IDBI 2Q12 - Another poor result :Macquarie Research,

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IDBI
2Q12 - Another poor result
Event
 IDBI reported 2Q12 PAT of Rs5.2bn, 19% above our estimate. The surprise
was mainly driven by higher treasury gains and lower provisions. Operating
performance remains weak though. Maintain Underperform.
Impact
 Delinquencies remain high. Delinquencies were a chunky 2.4% this quarter
up from 1.9% from last quarter. Delinquencies were well diversified with no
big NPLs from the usual suspects – textile, infra, gems and jewellery. This we
believe makes the situation more worrying. SMEs remain the main cause of
delinquencies, and we expect stress from there to continue.
 Not withstanding the increased delinquencies, the bank cut back on
provisioning. Provision coverage, excluding technical write offs, thus fell
400bp QoQ to 37% – the lowest in our banks coverage universe.
 Loan book has not grown. The loan book was flat QoQ and management is
looking for sub-15% growth for FY12E. They are looking to restructure the
SME department, which has been a source of significant delinquencies and
was a thrust in the previous chairman’s tenure. Much of the growth was in agri
and corporate loan book (which also benefitted from some SMEs being
reclassified as medium corporate). However retail loans also contracted by a
chunky 9%QoQ.
 Pressure on margins despite growth in CASA. There was good growth in
CASA which grew by 10% QoQ. However the bank has a substantial two
thirds of its deposits as wholesale deposits, where it is facing the pressure of
high rates. Accordingly cost of funds was up 40bp QoQ which led to a 7bp
QoQ margin decline to 2.0%.
 Poor fees growth. Core fees were down 19% YoY. We believe that this is
largely due to slowing loan growth, particularly project finance, and likely will
remain under pressure. However a trading gain of Rs600m provided some
support to the non interest income.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs95.00 based on a Sum of Parts methodology.
 Catalyst: Pressure on NIMs and asset quality in 2Q12E
Action and recommendation
 The return ratios for the bank are likely to be under pressure and remain poor.
We maintain Underperform.

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.

read about other banks (click link below):

India banks- Gloom, doom, kaboom!:: Macquarie Research,

IDBI — Weak earnings outlook; Cut PO, Reiterate Underperform ::BofA Merrill Lynch,

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IDBI — Weak earnings outlook; Cut PO,
Reiterate Underperform
Country Overview
Meeting with IDBI Bank
We met with IDBI Bk recently. Per the bank, FY12/13 to be slow on B/s growth,
but focus on CASA; filling in priority sector requirements (~27% PSL now); and a
watch on asset quality, especially SME. The bank expects 2H to show an
improvement in slippages; however, we see an emerging credit cycle by 2H. IDBI
Bk is also looking at NIMs expanding (yoy) to 2.3% vs. 2.1% in FY11.
Building in a credit cycle; slippages at +1.7/2.2% (vs. 1.4%)
IDBI Bk’s exposure to potential problem sectors (Infra. and SME / MSME) makes
up ~45% of loans vs. sector avg. of ~25%, as well as having higher share of
restructured loans (~6.7%). While we est. a sharp rise in slippages (~1.7/2.2% in
FY12/13 vs. 1.4% in FY11), there is still an upside risk, given that we think sector
slippages likely to avg. ~2.7% by FY13 (see- Banks-Retail, 22 August 2011).
EPS growth: flat/<10% in FY12/13 on top line; NIMs peaked
We have raised our earnings by ~11% for FY12E, capturing strong FY11, but cut
FY13E by 8%. We est. earnings flattish yoy in FY12 and <10% yoy growth in
FY13 driven by weak top line (+11-13%) on flattish margins due to a) rising
funding costs (~45% wholesale/~17% CASA); b) weak ALM (~23% of loans < 1-
year vs. ~50% of liabilities); and as the bank builds up its PSL (low-yields) to 40%
by Mar’13.
Valuations low, but also has low return ratios, hence U/P
IDBI Bk is the least expensively valued bank (+0.7x adj. for NPLs / invsts.) in our
coverage, but also has structurally low return ratios (RoAs at ~0.6-0.7%/RoEs at
<12%), with further risks to asset quality. Moreover, low Tier 1 (FY12 est. at
7.6%) will limit growth/keep RoEs low. Hence, we believe IDBI Bk will de-rate to
~0.6x 1-yr fwd. book, implying a PO of Rs101 (incl. Rs15/shr. for invsts.).
Reiterate Underperform.


IDBI (XDBIF)
Our PO on IDBI at Rs101. IDBI Bk is the most inexpensively valued bank (+0.7-
0.8x adj. for NPLs and invsts.) in our coverage, but also has structurally low
return ratios (RoAs at 0.6-0.7% and RoEs at +11-12%), with further risks of higher
NPLs owing to an emerging credit cycle, in our view, by end FY12. Moreover, low
Tier 1 (FY12 est. at 7.6%) will limit future growth and keep RoEs low. Hence, we

believe IDBI Bk will de-rate to 0.6x 1-yr fwd. book, implying a PO of Rs101 (incl.
Rs15/shr. for invsts.). Our target PB multiple of 0.6x core book is based on 1.5
SD below historically traded average multiples, owing to weak earnings trajectory
and risks to asset quality, Hence, reiterate Underperform. Upside risks are a
rebound in the macro situation resulting in faster growth for the bank and lower
NPLs resulting in earnings rebound and capital infusion enabling future growth.
Downside risks are a sharp rise in NPLs and an inability to manage growth.

IDBI-- Multiple stresses::Macquarie Research,

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IDBI
Multiple stresses
Event
 IDBI reported 1Q12 PAT of Rs3.4bn, much below our estimate of Rs5.1bn.
The shortfall, we believe, was mainly due to high provisions. Earning continue
to face headwinds and we have reduced our earnings estimates for FY12-14
by 2–6% and TP to Rs115 from Rs130 earlier. Maintain Underperform.
Impact
 Asset quality continues to be disappointing. Delinquencies remain high at
1.6% of loans. The NPLs were spread across sectors, with no large one-offs.
IDBI’s low provisioning coverage excluding technical write-offs at 41% means
that provision expense remains high. Credit cost of Rs3.6bn was higher than
our expectation. The stresses on the portfolio remain; in 1Q12, there were
some large restructurings amounting to Rs4bn.
 CASA falls sharply. NIM, aided by interest on income tax refund, was flat
QoQ at 2.1%. Adjusted for income tax refund interest income, it was down
~10bp QoQ. While this was better than our expectation, the underlying
movement in low-cost deposits is worrying, in our view. The bank’s CASA
ratio declined 360bp to 17.3%, easily the lowest in our coverage. The last few
quarters saw significant accretion in savings accounts, as the bank made a
focussed attempt to attract such accounts. However, we believe, the efforts
have been offset by the attraction of high term deposit rates in 1Q12. Thus
deposits in savings accounts actually reduced 2% QoQ even as term deposits
were up 7%QoQ.
 Loan growth was sluggish at 14.5% YoY, contracting 1%QoQ.  Large
corporate lending, forming two-thirds of loans, grew only 7% YoY. Growth was
mainly driven by retail, which was up 49%YoY.
 Poor fee growth. Core fee was down 16% YoY. We believe this is largely
due to slowing loan growth, particularly project finance, and likely would
remain under pressure. The company also booked a trading loss of Rs350m
in 1Q12.
Earnings and target price revision
 We have cut our EPS estimates for FY12-14E by 2-6%, to factor in lower loan
growth and higher provisions partially offset by higher NIMs. Our TP reduces
to Rs115 from Rs130, driven by lower ROE even as we roll-over to FY13E
valuations.
Price catalyst
 12-month price target: Rs115.00 based on a Sum of Parts methodology.
 Catalyst: Pressure on NIMs and asset quality in 2Q12E
Action and recommendation
 Return ratios remain poor, and are likely to remain under pressure. We
maintain Underperform.

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

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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).

IDBI (IDBI.BO, Rs136.05, UW, PT Rs110) :Morgan Stanley Research

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Investment Thesis
• Margin improvement over the past
year has benefited from low short rates.
CASA/deposits ratio is low at 15% vs.
35% for the system (Mar’10) and bulk
deposits form ~60% of their term
deposits — implying that margins will
compress as the full impact of rising
rates filters through.
• Asset quality is a concern given the
impaired loans ratio at 10.1% (avg. for
our coverage is 5.5%). We expect
credit costs to remain elevated through
F2012.
• Even after factoring in the recent
capital infusion from the government
(which resulted in share count
increasing by 35%) – Tier I ratio is only
8.84% (avg. ~10.5% for our coverage)
• Valuations at 8.9x earnings and 1.0x
BV on our F2012 estimates look
expensive in the context of uncertainty
on margin progression and asset
quality stress.
Key Value Drivers
• NIM
• Credit costs
• Loan growth
• Fee income
Potential Catalysts
• Asset quality & CASA/deposits trends
over the next few quarters
• Trend in short rates
• News flow related to additional capital
raising
Risks
• Upside: Better-than-expected NIMs,
CASA/deposits and asset quality.
• Downside: Higher-than-expected
credit cost and sharp rise in short
rates.


Price Target Rs110 Derived from our probability weighted residual income model
Bull
Case
Rs175
1.3x F2013e
BVPS
Stronger-than-expected economic growth. Loan and deposit
growth in F2012/13 higher than base case estimates at 20% —
driving stronger NII and fee income growth. Margin progression is
better than expected owing to better CASA traction; Credit costs
drop materially below base case estimate to 50 bps in F2012-13.
Base
Case
Rs105
0.8x F2013e
BVPS
Margins compress and credit costs decline. Expect margins to
compress by ~60 bps to 1.70% by F4Q12 from current reported
level of 2.28%. Expect credit costs to decline to 75 bps in F2012
from current levels of 148 bps.
Bear
Case
Rs70
0.5x F2013e
BVPS
Disruptive rise in rates: Loan growth slows down sharply,
CASA/deposits falls sharply and margins compress more than
expectations. Impaired loan formation re-accelerates, implying that
credit costs remain higher for longer (at ~150 bps).
Source: FactSet, Morgan Stanley Research

IDBI - Aiming for a turnaround:: Macquarie Research

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IDBI
Aiming for a turnaround
Event
 IDBI Bank is one of India’s largest scheduled commercial banks. IDBI started
its journey as a development financial institution before converting into a bank
in 2003. The bank provides the entire gamut of financial services to both
corporate and retail customers.

Macquarie Research: IDBI -Very poor results

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IDBI -Very poor results
Event
 IDBI’s 3Q11 results were marked by asset-quality shock, stagnating loan
growth and fees. PAT of Rs4.5bn was boosted by a deferred tax writeback of
Rs2.8bn. Excluding that, PAT was down 39%YoY. We are cutting our TP from
Rs155 to Rs120 while retaining our Underperform rating on the stock.

IDBI -Return ratios remain poor : Macquarie

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IDBI
Return ratios remain poor
Event
􀂃 IDBI reported 2Q11 net profit of Rs4.3bn, up 69% YoY and 46% ahead of our
estimate, the surprise mainly being driven by higher margins. Management
held an analyst meeting where they signalled their intention to improve the
poor operating metrics of the bank on a sustainable basis.
􀂃 Retain Underperform. We believe that while the initial incremental
improvements may be easier to achieve, the task to bring return ratios on par
with peers is likely to be a long winded one. We believe valuations have run
ahead of fundamentals for the stock and while we increase our earnings and
TP to Rs155 from Rs105, we retain our Underperform on the stock.
Impact
􀂃 Loan book continues to shrink. After growing at 34% in FY10, the bank
under new CMD has signalled a more measured approach. Accordingly, its
loan book has declined 6% in 1H over FY10, growing 24% YoY. While this
would help in improving margins, it should also negatively impact fees.
Management is looking for 18–20% loan growth in FY11E, which would mean
a significant acceleration in 2H11.
􀂃 Current NIMs not sustainable. NIMs for the quarter were 2.27%, up 53bp
QoQ and much higher than our expectation. This has been achieved through
1) retirement of higher cost deposits, 2) increase in the lending rates,
3) availability of free equity from government, and 4) shrinking the loan book.
Going forward, the bulk of the resources to fund the accelerated loan growth
in 2H11 would have to come from term deposits and borrowings, pushing up
the cost. CASA still remains poor at 15% and while this should go up under
the more focused approach of management, it is likely to be a slow and
sedate increase.
􀂃 However, we do expect the bank to sustain ~1.5-1.6% NIM (vs 1% NIM
earlier) on the back of its focus on retail and SME lending and improvement in
CASA. Accordingly we have increased our NIM estimates.
􀂃 High provisioning. Credit costs continue to be high at 1% of loans. The bank
had Rs4bn of writeoffs this quarter, signalling continued asset quality issues.
Earnings and target price revision
􀂃 We increase our EPS estimates by 17–30% on the back of expectations of
higher NIMs partially offset by higher provisioning as asset quality
improvements are taking longer to come by. Higher NIMs have also increased
our ROE and target multiple. Our TP increases to Rs155 from Rs105 earlier.
Price catalyst
􀂃 12-month price target: Rs155.00 based on a Sum of Parts methodology.
􀂃 Catalyst: Reduction in margins on higher cost of fund in 2H11E.
Action and recommendation
􀂃 The ROA of the bank at 0.7%, even under higher NIM assumptions, remains
the poorest in our coverage. ROEs of ~ 15% are misleading because of
stretched leverage. Accordingly, we find current valuations of 1.5x adjusted
FY12E BVPS rich. Maintain UP. Our TP values the bank at 1.2x FY12E
adjusted BVPS with additional Rs13 for key holdings.

IDBI: F2Q11: Margins Expand Sharply :: Morgan Stanley

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IDBI: F2Q11: Margins Expand Sharply

IDBI Bank reported profits of Rs4.3 bn (+71% QoQ
and +69% YoY): Our estimate was Rs3.3 bn. The key
reason for the beat was significantly better than
expected NII progression (driven by margin expansion)
The key highlights from the results include:
1) Margins expanded sharply, 63 bps QoQ / 122 YoY
to 2.27%.
2) Volume growth was weak. The loan book
contracted by 4% QoQ and the deposit book by 2%
QoQ. On a YoY basis, loans grew by 24% YoY
while deposits grew by 18% YoY.
3) Loan loss provisions were stable QoQ at Rs3.2 bn
(96 bps of loans, annualized). Coverage ratio
improved to 74.5% from 73.6% in the previous
quarter. GNPLs were down 6% QoQ.
4) Operating costs moved up by 26% QoQ and 90%
YoY, driven by employee expenses. However,
given strong revenue progression, cost:core income
ratio moved to 39% from 38% in the previous
quarter.
5) Capital gains and recoveries contribution to
earnings remained very low.
6) Core fee income growth was at 14% YoY (+24%
QoQ). It was 50% YoY in the previous quarter.
Given the sharp nature of the rise in margins, we
will look for further clarity on margin sustainability
at IDBI Bank’s analyst meeting (scheduled on
October 29). We will follow up with a more detailed
note.

Motilal Oswal: IDBI BANK: Management Meet update

IDBI BANK: Management Meet update: Consolidation to improve balance sheet profile and profitability; Neutral

We met with the management of IDBI Bank (IDBI IN, Mkt Cap US$3.5b, CMP Rs162, Neutral) to get an update on the business growth, asset quality and profitability outlook. The focus is to grow inline with industry and improve core operating profitability. IDBI Bank targets to improve margins to 2.2% by FY12 and achieve ROA of 1% (from 0.5% in FY10) in next 2-2.5 years. Key highlights:

-          Over next two years, focus will be on restructuring balance sheet by improving share of high yielding retail and SME loans on asset side and higher share of CASA and retail term deposits on liability side.

-          It is targeting CASA ratio of 20% in next 2 years (from 13% reported in 1QFY11) and NIMs of 2.2% (from 1.64% in 1QFY11).

-          After strong fee income CAGR of 67% over FY08-10, expects fee income to grow inline with the loan growth

-          Asset quality will under pressure on account of higher slippages for next couple of quarters, but GNPA is expected to be contained below 2% for FY11.

Consolidating Growth to improve balance sheet profile

-          IDBI has always had a higher proportion of borrowings in its liabilities than its peers due its earlier role as a DFI. Post merger, the bank had replaced borrowings with bulk deposits, which also kept margins lower. Currently of the total deposits 55% are bulk deposits. This will reduce as the focus is on CASA and retail deposits.

-          It expects to improve CASA ratio to 17% by FY11 and 20%+ by FY12 by (1) waiver of minimum balance and service charges for savings deposits (2) leveraging on its large corporate and SME relationships and (3) better contribution from new branches.

-          Bank is in process of merging IDBI Home finance with itself and post merger, IDBI Home Finance branches would be converted as hubs to garner retail business.

Macquarie Research: SELL Canara Bank, Union Bank and IDBI

India PSU banks
The party is over
Risk/reward highly unfavourable; BOB, PNB now Neutral
We believe that after the recent significant outperformance of the Indian public
sector banks, the risk/reward has become highly unfavourable, and we foresee
near-term pressures in the form of weak loan growth, lower margins and issues
regarding opex and asset quality, resulting in earnings downgrades by the street.
Our earnings estimates are 10–15% below consensus. We downgrade PNB and
BOB to Neutral based on valuations. We reiterate our non-consensus bearish
call on the sector.
Do not look at history, look beyond
During the past five years, PSU banks have been re-rated due to their stronger
growth profile, superior technological platform and improving ROA. However, the
market seems to ignore several important aspects. Loan growth in this cycle is
expected to be far lower (20–22% vs 30% in the earlier cycle), fee income
momentum is structurally likely to be lower, and opex and credit charges are
likely to remain high in the early part of the cycle, due to waning productivity
benefits and the regulatory requirement of 70% NPL coverage, respectively.
Moreover, with capital requirements likely to become more stringent, we think
leverage structurally is likely to be lower, thereby resulting in lower ROEs.
Near term: Loan growth and margins could disappoint
We think loan growth could disappoint, mainly due to increasing financial
disintermediation, exacerbated by the new base rate regime and structural
challenges to recovery in several segments. Margins could disappoint in the next
two quarters, due to sharp increases in deposit and wholesale funding rates
without commensurate increase in PLR or base rates. Weak loan growth would
further result in deposits being parked in low-yielding government securities (Gsecs),
which would result in negative carry.
Opex burden: Additional headwind on earnings
After several years of productivity benefits, the pace of increases in such
benefits is likely to slow, due to a net increase in the employee base. Pensions
that have not been accounted for could erode PSU banks’ net worth by 10%.
Assumptions used to arrive at pension obligations are very conservative. Our
revised assumptions result in an additional 5% impact on net worth.
Asset quality: Near-term pains exist
Our interactions with credit rating agencies reveal that, in the near term, overall
system NPLs could increase 50%-plus in FY11 vs our estimate of 30% for our
coverage universe. Slippages could be mainly from restructured assets, SME
segments and sectors such as textiles, leather, chemicals, steel intermediaries
and commercial real estate.
Valuation multiples: No room for comfort
PSU banks are trading one standard deviation above historical averages, with
many trading at historically high multiples. Even after we assume the multiples at
the peak of 2007 bull market, when fundamentals were far better than they are
today, upside to current market price is limited, in our view. The discount of PSU
banks to private banks at 40% is now the lowest ever. Our key Underperforms
are banks with weak deposit franchises, such as Canara Bank, Union Bank and
IDBI. For investors who want exposure to PSU banks, we recommend adding
BOB and PNB on corrections.