IDBI- Margin and asset quality concerns :TP of Rs130 : Macquarie Research,

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


IDBI
Margin and asset quality concerns
Event
 IDBI reported 4Q11 PAT of Rs5.1bn, up 61% and significantly above our
estimate of Rs3.6bn. A large driver of the surprise was sharply reduced
provisions. Earning headwinds remain, however, and we maintain our
Underperform rating with a TP of Rs130 (previously Rs120).

Impact
 Wholesale dependence hits margins hard. NIMs declined 19bp QoQ to
2.1%, as cost of funds has shot up 33bp to 6.73% in 4Q11. IDBI has one of
the weakest liability franchises in our coverage. After guiding to sacrifice
growth for NIMs, the bank did the opposite in 4Q11. It grew its loan book 17%
QoQ, which necessitated 12% QoQ growth in higher-cost time deposits. We
believe the pain from higher cost of funds may not yet be over for the bank.
 Loan growth was driven by infra, retail and agriculture-related lending. After a
brief period in which it tried to consolidate, management will aim to grow much
faster now than FY11’s growth of 14%YoY.
 Provisions cut substantially even as asset quality worsens. Gross NPLs
declined sequentially this quarter, largely due to some agri led up gradations.
However, asset quality in SME and personal loans deteriorated sharply, with
the net NPL ratio of SME loans increasing 63bp QoQ to 1.95% and personal
loans increasing 26bp QoQ to 1.13%.Given that the bank seems to still be
familiarizing itself with these segments and has lent aggressively, we expect
delinquencies to remain high. Despite this, the bank substantially cut its
provisioning 57% QoQ. As a result, actual coverage declined to 40% from
47% in 3Q11.
 Fees likely to see a slowdown. Non-interest income was strong, up 24%
YoY in 4Q11. This, we believe, was largely driven by bunching up of
syndication-related fees and healthy recovery income. We believe maintaining
the growth could be challenging for the bank, largely as it is already heavily
exposed to infra lending. Infra loans, which grew 40% QoQ, already form 31%
of the bank’s loan book. Recovery income growth may also slow as real
estate prices take a breather.
Earnings and target price revision
 We have increased our EPS by 8–9% post the results. We have increased
our TP from Rs120 to Rs130, driven by higher ROE and BVPS.
Price catalyst
 12-month price target: Rs130.00 based on a Sum of Parts methodology.
 Catalyst: Further NIM compression, continued asset quality pains in 1H12E.
Action and recommendation
 We maintain our UP on the stock, as we believe earnings headwinds remain.
We believe ROEs will remain around 13%, with an earnings CAGR of ~14%
for the next two years. Our TP values the core bank at 1.0x adjusted FY12E
BVPS. We value the subsidiaries at Rs13 per share.