IDBI's favourable ratios

SMARTSHARE

Since end-November, the IDBI stock price has moved from Rs 85 to Rs 108 "" a gain of about 27 per cent in just over three weeks.

During the same period, IDBI Bank has risen from Rs 48 to Rs 57, a 22 per cent gain. In comparison, the Sensex has gained around 3.5 per cent, moving from 6,195 points to 6,413 points.

While most banking stocks outperformed in December, there are special circumstances attached to the IDBI-IDBI Bank couple. The long-awaited merger, which will create a universal bank with assets of over Rs 85,000 crore, comes closer in January when the merger ratio is to be declared.

In order to concentrate on that perhaps, C M D Damodaran has quit his duties at UTI. Depending on the ratio, shareholders in the respective stocks could get a better or worse deal.

However, regardless of the ratio, it would help if the market prices of both stocks are as high as possible when the merger is announced.

This bull run will ensure that. Given the relative interest in the stocks in terms of price appreciation as well as in terms of trading volume, the betting appears to be that the ratio will favour IDBI. However, recent developments have taken some of the pressure off IDBI's admittedly dreadful balance-sheet and made investors more comfortable.

For one, IDBI is already technically a bank rather than a financial institution and that makes merging the businesses easier. The bailout that allowed the former FI to convert its status involved taking Rs 9,000 crore of bad assets off the IDBI balance sheet and transferring them to the Stressed Asset Stabilisation Fund (SASF), a vehicle created for this purpose.

The SASF flogged zero-interest bonds backed by a GoI guarantee in an exercise of creative financial engineering. That bailout saves some Rs 750 crore in provisioning for IDBI. And note that the assets were transferred at par rather than being discounted down.

IDBI has also started rejigging its business focus to become less dependent on its earlier portfolio of term-loans, which had a nasty habit of turning sour. It has logged a sharp rise in credit sanctions in 2004-05 when about 30 per cent growth has been visible.

The focus has moved to the corporate and retail segments. About 60 per cent of new sanctions are in the corporate sector and most of the rest was in retail. Retail assets at somewhat over Rs 4,000 crore now forms around 45 per cent of the total IDBI asset base and of that, the bulk (about 85 per cent) are home loans, which have low default rates.

So the former FI's balance sheet won't look quite that bad as it could have. Cost of funding has dropped to around 6 per cent in this fiscal from around 6.4 per cent in the last 2003-04 fiscal and over 8 per cent in 2002-03.

Funding costs could come down further given that IDBI successfully raised US $250 million recently at Singapore in an ECB at 162.8 basis over the 5-year US Treasury rate. The issue was over-subscribed. That should give IDBI some confidence to face the future.