IDBI Bank ACCUMULATE. Performance Highlights CMP. `105 Target Price `117. 4QFY2012 Result Update Banking. Investment Period 12 months

Transcription

1 4QFY2012 Result Update Banking April 23, 2012 IDBI Bank Performance Highlights Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy) NII 1,211 1, Preprov. profit 1, PAT For 4QFY2012, IDBI Bank reported a healthy performance. Net profit grew by 49.3% yoy to `771cr, above our estimates, primarily due to lower provisioning expenses than estimated by us. Improvement in asset quality and NIM were the key highlights of the result. We recommend Accumulate on the stock. Asset quality surprises positively: The bank s loan book witnessed significant traction in 4QFY2012 on account of meeting yearend targets (particularly priority sector lending). The bank s advances grew by 16.0% qoq (up 15.3% yoy) and deposits grew by 18.8% qoq (up 16.6% yoy). Growth in current and savings accounts was healthy at 33.6% yoy and 36.4% yoy, respectively. CASA ratio as of 4QFY2012 stood at 24.1% (19.7% in 3QFY2012). The bank s NIM expanded by 18bp qoq during 4QFY2012 on account of lower cost of funds (down 26bp sequentially), primarily due to higher CASA floats (CA deposits up 77.4% qoq). The bank relies heavily on bulk deposits for its funding (~55% of overall deposits as of 4QFY2012); however, the bank rolled over most of these deposits during January 2012 and escaped the high costs that prevailed during most of 4QFY2012. The bank s commissionbased fee income increased sharply during 4QFY2012 by 94.3% qoq (up 24.9% yoy), as the bank realized pending fee accruals (processing and syndicationbased fee income) that got approved in 4QFY2012. For 4QFY2012, IDBI Bank s asset quality surprised positively with slippage ratio declining to 1.0% in 4QFY23012 from 3.1% in 3QFY2012. Consequently, provisioning cost declined sharply by 32.6% qoq in 4QFY2012 to `274cr (`406cr in 3QFY2012). The bank restructured ~`1,500cr worth of accounts during 4QFY2012, of which `763cr relates to restructuring of Air India. ACCUMULATE CMP `105 Target Price `117 Investment Period 12 months Stock Info Sector Banking Market Cap (` cr) 10,334 Beta Week High / Low 154/77 Avg. Daily Volume 508,392 Face Value (`) 10 BSE Sensex 17,097 Nifty 5,201 Reuters Code IDBI.BO Bloomberg Code IDBI@IN Shareholding Pattern (%) Promoters 70.5 MF / Banks / Indian Fls 14.6 FII / NRIs / OCBs 3.2 Indian Public / Others 11.7 Abs. (%) 3m 1yr 3yr Sensex 2.1 (12.8) 50.9 IDBI Bank 9.4 (30.1) 55.6 Outlook and valuation: Considering the bank s healthy performance in 4QFY2012, we have lowered our provisioning expense estimates for FY2013 by 8.3% and increased our bottomline estimates by 12.6%. We value the stock at 0.7x FY2014 ABV and, hence, recommend Accumulate on the stock with a target price of `117. Key financials Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E NII 4,329 4,545 5,598 6,890 % chg Net Profit 1,650 2,032 2,540 3,060 % chg NIM (%) EPS (`) P/E (x) P/ABV (x) # RoA (%) RoE (%) ; Note: # without adjusting for SASF Vaibhav Agrawal Ext: 6808 vaibhav.agrawal@angelbroking.com Varun Varma Ext: 6847 varun.varma@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 4QFY2012 performance Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy) Interest earned 6,079 5, , on Advances / Bills 4,700 4, , on investments 1,328 1,349 (1.6) 1, on balance with RBI & others on others 20 0 NA Interest Expended 4,869 4, , Net Interest Income 1,211 1, , Other income Other income excl. treasury Fee Income Treasury Income (18.8) 48 (18.8) Recoveries from written off a/c (23.3) Others Operating income 1,988 1, , Operating expenses Employee expenses Other Opex Preprovision Profit 1, , Provisions & Contingencies (32.6) 282 (2.9) Provisions for NPAs (83.8) 131 (55.7) Provisions for Investments 112 (85) NA 144 NA Other provisions (22.2) 7 NA PBT Provision for Tax , (59.3) PAT Effective Tax Rate (%) bp 41.7 (2537)bp Exhibit 2: Actual vs. Angel estimates Particulars (` cr) Actual Estimates Variation (%) NII 1,211 1, NonInterest Income Operating Income 1,988 1, Operating Expenses (0.3) PreProv. Profit 1, Provisions & Cont (45.3) PBT Prov. for Taxes PAT April 23,

3 Exhibit 3: 4QFY2012 performance Particulars 4QFY12 3QFY12 %chg (qoq) 4QFY11 %chg (yoy) Balance sheet Advances (` cr) 181, , , Deposits (` cr) 210, , , CredittoDeposit Ratio (%) (213)bp 87.0 (98)bp Current deposits (` cr) 31,722 17, , Saving deposits (` cr) 19,002 16, , CASA deposits (` cr) 50,724 34, , CASA ratio (%) bp bp CAR (%) bp bp Profitability Ratios (%) Cost of funds (26)bp bp Yield on assets bp bp Return on Earning Assets bp bp Cost of Liabilities (29)bp bp Reported NIM bp 2.1 (3)bp Costtoincome ratio (482)bp bp Asset quality Gross NPAs ` cr) 4,551 4,640 (1.9) 2, Gross NPAs (%) (45)bp bp Net NPAs (` cr) 2,911 3,058 (4.8) 1, Net NPAs (%) (35)bp bp Provision Coverage Ratio (%) (81)bp 74.7 (638)bp Slippage ratio (%) (218)bp bp NPA provision to avg. assets (%) (48)bp 0.2 (14)bp Loan growth up on priority sector lending The bank s loan book witnessed significant traction in 4QFY2012 on account of meeting yearend targets (particularly priority sector lending). The bank s advances grew by 16.0% qoq (up 15.3% yoy) and deposits grew by 18.8% qoq (up 16.6% yoy). On a sequential basis, growth in loan book was driven by higher agri lending (which increased by 58.3% qoq), corporate loans (which increased by 14.4% qoq) and retail loans (largely priority sector home loans which increased by 11.5% qoq) during 4QFY2012. Management has indicated that it would continue with its strategy of growing slower than the system in FY2013 as well to increase its total proportion of CASA deposits and has guided for loan growth of 15% over FY2013. Exhibit 4: Agri and retail (home loans) lending up in 4QFY2012 Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy) % to total Corporate 123, , , SME 8,193 8,946 (8.4) 13,527 (39.4) 4.5 Agriculture 18,906 11, , Retail 30,472 27, , Total advances 181, , , April 23,

4 CASA deposits grew strongly by 45.6% qoq, primarily on account of a sharp spike in current account deposits (up 77.4% qoq) due to oneoffs (higher CASA floats) related to activities such as issuance of taxfree bonds. Saving account deposits growth continued to witness higher traction growing by 12.1% qoq. On a yearly basis, growth in current and savings accounts was healthy at 33.6% yoy and 36.4% yoy, respectively. CASA ratio as of 4QFY2012 stood at 24.1% (19.7% in 3QFY2012). About a year back, the bank had waived off all transaction and servicerelated charges on all current and saving bank accounts to attain higher growth in CASA deposits. As a result, the bank has increased the number of saving accounts by robust ~36% (to ~60.3lakh accounts) over the past one year. Exhibit 5: Priority sector lending drives loan book growth Exhibit 6: CASA deposit growth remains healthy Adv. qoq chg (%) Dep. qoq chg (%) CDR (%, RHS) (10.0) (1.3) (2.3) (1.0) CASA ratio (%) CASA yoy growth (%, RHS) NIM increases sequentially on lower cost of funds The bank s NIM expanded by 18bp during 4QFY2012 on account of lower cost of funds (down 26bp sequentially), primarily due to higher CASA floats (CA deposits up 77.4% qoq). The bank relies heavily on bulk deposits for its funding (~55% of overall deposits as of 4QFY2012); however, the bank rolled over most of these deposits during January 2012 and escaped the high costs that prevailed during most of 4QFY2012. April 23,

5 Exhibit 7: Lower cost of funds sequentially... Exhibit 8:...leading to higher NIM for 4QFY2012 (%) (%) Fee income picks up on yearend surge The bank s commissionbased fee income increased sharply during 4QFY2012 by 94.3% qoq (up 24.9% yoy), as the bank realized pending fee accruals (processing and syndicationbased fee income) that got approved in 4QFY2012. Majority of the commissionbased fee income in 4QFY2012 was derived from processing (project appraisals) and syndicationbased fees. Management has attributed the higher sequential growth in fee income to this yearend surge and expects fee income to dip back to normalized levels again from 1QFY2013. Exhibit 9: Fee income up on year end traction Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy) CEB Treasury (18.8) 48 (18.8) Forex Recoveries (23.3) Others (2.9) Other income Other income excl. treasury Slippages surprise positively during 4QFY2012 IDBI Bank s asset quality surprised positively during the quarter, with slippage ratio declining to 1.0% in 4QFY2012 from 3.1% in 3QFY2012. Consequently, provisioning cost declined sharply by 32.6% qoq in 4QFY2012 to `274cr (`406cr in 3QFY2012). The bank restructured ~`1,500cr worth of accounts during 4QFY2012, of which `763cr relates to restructuring of Air India. The bank s gross NPA during 4QFY2012 declined by 1.9% qoq and net NPA declined by 4.8% qoq. As of 4QFY2012, the bank s gross NPA ratio stood at 2.5% (2.9% in 3QFY2012) and net NPA ratio stood at 1.6% (1.8% in 3QFY2012). The bank s effective tax rate was lower at 16.3% for 4QFY2012. The bank utilized deferred tax credit worth `258cr during the quarter. Also, due to deferred tax adjustments the bank s tax liability further reduced by `184cr (reversal of earlier years) and `65cr (not created for FY2012). April 23,

6 Exhibit 10: Asset quality surprises positively Exhibit 11: Slippages down significantly during 4QFY Gross NPAs (%) Net NPAs (%) PCR (%, RHS) Slippages (%) Credit cost (%, RHS) Exhibit 12: Branch expansion trend Exhibit 13: Cost ratios inch up a bit 1, Branches ATMs (RHS) 1,542 1,518 1,496 1,459 1, ,600 1,500 1,400 1,300 1,200 (%) Opex to average assets (%, RHS) CIR (%, RHS) April 23,

7 Investment arguments Strong branch expansion and relatively healthy fee income IDBI Bank enjoys the advantage of a modern, 100% CBS branch network, which is growing organically at a much faster rate than other PSU banks (17 18% CAGR post the FY2007 UWB acquisition). While the present 973 branches are predominantly urbanconcentrated (~66%), the bank intends to increase its presence in semiurban areas going forward. Management is planning to open another 150 branches in FY2013, which we believe should continue to increase the contribution of retail deposits in the bank s funding mix and drive strong CASA market share gains. The bank s CASA deposits posted a 35.7% CAGR over FY , and we have factored in a 21.7% CAGR over FY201214E. Relative to other PSU banks, on account of the bank s strong corporate relationships and government mandates, the bank s fee income at 0.7% is also reasonably healthy (though going forward, in light of the bank s recent move to waive off charges for retail depositors to attract CASA deposits as well as slower balance sheet growth and consistent with management s guidance, we have factored in moderate 13.0% yoy growth in fee income for FY2013). RoA enjoying structural tailwinds Historically, IDBI Bank has witnessed the lowest NIM in the industry, majorly on account of high cost of funding due to the liability mix heavily skewed towards bulk deposits. Also, since the bank relied heavily on corporate lending to increase its loan book, yields on assets on an average have been lower than peers. In wake of lower NIMs, the bank has indicated a strategy of lower advances growth (~15% for FY2013) than the system to concentrate on the increasing percentage of lowcost CASA deposits and to consciously shift focus from large corporate lending to retail and MSME lending to bring in higheryielding loans. April 23,

8 Investment concern SASF A burden on the bank s books Due to the erstwhile DFI structure being challenged by a number of assetquality issues, IDBI Bank at the time of the merger had to set up a stressed asset stabilization fund (SASF) to quarantine defaulted assets. The transfer value of the SASF was ~`9,000cr, through which the bank has witnessed only ~`3,800cr worth cash recoveries (as of FY2012). The possibility of an entire recovery seems implausible and would lead to full provisioning expenses towards the amount that remains unrecoverable. The SASF with an outstanding value of ~`5,200cr also remains a burden on the bank s investment books due to its special nature of zero interest securities. Accordingly, we have adjusted 75% of the value of the SASF against the bank s net worth to arrive at ABV estimates for valuing the bank. At the same time, the bank has material stakes in several financial institutions, including NSE, CARE, NSDL and ARCIL, apart from subsidiaries such as IDBI Federal Life, and the market value of all these investments is estimated to be about `2,000cr more than the bank s investment cost (about `15 per share, post 25% holding company discount). Monetization of these investments could partially help in compensating the decline in the bank s net worth on account of legacy NPAs, providing an upside to our estimates. Outlook and valuation The bank has been among the fastestgrowing banks in terms of CASA deposits over the past few years (CAGR of ~36% over FY200712) even when compared to private banks and now has a market share of 2.1% (as of FY2011). At the CMP, the bank is trading at valuations of 0.8x FY2013E P/ABV, adjusting for the SASF amount (0.6x without adjusting). Considering the bank s healthy performance in 4QFY2012, we have lowered our provisioning expense estimates for FY2013 by 8.3% and increased our bottomline estimates by 12.6%. We value the stock at 0.7x FY2014 ABV and, hence, recommend Accumulate on the stock with a target price of `117. Exhibit 14: Key assumptions Earlier estimates Revised estimates Particulars (%) FY2013 FY2014 FY2013 FY2014 Credit growth Deposit growth CASA Ratio NIMs Other Income growth Growth in Staff Expenses Growth in Other Expenses Slippages Coverage Ratio Source: Angel Research April 23,

9 Exhibit 15: Change in estimates FY2013 Particulars (` cr) Earlier Revised Earlier Var. (%) estimates estimates estimates FY2014 Revised estimates Var. (%) NII 5,563 5, ,859 6, Noninterest income 2,258 2, ,559 2, Operating income 7,821 8, ,418 9, Operating expenses 3,153 3,150 (0.1) 3,808 3,805 (0.1) Preprov. profit 4,668 4, ,610 5, Provisions & cont. 1,447 1,327 (8.3) 977 1, PBT 3,221 3, ,633 4,530 (2.2) Prov. for taxes ,503 1,470 (2.2) PAT 2,255 2, ,130 3,060 (2.2) Source: Angel Research Exhibit 16: P/ABV # band 250 Price (`) 0.5x 0.7x 0.9x 1.1x 1.3x Apr06 Sep06 Feb07 Jul07 Dec07 May08 Oct08 Mar09 Aug09 Jan10 Jun10 Nov10 Apr11 Sep11 Feb12 Jul12 Dec12 ; Note: #Without adjusting the book value for SASF April 23,

10 Exhibit 17: Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) FY2014E P/ABV (x) FY2014E Tgt. P/ABV (x) FY2014E P/E (x) FY201214E EPS CAGR (%) FY2014E RoA (%) FY2014E RoE (%) AxisBk Buy 1,135 1, FedBk Neutral HDFCBk Neutral ICICIBk* Buy 843 1, SIB Neutral YesBk Buy AllBk Buy (2.1) AndhBk Neutral BOB Buy BOI Accumulate BOM Buy CanBk Accumulate CentBk Reduce (7.1) CorpBk Buy DenaBk Buy IDBI # Accumulate IndBk Accumulate IOB Accumulate J&KBk Neutral OBC Buy PNB Buy 887 1, SBI* Buy 2,192 2, SynBk Buy UcoBk Neutral UnionBk Buy UtdBk Buy VijBk Reduce (5.6) ; Note:*Target multiples=sotp Target Price/ABV (including subsidiaries), # Without adjusting for SASF April 23,

11 Income statement Y/E March (` cr) FY09 FY10 FY11 FY12E FY13E FY14E NII 1,239 2,256 4,329 4,545 5,598 6,890 YoY Growth (%) Other Income 1,562 2,181 2,084 2,119 2,406 2,699 YoY Growth (%) (9.8) 39.6 (4.4) Operating Income 2,802 4,437 6,413 6,664 8,004 9,589 YoY Growth (%) Operating Expenses 1,338 1,831 2,255 2,607 3,150 3,805 YoY Growth (%) Pre Provision Profit 1,464 2,605 4,158 4,056 4,855 5,784 YoY Growth (%) (2.4) Prov. & Cont ,561 1,877 1,427 1,327 1,254 YoY Growth (%) (25.3) (24.0) (7.0) (5.5) Profit Before Tax 985 1,045 2,281 2,630 3,528 4,530 YoY Growth (%) Prov. for Taxation ,470 as a % of PBT PAT 859 1,031 1,650 2,032 2,540 3,060 YoY Growth (%) Balance sheet Y/E March (` cr) FY09 FY10 FY11 FY12E FY13E FY14E Share Capital ,279 1,279 1,279 Reserves & Surplus 8,699 9,440 13,583 18,120 20,067 22,385 Deposits 112, , , , , ,376 Growth (%) Borrowings 35,532 35,010 36,607 40,566 45,500 52,253 Tier 2 Capital 8,885 12,699 14,962 12,912 14,591 16,633 Other Liab & Prov. 6,160 8,031 6,754 7,467 8,665 10,543 Total Liabilities 172, , , , , ,470 Cash balances 8,592 13,903 19,559 15,090 9,683 11,135 Bank balances 2, ,207 2,967 3,389 3,892 Investments 50,048 73,345 68,269 83, , ,231 Advances 103, , , , , ,368 Growth (%) Fixed Assets 2,824 2,997 3,037 3,019 3,344 3,726 Other Assets 4,867 4,446 4,206 5,427 6,198 7,118 Total Assets 172, , , , , ,470 Growth (%) April 23,

12 Ratio analysis Y/E March FY09 FY10 FY11 FY12E FY13E FY14E Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan Loss Prov./Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS# DPS Valuation Ratios PER (x) P/ABVPS (x)# Dividend Yield DuPont Analysis (%) NII () Prov. Exp Adj. NII Treasury Int. Sens. Inc Other Inc Op. Inc Opex PBT Taxes RoA Leverage (x) RoE Note: # without adjusting for SASF April 23,

13 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement IDBI Bank 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (5 to 5%) Reduce (5% to 15%) Sell (< 15%) April 23,