IDBI - Tough going ::Macquarie Research,

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IDBI
Tough going
Event
 We maintain our Underperform on IDBI with a reduced TP of Rs95 from
Rs115 earlier.
Impact
 Asset quality troubles likely to remain. Asset quality has been a bugbear
with delinquencies persistently high and continued restructurings. We think it
is unlikely to get any better. The bank has grown its book at a very fast clip
~30% during FY08-10 where we believe underwriting standards may have
slipped. While loan growth slowed down in FY11 primarily due to capital
constraints, the delinquencies have remained stubbornly high. Given the high
interest rates and slowing economy, the asset quality situation is unlikely to
improve in FY12/13E. Coverage excluding technical write offs is low at 41%,
which means continued high credit costs.
 Increasing CASA has not yielded much in terms of results. IDBI has had
historically the poorest liabilities franchise in our coverage universe. The bank
has been heavily dependent on wholesale funding and as a result its NIMs have
been highly volatile. The bank had initiated well publicised attempts to increase
savings deposits including waving off all charges on savings accounts. It has
also retrained its employees to bring in a more retail focus. While it resulted in
early gains, the efforts have since stagnated in the face of persistently high term
deposit rates. The CASA ratio has come down sharply from 21% in 4Q11 to
13% in 1Q12 with the SA ratio remaining stagnant at 7.7% for three quarters
consecutively and the volatile CA component going up and down.
 Fee growth hampered due to slowdown in project loans. The slowing
project lending has impacted fees as well. Core fees have been down 16%
YoY in 1Q. We believe that project lending is unlikely to pick up anytime soon
and so fees will remain constrained.
Earnings and target price revision
 We are cutting our earnings for FY13E and FY14E by 8% and 9%,
respectively, driven by higher credit costs. We cut our TP to Rs95 from Rs115
earlier due to a lower P/BV multiple and earnings cut.
Price catalyst
 12-month price target: Rs95.00 based on a Sum of Parts methodology.
 Catalyst: Continued stress on NIMs and asset quality
Action and recommendation
 Return ratios for the bank are likely to remain poor. Maintain Underperform.
Our TP values the stock at 0.7x adjusted P/BV with another Rs13 for major
investments.

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