IDBI Bank,Business re-engineering on the way… ICICI Securities

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Business re-engineering on the way…
IDBI Bank reported PAT of Rs 429 crore, up a stellar 69% YoY and 71%
QoQ well above all expectations. The thrust was provided by higher NII
of Rs 1168 crore, which grew 14% YoY and 37% QoQ. It pushed NIM to
2.3% and controlled asset quality leading to lower provisioning. The
business mix saw 21% YoY growth but declined 3% QoQ to Rs 284518
crore (in line with bank’s strategy to moderate growth). New CMD, Mr
Malla, has placed more emphasis on quality and profitability (focusing
on positive spreads) rather than adding size. We see FY11 as a year of
consolidation after two previous years of greater than 30% growth in
assets. The results of such a process will be visible from FY12E
onwards. We expect 36% CAGR in PAT over FY10-12E to Rs 1905 crore.




NIM over 2% for the first time
NII push was provided by a fall in the cost of funds to 6.6% from 7.5% in
Q2FY10. Given this, there was a rise in CASA ratio to 15% from 11%, fall
in share of bulk deposits and gradual shedding of erstwhile IDBI bonds.
On the other hand, yield on assets remained flat at 9.1%. This pushed up
NIM to over 2% (2.27% in Q2FY11) for the first time. We expect the bank
to maintain NIM of above 2% for the coming quarters as well.
Asset quality: Under the spotlight
GNPA fell 6% QoQ to Rs 2472 crore (GNPA ratio @1.9%) while NNPA fell
by 4% QoQ to Rs 1549 crore. Provision coverage stands at 74.5% (37.3%
excluding technical w/offs). Restructured assets declined by Rs 50 crore
QoQ to Rs 9315 crore. The management is expecting repayments to flow
back in from restructured assets. This would reduce the portfolio to that
extent. This would reduce the provisioning requirement (which was high
in the previous four or five quarters) and help in PAT growth. We expect
GNPA @2.1% and NNPA @ 0.9% for FY12E.
Valuation
The bank is in a phase of consolidation and the operating matrix is
expected to show positive improvement. We expect CASA to reach 18%
and 21% for FY11E and FY12E, respectively. We see an expansion in the
RoA to 0.7% and RoE of 14% (despite recent capital infusion by GoI) by
FY12E. We are valuing the core business of the bank at 1.5x FY12E ABV
and ascribing Rs 40 to its investment book providing a fair value target of
Rs 206. We recommend a BUY rating on the stock.