to an increase in target multiple from 1.2x to 0.9x FY12E BVPS.