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.