If recent moves are any indication, IDBI Bank is vying for aggressive growth in its reach, business and profitability. The bank has recently done away with the minimum balance requirement for its account holders. Besides, it has waived off the service charges on demand drafts, cheque book issuances, etc. It also aims to expand its branch network by a third. All of these are aimed at increasing the share of current account and savings account (Casa) deposits.
On the other hand, the capital infusion by the government will help the bank to lend more. It’s no surprise that the bank’s stock has done better than the Sensex in the last three months. Strong business growth and improving margins should ensure that volumes would be growing profitably in future.
Robust business growth
IDBI’s advances grew at a robust 34 per cent, compared to 17 per cent achieved by the industry in 2009-10. The capital infusion of Rs 3,200 crore by the government should help IDBI Bank sustain this outperformance. Along with the capital infusion, the bank can raise another Rs 6,000 crore by way of Tier-II capital, which will be sufficient to meet its lending target of Rs 60,000 crore for 2010-11. Overall, expect advances to grow at 35 per cent in 2010-11.
| GROWING FAST ON A LOW BASE | |||||
| In Rs crore | FY10 | Q1 FY11 | % chg | FY11E | FY12E |
| Net interest income | 2,267 | 851 | 169.0 | 3,500 | 4,200 |
| Other income | 2,292 | 466 | -38.0 | 2,400 | 2,600 |
| Operating profit | 2,727 | 830 | 10.0 | 3,500 | 4,000 |
| Net profit | 1,033 | 251 | 45.0 | 1,301 | 1,750 |
| P/BV | 0.9 | 0.9 | 0.8 | ||
| E: Analyst estimates | |||||
The capital infusion will also come in handy with the bank increasing its branch network. In addition to incentives given to savings account holders, the bank aims to add another 250 branches that will take its branch count to 1,000 by next March. The management expects low-cost deposits’ share to increase to 20 per cent by the end of the financial year, from 13 per cent currently.
In terms of advances, while the corporate segment constitutes around three-fourths of the loan book with main focus on infrastructure, increased lending to small and medium enterprises – along with an expanding home loan portfolio (post the merger of its home-finance subsidiary) – should result in a better mix.
Outlook
On the back of improving core business, IDBI has done well in the recent past. The growth in lending as well as an improvement in margins will help business volumes to grow profitably. The net interest margin for IDBI bank stands at 1.65 per cent, which is one of the lowest amongst the larger banks. However, what is impressive is that, except for the slippage last March, it has been able to improve margins since the last six quarters. A greater Casa share and capital infusion should aid margins further.
On the flip side, asset quality (non-performing assets, or NPAs) has slipped sequentially with gross NPA at 1.95 per cent for the June quarter. Since IDBI has been consistently providing for more, its provision coverage ratio has inched up to 39 per cent now (from 34 per cent in the March quarter). The ratio, however, looks better at 73 per cent if technical write-offs are also included (higher than RBI’s mandate).
At Rs 139.70, the stock trades at 0.9 times its estimated 2010-11 book value. Since the stock is up 15 per cent in the last seven sessions, investors could buy on dips with a long-term perspective.
