IDBI Bank :: Avendus 2012 top ideas

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Rise in NIM, improved liability‐mix may drive the rebound
 Improvement in the deposit mix along with a rise in the proportion
and growth in savings deposits have been key positives in the past few
quarters. While rise in slippages and NPL ratios are concern areas, the
decline in outstanding restructured loans is a positive. Despite rising
NPLs, net profit growth in 1HFY12 was 25% y‐o‐y, ahead of most peers.
The slippage in restructured loans in 1HFY12 has stayed below that in
FY11. Improvement in the concern areas is underway and may lead to
a rebound in valuations over the next 12 months. Our FY12‐FY14
forecasts for NPL provisions have been raised by 8‐bp to 0.63%, while
those for net profit have been lowered by up to 12%. We roll over the
TP to Dec12 and lower it to INR148. Maintain Buy. High slippages and
rising NPL provisions are key risk factors.
Large value, even if we exclude the value of subsidiaries
Our Dec12 TP implies a potential return of c83% over the next 12‐month
period. The TP values IDBI, including strategic investments, at a one‐year
forward adjusted P/B of 1.0x. We value the core banking business at 0.8x P/B. If
the P/B returns to the normal mean of 0.8x (by applying a 10% de‐rating to the
FY11 P/B) during FY10‐FY11, the potential upside may be c79%.
Rising NPLs; large restructured book drove underperformance in 2011
In 2011, IDBI underperformed the CNXPSBK and the Nifty by 9% and 27%,
respectively. The large underperformance was driven by a rise in slippages and
the concerns on rising NPLs from restructured loans. Gross and net NPL ratios
increased by 71‐bp and 51‐bp to 2.47% and 1.57%, respectively, in 1HFY12.
Restructured loans as a percentage of total loans declined to 5.7% at end
Sep11. Despite rising NPLs, PAT growth in 1HFY12 was 25% y‐o‐y.
Large upside, even if the worse case is applied
If the worst‐case scenario is applied for FY12f‐FY14f – incremental NPL, net NPL
ratio and NPL provisions/assets at 1.33%, 2.12% and 0.97%, respectively (46‐
bp, 32‐bp and 34‐bp higher than the base case) – the DCF fair value falls 11% to
INR155/share. The CMP implies a distress scenario for asset quality, net NPL
ratio at 3.4% and NPL provision/assets at 2.0%. With other forecasts remaining
same, the CMP also implies a cumulative loss of INR27.9bn over FY12f‐FY14f.
We forecast 38‐bp NIM expansion during FY12f‐FY14f
We forecast a 38‐bp rise in NIM to 2.21% till FY14, partly driven by savings
deposits growth, which has stayed above 30% in the past two quarters despite
a sharp rise in rates. We estimate a CAGR of 14% in PAT over FY12f‐FY14f. After
the decline in FY12, RoE is forecast to rise by 150‐bp to 15.0% in FY14.
Rollover TP to Dec12; Maintain Buy
We value IDBI using a combination of the DCF, P/E and P/B methods. For the
semi‐explicit period, we assume a CAGR of 14% in loans and RoA of 0.80%. We
raise our forecast for NPL provisions by 8‐bp to 0.63% and lower our PAT
forecast by up to 12%. We roll over the TP to Dec12 and lower it marginally to
INR148. Maintain Buy. High slippages and rising NPL provisions are risk factors.


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