Low Tier 1 ratio (7.7% as of June
2013) and CAR of 12.6% but regular infusion of equity by the government.
Profitable track record with net interest
margin of more than 2% and adequate liquidity.
We have a Negative fundamental view
on IDBI, though eventual credit/default
risk is low.
Neel Gopalakrishnan
neel.gopalakrishnan@credit-suisse.com, +65 6212 2045
Q1 results show further asset quality weakness
IDBI Bank’s results for the first quarter of FY 2014 (year ending March) showed further deterioration in its asset quality.
While this is a trend seen in most Indian banks, we view IDBI’s
asset quality as below-par relative to most Indian banks. The
reported gross non-performing loans ratio (NPL) was 4.3% as
of June 2013, up from 3.2% in March 2013 and 2.5% in
March 2012. However, the bank also reported restructured assets amounting to around 7.5% of gross loans (around 7% as
of March 2013). Hence, the aggregate weak loans of around
12% is relatively high, though the bank does not expect a significant slippage of restructured loans back into NPLs. Given
the slowdown in the Indian economy following a period of rapid
credit growth, we believe NPLs will likely rise further in the
near term. Indeed, at the conference call following Q1 earnings, IDBI management said that it has one large exposure to
a textile company that will likely turn non performing near term.
While it said it had no other major single-name exposures, we
believe on an aggregate basis, asset quality has room to deteriorate further before stabilizing.
IDBI Bank’s capitalization is relatively low. As of June
2013, it reported a Tier 1 capital ratio of only 7.7% and a total
CAR of 12.6%. However, the Indian government has a track
record of recapitalizing banks when the T1 ratio falls below
��
2013) and CAR of 12.6% but regular infusion of equity by the government.
Profitable track record with net interest
margin of more than 2% and adequate liquidity.
We have a Negative fundamental view
on IDBI, though eventual credit/default
risk is low.
Neel Gopalakrishnan
neel.gopalakrishnan@credit-suisse.com, +65 6212 2045
Q1 results show further asset quality weakness
IDBI Bank’s results for the first quarter of FY 2014 (year ending March) showed further deterioration in its asset quality.
While this is a trend seen in most Indian banks, we view IDBI’s
asset quality as below-par relative to most Indian banks. The
reported gross non-performing loans ratio (NPL) was 4.3% as
of June 2013, up from 3.2% in March 2013 and 2.5% in
March 2012. However, the bank also reported restructured assets amounting to around 7.5% of gross loans (around 7% as
of March 2013). Hence, the aggregate weak loans of around
12% is relatively high, though the bank does not expect a significant slippage of restructured loans back into NPLs. Given
the slowdown in the Indian economy following a period of rapid
credit growth, we believe NPLs will likely rise further in the
near term. Indeed, at the conference call following Q1 earnings, IDBI management said that it has one large exposure to
a textile company that will likely turn non performing near term.
While it said it had no other major single-name exposures, we
believe on an aggregate basis, asset quality has room to deteriorate further before stabilizing.
IDBI Bank’s capitalization is relatively low. As of June
2013, it reported a Tier 1 capital ratio of only 7.7% and a total
CAR of 12.6%. However, the Indian government has a track
record of recapitalizing banks when the T1 ratio falls below
2013. While we believe there will be further capital infusions
going forward, IDBI’s capitalization is nevertheless expected to
remain on the lower side.
IDBI, however, maintains a profitable track record. It reported net income of INR 18.8 bn (around USD 375 m) in FY
2013 on operating income of INR 86 bn (around USD 1.7
bn). In Q1 2014, it reported net income of INR 3.1 bn on operating income of INR 21.9 bn. The net interest margin has
been consistently around 2% over the past three years. The
bank expects the interest margin to stay around this level in
FY 2014. However, it expects to grow slower than the Indian
banking industry and guided toward a 10% increase in the
loan book in FY 2014 compared to a compounded annual
growth rate of around 17% between FY 2009 and FY 2013.
IDBI also maintains adequate liquidity. As of June 2013, it had
an investment portfolio of around INR 866 bn (around USD 14
bn), comprising mainly government of India securities. The current holding of government securities is higher than the minimum required under regulations.
Our view
Our fundamental Negative view on IDBI Bank reflects our expectation that IDBI’s asset quality would deteriorate further in
the near term while its capitalization would remain weak. That
said, we think eventual credit/default risk is low given that its
standalone credit profile is still adequate. In addition, the government is expected to provide support, if needed. The government has demonstrated its support to IDBI Bank in various
forms in the past. These include guarantees on the bank’s borrowings, periodic equity infusions and converting its Tier 1
bonds into equity. Also, to clean up its non-performing loans,
the government had established a special-purpose entity called
Stressed Assets Stabilization Fund (SASF) in 2004.
A key rating risk for IDBI Bank arises from the possibility
of a sovereign downgrade, the likelihood of which has increased, in our view, following the recent deterioration in India’s macroeconomic situation. However, we believe rating
agencies may wait till the national elections in early 2014 for
clarity on the political situation that would be critical in reinforcing business and investor confidence in the Indian economy.
Even if downgraded, as a BB+ rated credit, we believe eventual credit risk should be relatively low.
Acknowledgements
We wish to thank Shubha Bhanu of Credit Suisse Business
Analytics (India) Private Limited for contributing to this publication.
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