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India Equity Research Reports, IPO and Stock News
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IDBI Bank exceeded both our as well as consensus expectations by reporting a PAT of ` 5162.5 million, up 62% yoy during Q4FY11. The merger of IDBI Home Finance and IDBI Gilts however added ` 250 million to the bottom-line, excluding which PAT would have come in at ` 4912.5 million. The higher than expected PAT was due to lower than expected provisioning as the bank’s asset quality improved on a sequential basis.
Key Highlights NII expands 46% yoy: The NII increased by a robust 46% yoy despite a muted 14% yoy growth in advances. This was due to a 53 bps yoy improvement in the reported NIM to 2.1%. On a sequential basis however, NII contracted by 8% as the NIM deteriorated by 18 bps on the back of a 31 bps increase in the cost of funds coupled with higher priority sector lending.
Strong traction in other income: Non interest income increased 23% yoy and a robust 51% qoq despite lower treasury income on the back of a strong traction in fee based income, forex as well as recoveries.
Cost to income expands sequentially: The cost to income ratio of the bank expanded by 330 bps sequentially to 34.6% due to an 84% qoq increase in employee expenses. Higher employee expenses were due to addition of around 300 employees on account of the merger of subsidiaries as well as higher pension provisions.
Asset quality improves sequentially: The asset quality of the bank improved sequentially with absolute GNPAs coming off by 7.8% qoq. On a relative basis as well both %GNPAs and % NNPAs came off by 46 bps and 14 bps sequentially to 1.76% and 1.06%. Improvement in asset quality was on account of higher recoveries as well as write offs. As a result of improved asset quality provisions declined 48% yoy and 57% qoq thus boosting bottom-line.
Higher tax rate restricts bottom-line growth: The tax rate for the quarter came in at 42%, the higher tax rate was on account of deferred tax payments during the quarter.
CASA ratio improves to 20.9%: Total deposits of the bank increased by a muted 8% yoy but a strong 20% qoq. Importantly the CASA ratio of the bank improved by 582 bps qoq to 20.9% This sudden spurt in CASA ratio could be due to one off and may not be sustainable in the immediate future. However we believe the improvement in CASA should continue and should reach to 24% by FY13.
Key Investment Argument
A public sector bank with private sector characteristics: Although a public sector bank, IDBI Bank displays several characteristics of private sector banks. These include:
Early Adoption of Technology: IDBI Bank has been one of the pioneers in the adoption of technology amongst public sector banks and has won several awards including IBAs banking technology award for its IT initiatives. The bank was also one of the first few banks to adopt complete system based recognition of NPAs.
High Operational Efficiencies: Public sector banks are often associated with poor employee productivity. However IDBI Bank is one of the most efficient banks amongst its peers. Its FY10 business per branch stood at Rs 4320 mn (peer set average at Rs 1199 mn) while business per employee stood at Rs 250 mn (peer set average ~Rs 104 mn).
Strong stream of fee based income: IDBI bank having been a DFI has a competitive advantage in infrastructure lending and services related to the same. As a result, its fee based income stands higher than its peers. Fee Income for FY10 stood at ~0.6% of average assets as compared to ~0.4% for its peers
CASA ratio expected to reach 24% by FY13: IDBI bank has managed to improve its CASA ratio from 14.6% in FY10 to 21% as at the end of March 2011. Branch expansion in rural and semi urban areas, coupled with initiatives such as waiving off charges for CASA accounts is expected to lead to a CASA ratio of ~24% by FY13. NIM to sustain at ~2%: Despite an increase in term deposit rates, we expect the NIMs of IDBI bank to sustain at around 2% for FY12-13 on the back of increased focus on high yielding SME segment as well as improvement in the CASA ratio. Asset quality concerns overdone: During Q4FY11, the bank had witnessed improvement in asset quality and this is expected to continue in FY12 as well. The MSME slippages are due to the fact that the bank is new to this segment and are expected to moderate once the bank gains experience in this segment. The recent appointment of RM Malla ex CMD of SIDBI as CMD of IDBI Bank provides some comfort as far as the future performance of the banks MSME portfolio is concerned. Loan book consolidation to lead to improved return ratios: The bank after having grown its loan book at a fast pace of 30.3% CAGR for FY07-10, is now consolidating its loan book growth, in order to focus on profitability. Advances are expected to grow by 17% yoy in FY12. Improved focus on profitability and slower balance sheet growth is expected to lead to an improvement in return ratios. We expect ROA and ROE to improve gradually from hereon and should lead to rerating of the stock Attractive Valuations: At the CMP of ` 149, the bank is trading at 1.2x and 1.0x its FY12E and FY13E ABV respectively. At 1.2x its FY12E ABV, IDBI bank trades largely in line with its one year forwards P/ABV multiple. However based on it improving NIM and return ratios we believe that the bank should trade at higher multiples. Additionally its impressive investment book provides a cushion to its valuations. We expect the stock to rerate in the medium term and outperform the sector as well. Our full report and rating on IDBI Bank will follow soon.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDBI Bank exceeded both our as well as consensus expectations by reporting a PAT of ` 5162.5 million, up 62% yoy during Q4FY11. The merger of IDBI Home Finance and IDBI Gilts however added ` 250 million to the bottom-line, excluding which PAT would have come in at ` 4912.5 million. The higher than expected PAT was due to lower than expected provisioning as the bank’s asset quality improved on a sequential basis.
Key Highlights NII expands 46% yoy: The NII increased by a robust 46% yoy despite a muted 14% yoy growth in advances. This was due to a 53 bps yoy improvement in the reported NIM to 2.1%. On a sequential basis however, NII contracted by 8% as the NIM deteriorated by 18 bps on the back of a 31 bps increase in the cost of funds coupled with higher priority sector lending.
Strong traction in other income: Non interest income increased 23% yoy and a robust 51% qoq despite lower treasury income on the back of a strong traction in fee based income, forex as well as recoveries.
Cost to income expands sequentially: The cost to income ratio of the bank expanded by 330 bps sequentially to 34.6% due to an 84% qoq increase in employee expenses. Higher employee expenses were due to addition of around 300 employees on account of the merger of subsidiaries as well as higher pension provisions.
Asset quality improves sequentially: The asset quality of the bank improved sequentially with absolute GNPAs coming off by 7.8% qoq. On a relative basis as well both %GNPAs and % NNPAs came off by 46 bps and 14 bps sequentially to 1.76% and 1.06%. Improvement in asset quality was on account of higher recoveries as well as write offs. As a result of improved asset quality provisions declined 48% yoy and 57% qoq thus boosting bottom-line.
Higher tax rate restricts bottom-line growth: The tax rate for the quarter came in at 42%, the higher tax rate was on account of deferred tax payments during the quarter.
CASA ratio improves to 20.9%: Total deposits of the bank increased by a muted 8% yoy but a strong 20% qoq. Importantly the CASA ratio of the bank improved by 582 bps qoq to 20.9% This sudden spurt in CASA ratio could be due to one off and may not be sustainable in the immediate future. However we believe the improvement in CASA should continue and should reach to 24% by FY13.
Key Investment Argument
A public sector bank with private sector characteristics: Although a public sector bank, IDBI Bank displays several characteristics of private sector banks. These include:
Early Adoption of Technology: IDBI Bank has been one of the pioneers in the adoption of technology amongst public sector banks and has won several awards including IBAs banking technology award for its IT initiatives. The bank was also one of the first few banks to adopt complete system based recognition of NPAs.
High Operational Efficiencies: Public sector banks are often associated with poor employee productivity. However IDBI Bank is one of the most efficient banks amongst its peers. Its FY10 business per branch stood at Rs 4320 mn (peer set average at Rs 1199 mn) while business per employee stood at Rs 250 mn (peer set average ~Rs 104 mn).
Strong stream of fee based income: IDBI bank having been a DFI has a competitive advantage in infrastructure lending and services related to the same. As a result, its fee based income stands higher than its peers. Fee Income for FY10 stood at ~0.6% of average assets as compared to ~0.4% for its peers
CASA ratio expected to reach 24% by FY13: IDBI bank has managed to improve its CASA ratio from 14.6% in FY10 to 21% as at the end of March 2011. Branch expansion in rural and semi urban areas, coupled with initiatives such as waiving off charges for CASA accounts is expected to lead to a CASA ratio of ~24% by FY13. NIM to sustain at ~2%: Despite an increase in term deposit rates, we expect the NIMs of IDBI bank to sustain at around 2% for FY12-13 on the back of increased focus on high yielding SME segment as well as improvement in the CASA ratio. Asset quality concerns overdone: During Q4FY11, the bank had witnessed improvement in asset quality and this is expected to continue in FY12 as well. The MSME slippages are due to the fact that the bank is new to this segment and are expected to moderate once the bank gains experience in this segment. The recent appointment of RM Malla ex CMD of SIDBI as CMD of IDBI Bank provides some comfort as far as the future performance of the banks MSME portfolio is concerned. Loan book consolidation to lead to improved return ratios: The bank after having grown its loan book at a fast pace of 30.3% CAGR for FY07-10, is now consolidating its loan book growth, in order to focus on profitability. Advances are expected to grow by 17% yoy in FY12. Improved focus on profitability and slower balance sheet growth is expected to lead to an improvement in return ratios. We expect ROA and ROE to improve gradually from hereon and should lead to rerating of the stock Attractive Valuations: At the CMP of ` 149, the bank is trading at 1.2x and 1.0x its FY12E and FY13E ABV respectively. At 1.2x its FY12E ABV, IDBI bank trades largely in line with its one year forwards P/ABV multiple. However based on it improving NIM and return ratios we believe that the bank should trade at higher multiples. Additionally its impressive investment book provides a cushion to its valuations. We expect the stock to rerate in the medium term and outperform the sector as well. Our full report and rating on IDBI Bank will follow soon.
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