| Total assets
(Rs cr) | Net NPA/net
advances (%) | Capital
adq. ratio
(%) | Book value
per share
(Rs) |
| State Bank of India | 407,815 | 3.48 | 13.53 | 384.00 |
| Punjab National Bank | 102,332 | 0.98 | 13.10 | 189.00 |
| ICICI Bank | 125,229 | 2.21 | 10.36 | 87.00 |
| HDFC Bank | 42,307 | 0.16 | 11.66 | 95.00 |
| Canara Bank | 99,539 | 2.89 | 12.66 | 128.00 |
| Bank of Baroda | 85,109 | 2.99 | 13.91 | 174.00 |
| IDBI Bank (merged)* | 77,298 | 0.80 | 18.20 | 110.20 |
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New look balance-sheet
The new bank begins life armed with a cache of Rs 9,000 crore in the form of zero-coupon bonds that will be held to maturity. This princely sum, donated by the government, has been swapped for an equivalent amount of non-performing loans (NPLs) transferred to a Stressed Asset Stabilisation Fund (SASF). |
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| The transfer of assets to the SASF is 'without recourse' to IDBI for 20 years, which is the tenor of the bonds. As an when an NPL is settled it will go back to IDBI and will earn interest, and an equivalent sum of bonds will be extinguished. |
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| If some assets are not recovered after 20 years by SASF, then those could flow back to the bank. With this transfer, IDBI has managed to get the Rs 1,200-crore Dabhol NPA off its books, though the non-funded portion of the asset of Rs 900 crore still remains. |
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| IDBI's balance-sheet has thus been cleaned up with net NPLs down from 15 per cent to less than 1 per cent. More pertinently, the bank does not need to apportion capital for the transferred assets - a saving of approximately Rs 700 crore - and neither does it need to make provisions for them - a saving of approximately Rs 800 crore. |
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| There are some sub-standard assets left behind on the books though, which, the chairman claims, are recoverable in the near term, some of which have been provided for. |
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| IDBI has managed to buy itself five years time before it starts maintaining the required quantum of gilts or the statutory liquidity ratio that all banks are supposed to. It has, however, deposited Rs 2,400 crore for CRR from day one. |
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| As for priority sector lending, which the RBI says should be 40 per cent of advances of any bank, Damodaran says with the definition changing, lending to the infrastructure sector would be considered as lending to the priority sector. |
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| Thus, while the project finance SBU will fund only infrastructure projects, the retail banking SBU (former IDBI Bank) will continue to lend to the farm sector also, to the extent of 18 per cent of advances. |
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Cheaper liabilities
IDBI has a legacy of high-cost liabilities of almost Rs 45,000 crore, priced at slightly over 9.5 per cent. In the next two to three years it hopes to replace these with cheaper deposits raised at its 100-odd branches. |
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| Damodaran says the bank should be able to bring down the weighted average cost of liabilities from about 9.5 per cent at present by about 100 basis points over 12 months. That could mean a saving of Rs 500 crore. |
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| While not setting a target for deposits, the chairman says the bank will do what it takes to attract customers, indicating that it may price its deposits marginally higher for some time. |
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| Incidentally, ICICI Bank managed around Rs 20,000 crore worth of deposits in two years. IDBI should be able to do around Rs 5,000 crore, given that it is a government bank and there is better liquidity in the system. |
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Steady loan growth
IDBI recently lowered its PLR from 12.5 per cent to 10.5 per cent in a bid to become more competitive in the marketplace. With the corporate sector once again looking to expand capacities and put up new ventures, opportunities for lending exist and the bank should be able to grow its asset book by about 10-12 per cent a year. |
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| The capital adequacy ratio (CAR) stands at 18.5 per cent which allows enough room for growth. The growth in net interest income for IDBI (standalone) will in the initial period be driven by the repricing of deposits. |
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| According to back-of-the-envelope calculations, net interest income should go up to Rs 1,350 crore in FY06 with the interest expenditure coming down by Rs 500 crore. |
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| Also, given the recovery in industrial segments such as steel and textiles, a good portion of the stressed assets should be recoverable and incremental NPLs should be fewer. So, the amount of incremental provisioning required going forward should be less than Rs 250 crore a year. |
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Competitive pressure
A cleaner balance-sheet no doubt has its positives but it will not help the bank too much in the marketplace where savvy marketing, good customer service and state-of-the-art technology are needed to stay ahead. True, IDBI Bank has built a reputation for itself and will not face a shortage of capital. |
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| Nonetheless, it must be admitted that IDBI simply does not have the management bandwidth of an HDFC Bank or an ICICI Bank. Besides, the integration will take its time and have its share of teething troubles. The technology platforms of the merging entities, however, are compatible. |
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| If IDBI is indeed to become the second-largest bank, the inorganic route is the fastest. However, a merger with a public sector bank will take its toll on IDBI in the initial years as integration will be a long and tedious process. |
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Valuation
According to analysts, based on the expected savings and the management's indications, the merged entity's earnings could touch Rs 16.50 in FY06, with an adjusted book value of Rs 131. |
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| The swap ratio for the merger has not been announced, but indications are that it could be in the ratio of 1:1.5 (one share of IDBI for 1.5 shares of IDBI Bank), given the projected earnings and book values. |
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| On a standalone basis, IDBI's earnings are expected to be around Rs 15.50 in FY06 with a book value of Rs 130. At the current price of Rs 90, the stock trades at 0.7 price to book and is attractively valued. Analysts have set a target price of Rs 130-135 for the merged entity. |
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