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Power of Positioning

IDBI has put itself in a position of strength, but it may be susceptible to a downturn

The Industrial Development Bank of India (IDBI) is one of India’s leading private sector banks and occupies the fourth position in overall ratings. It was established in 1964 as a wholly-owned subsidiary of the Reserve Bank of India (RBI) to provide credit and other facilities for development of the industrial sector. In 2005, IDBI transformed itself into a full-service commercial bank after merging its commercial banking arm, IDBI Bank, into itself. Over the years, IDBI has enlarged its basket of products and services, with its offerings covering almost the entire spectrum of industrial activities, including manufacturing and services. IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as well as for expansion, modernisation and diversification purposes.

Also the bank boasts of the distinction of having set up the likes of — The National Stock Exchange of India (NSE), The National Securities Depository Services Ltd. (NSDL) and the Stock Holding Corporation of India (SHCIL).

The bank is promoted by the Government of India, with 53 per cent of the stake being vested with the Centre. After that, the biggest chunk is held by institutional investors, who have cornered a fourth of the pie. Of this nearly 12 per cent lies with the financial institutions and banks.

Investment Rationale
Increased Operating Profits
IDBI Bank has over the years successfully transformed itself from a development financial institution (DFI) into a full-service commercial bank. IDBI’s core operating profit witnessed an impressive growth of ~275 per cent year-on-year (YoY) in Q1FY2010. This growth was logged because of an improvement in various operating parameters, margins, lower cost of incomes and healthy growth in advances. However, because of a multi-fold increase in provisioning expenses, net profit growth got restricted to 7.6 per cent.

Operating Expenses Spike
During the quarter, IDBI underwent aggressive recruitment drives and branch expansions implementation, leading to 29 new branches being set up. But this was at the cost of a 50 per cent increase in operating expenses. Despite that, the cost-income (ex-treasury) ratio improved substantially to 52 per cent for the quarter.

Mixed Business Growth
Through Q1FY10, IDBI’s business growth remained healthy at 41.6 per cent YoY. This was led by a 58.9 per cent and 25.4 per cent growth in deposits and advances respectively.

Risk & Concerns
Downturn to Drive NPAs Up
Any disappointment on the economic recovery front may lead to a surge in the bank’s non-performing assets (NPAs) as the bank has exposure to most industrial sectors and hence needs to make higher provisions. This, in turn, could affect the bank’s future profitability.

Unimpressive NII
IDBI’s net interest income (NII) was much less than expected. For the quarter, its NII stood at Rs 316.4 crore. This was significantly higher than the previous year’s quarter at Rs 90.6 crore. The reason behind this may be the possible change in the accounting policy for the recoveries.

Low CASA Ratio
The low-cost deposits as a percentage of the bank’s overall deposits are lesser than that of other government-owned banks, mainly due to the different focus of the entity in its role as a DFI. The peers (other public sector banks [PSBs]) have a current account and savings account (CASA) ratio in the range of 25-40 per cent while IDBI Bank’s CASA ratio is much lower at ~12 per cent.

Restructuring of Loans
During FY2009, IDBI Bank restructured loans worth Rs 3,131 crore and currently has applications for restructuring of loans worth over Rs 5,500 crore. Together these constitute over 8 per cent of the bank’s total outstanding advances. The rate is significantly higher compared with that of other PSBs who have restructured loans to the tune of ~1.5-4.5% of their total loans.

Capital adequacy ratio (CAR) of the bank remains above the regulatory requirement of 12.3 per cent with tier-I CAR at 7.11 per cent. The same has improved vis-à-vis 11.57 per cent for the previous quarter, as the bank raised Rs 500 crore through upper tier-II bonds (15-year maturity; coupon rate of 8.95%).

IDBI Bank saw its earnings per share (EPS) grow on an annual basis from 12.3 per cent in FY07 to 15.7 per cent in FY08. Despite the severe slowdown in FY09 the bank grew by 17.8 per cent. It can be considered on dips.

This article appeared in the August 2009 issue of Wealth Insight.