IDBI Bank - Weak asset quality; we downgrade to a Hold - Anand Rathi

Credit growth modest, but NIM and CASA proportions improve. At 10.3% yoy, advances growth was faster than the past four-quarter average of 8.1%. Deposits grew faster, at 12.5% yoy, resulting in credit-to-deposits falling 175bps yoy to 90.6%. NIM improved 18bps yoy (flat qoq) to 2.2%, driven by a 3-bp yoy (140-bp qoq) rise in the proportion of CASA in deposits, to 22%. As the management focuses on prudent lending, we estimate CAGRs of 9.2% in advances and 9% in deposits over FY13-15.

Weak fee-income, but productivity improves. Fee-income fell 11% yoy, with fees-to-earning assets falling 16bps yoy (6bps qoq) to 0.73%. Treasury losses were Rs. 500m, and comprised -3.9% of pre-provisioning profit (3.6% in 1QFY13). Excluding Treasuries, operating profits grew 14.2% yoy (13.3% qoq). Productivity improved, with core cost-to-income down 207bps yoy (553bps qoq) to 37.3%, with cost-assets down 5bps yoy (13bps qoq), to 1.1%.

Asset quality slips, NPA coverage falls. Gross NPA rose 17.7% qoq, with NPA coverage (excl. technical write-offs) falling 657bps qoq to 44.8%. While fresh slippages were Rs. 21.5bn (annualized, 4.7% of loans), fresh restructuring was Rs. 5.6bn (annualized, 1.3% of loans), pushing total restructured loans to Rs. 146.7bn (8% of loans). While current valuations (0.6x PABV FY14e) appear to price in asset quality concerns, perceptions of default risk would persist until asset quality improves, restricting a sharp short-term valuation re-rating.

Our take. Due to higher NPA assumptions, we cut our PAT estimates for FY14/15 by 34.4%/12.6% and downgrade the stock from a Buy to a Hold. We expect the bank's FY14-15 RoE to hold below 10%, led by slower business growth and high NPA provisions. Also, capital infusion of Rs. 18bn by the government is likely to occur below book value, containing RoE improvement. Our target is based on the two-stage DDM (CoE: 18.8%; beta: 1.3; Rf: 8.5%). Risks: Upside - Sharp decrease in defaults; Downside - slower-than-estimated credit growth.

Source : Equity Bulls

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