IDBI Bank - "Asset quality and CASA concern push back estimate"::LKP

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Key highlights

Ø  IDBI Bank reported PAT growth of 34%/(35%) yoy/qoq led by NII growth of 35%/4% yoy/qoq .

Ø  NIMs during the quarter were higher yoy and stable qoq at 2.1% v/s 1.6%/2.1% yoy/qoq. The management has guided for NIMs of 2.1-2.2% during FY12.

Ø  The loan book grew 15%/(1.3%) yoy/qoq, at higher yields of 9.8% v/s 8.5%/9.2% yoy/qoq. Loan growth was driven by retail (50%/1.2% yoy/qoq) and SME (18%/(6%) yoy/qoq) while corporate assets grew by 7%/(0.1%) yoy/qoq. While the CD ratio remained marginally higher, term deposits grew by 7%/2% yoy/qoq and CASA by 50%/(19%).  On a qoq basis both current and savings account balances were under pressure as average balances declined (despite increase in no. of accounts). Thus the share of CASA at 17% declined on a yoy basis 21%/13% yoy/qoq.  The bank has retained its approach on CASA for the past 3 quarters. However, external factors such as low liquidity and a tight monetary policy are impacting CA and SA growth.  The management has guided for a 17-18% CASA target for FY12.

Ø  Gross npas were 2.1% v/s 1.9%/1.8 yoy/qoq and net npas were1.3% v/s 1.2%/1.1% yoy/qoq. On an absolute basis gross npas and net npas were higher 25%/18% and 20%/15% yoy/qoq.  Slippages were lower at Rs6220 mn v/s Rs19,580 mn qoq, however lower write offs and recoveries translated in higher gross npas. Major share of slippages were on account of SME (~50%), mid corporate portfolio. Although the management expects that mid corporate accounts will get upgraded over the next 3 quarters, SME may see prolonged stress. The management has increased slippage guidance for FY12 from 1.2% to 1.5%. Provisioning was lower yoy at (15%)/51% yoy/qoq, mainly on account of a reversal of Rs920 mn for ARCIL security receipts.

Ø  Non-interest income was lower by (8%)/(36%) yoy/qoq mainly on account of lower fee income by (12%)/(38%) yoy/qoq due to lower syndication and project appraisal fees during the quarter.

Ø  Operating costs increased by 14%/11% yoy/qoq and C/I ratios were 35% v/s 37%/35% yoy/qoq. The bank has increased branches to 883 in June 2011 from 813 in March 2011 and the management has guided for 1050 branches by March2012. Also the run rate of employee expenses is likely to increase in Q3 and Q4 of FY12.

Ø  The bank had a CAR of 13.8% with tier I of 8.3%. The management expects a 15% loan growth over FY12 and Tier I to reach 7.1-7.5% and capital raising will happen in FY13.

Ø  The bank has merged housing finance and IDBI gilts subsidiary which increased PAT by Rs180 mn (IDBI gilt was loss making FY11), NII by Rs80-100 mn, and asset size by Rs30 bn and networth by Rs1800-2000 mn during the quarter. There is no material impact to CAR and borrowings as the major source of funding for the subsidiaries was the parent company.

Ø  Tax rate during the quarter was higher as provisions for npas, investments and some tax provisions were added back during the quarter. Additions to provisions based on RBI changed norms were Rs2,790 mn, which were not eligible for tax deductions. Thus excluding these items the normalized tax rate was 27-28%.

Valuation and Outlook

The management has guided for a lower loan book growth of 15% in FY12 and NIMs contraction to 2.1-2.5% as compared to 2.4% in Q1FY12. Similarly CASA target has been reduced to 17-18% v/s 25% for FY12 and slippages are likely to increase from 1.2% to 1.5% in FY12. We believe that in addition to the above the bank is likely to face additional pressure on growth, margins and asset quality. We have reduced our loan book growth from 19% CAGR to 14% CAGR over FY11-13E and balance sheet growth from 14% to 10% FY11-13E. We believe that NII is expected to grow at 19% v/s 27%, operating income at 18% v/s 24%, PAT at 23% v/s 32% CAGR FY11-13E.

Adjusted for subsidiary valuations, the stock trades at P/ABV 0.8x FY12 and 0.7x on FY13. We have revised downwards our ABV to Rs118.9 from Rs121.2 and Rs140.2 from Rs143.2 for FY12 and FY13. We have valued the bank at a 1x multiple on FY13 ABV. We have revised downwards our target price from Rs189 per share to Rs170 per share. BUY