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Research
IDBI Bank - Strong core earnings; Buy - Anand Rathi
Posted On : 2012-11-01 20:29:29( TIMEZONE : IST )
Despite modest net interest income and healthy fee-income growth, IDBI Bank's 2QFY13 profits declined due to prudent NPA provisioning. While its focus on prudent credit growth, NIM protection and controlling operating costs are strong positives, its asset quality needs to improve, in our view, for a strong valuation upside.
- Cautious credit growth, stable NIM, better CASA share. To achieve its priority-sector lending targets in FY13, the bank is focusing on farm, SME (small and medium enterprises) and retail mortgage loans. This strategy resulted in cautious business growth - advances rose 6.7% yoy, deposits 3.2%. NIM improved 6bps yoy (flat qoq) to 2%, led by a 274-bp yoy rise in the proportion of CASA, to 21.9%. Savings deposits grew 30% yoy and now comprise 50% of CASA.
- Fees healthy despite one-offs; productivity stable. Adjusting for onetime syndication fees of Rs.1,250m, fee-income grew ~14% yoy. Hence, despite lower treasury gains of Rs.2bn (down 68.3% yoy), non-interest income grew 45.1% yoy. Productivity was largely stable, with core cost-income up 48bps yoy (224bps qoq) to 39.4%, and cost-assets up 17bps yoy (16bps qoq) to 1.2%, one of the lowest of its peers.
- NPA coverage rises, higher credit costs mar profits. Gross NPA rose 6.4% qoq, led by fresh slippages of Rs.6.2bn (1.5% of loans). Prudent provisioning for an airline exposure pushed NPA coverage up 523bps qoq to 42%. Fresh restructuring of Rs.15bn helped total restructured loans 15.1% qoq to Rs.125.3bn (7.5% of loans). While core earnings continue to improve, the capital cushion has been stretched by the high restructured book and net NPA (2%). Hence, perceptions of default risk would persist until asset quality improves, restricting a sharp short-term valuation re-rating.
- Valuation. We value the standalone bank at Rs.118 (0.6x FY14e ABV). We price the investments at book value (Rs.23), arriving at our target of Rs.141. Risk: Slower-than-expected economic growth.
