IDBI Bank. CMP: INR106 TP: INR121 Neutral

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1 BSE SENSEX S&P CNX 17,207 5,223 Bloomberg IDBI IN Equity Shares (m) 1, Week Range (INR) 154/77 1,6,12 Rel.Perf.(%) -1/0/-7 M.Cap. (INR b) M.Cap. (USD b) April QFY12 Results Update Sector: Financials IDBI Bank CMP: INR106 TP: INR121 Neutral IDBI Bank s 4QFY12 PAT grew 49% YoY and 88% QoQ to INR7.7b driven by (1) the 18bp QoQ improvement in NIM to 2.1%, (2) strong growth in fee-based income (up 1.8x QoQ), and (3) better-than-expected asset quality. Corporate and agriculture segments drive loan growth: While growth in loan book was flat during 9MFY12, strong expansion in 4QFY12 (up 16% QoQ) led to overall loan growth of 15% in FY12. The management has guided loan growth of 15% in FY13, to be driven by priority sector loans and corporate loans. NIM up 18bp QoQ a positive surprise: Reported NIM improved 18bp QoQ to 2.1%. While IDBI is expected to be a key beneficiary of interest rate reversal (50%+ bulk deposits), strong growth in PSL segment and repricing of loans at lower rates would limit margin benefit. The management has guided NIM of 2-2.2% in FY13. GNPA in absolute terms declines 2% QoQ: Gross slippages declined to INR3.8b (annualized slippage ratio of ~1% v/s 2.4% during 9MFY12). Recoveries and up-gradation picked-up and stood at INR4.6b (v/s INR6.1b in 9MFY12) leading to negative net slippage of INR860m, a key positive. Other highlights: (1) Daily average CASA ratio improved 70bp QoQ to 16.5%. (2) Cumulative equity infusion was INR33.2b in 4QFY12, resulting in equity dilution of ~30% on a pre-diluted basis. Tier I ratio stood at 8.4%. Valuation and view: Structurally, IDBI s operational performance remained weak in FY12. Despite lower tax of 23%, RoA was just 0.75% due to (1) lower NIM (~2%), (2) volatile growth in fee-based income (flat in FY12), and (3) increased pressure on asset quality. Continuous improvement in asset quality would be the key driver for rerating the stock (which has been volatile in the past few quarters). Maintain Neutral. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Sohail Halai (Sohail.Halai@MotilalOswal.com);

2 Strong loan growth driven by large corporate advances and PSL segment While growth in loan book was flat during 9MFY12, strong expansion in 4QFY12 (up 16% QoQ) led to overall loan growth of 15% in FY12. The incremental growth during the quarter was driven by 14% QoQ growth in corporate advances (up 16% YoY and formed 62% of incremental loans in 4QFY12) and 58% QoQ growth in agriculture loans (up 78% YoY and accounted for 28% of incremental loans in 4QFY12). Loans to the SME segment continued to decline (down 8% QoQ and 28% YoY) as the management remains cautious in this segment after asset quality issues emerged in FY11. Retail loans grew 11% QoQ (up 4% YoY). Management has guided for loan growth of 15% to be driven by PSL and past sanctions in corporate segment. NIM up 18bp QoQ a positive surprise Reported NIM expanded 18bp QoQ to 2.1% led by the lower cost of funds (down 26bp QoQ) to 8.4%, and 35bp improvement in yields on earnings assets to 10.7%. Despite tight liquidity conditions during 4QFY12, and strong growth in PSL segment, the improvement in margin was impressive. The sharp decline in slippages led to lower interest income reversals, boosting yield on loans. On the other hand, opportunistic borrowing, utilization of refinancing window and higher CA deposits due to government business helped contain cost of funds. For FY12, margin stood at 2% v/s 2.1% in FY11. Management guided for NIM of 2-2.2% for FY13. Asset quality improves QoQ performance in FY13 remains a key Gross slippages in 4QFY12 declined to INR3.8b (annualized slippage ratio of ~1% v/s 3.7% in 3QFY12 and 2.4% for 9MFY12). Adjusted for one large telecom account of INR7.7b, the slippage ratio in 3QFY12 stood at 1.4%. Recoveries and up-gradation picked up during 4QFY12 and stood at INR4.6b (v/s INR2.6b in 3QFY12 and INR6.1b in 9MFY12) leading to a negative net slippage of INR860m v/s average run rate of INR7.2b in first two quarters of FY12. Management has guided for quarterly slippages run-rate of maximum INR4.5b v/s INR7.9b in FY12. For FY12, reported net slippages (adjusted for up-gradation and recoveries made during the year) stood at INR25.6b (1.6% of opening loan), whereas on gross basis (quarterly summation of slippages), they were INR31.6b (2% of opening loans v/s 1.4% in FY11). GNPA declines QoQ In absolute terms, GNPA declined 2% QoQ to INR45.5b, whereas NNPA declined 5% QoQ to INR29.1b. In percentage terms, GNPA and NNPA declined 45bp and 35bp QoQ to 2.5% and 1.6%, respectively. PCR (cal) improved to 36% from 34% in 3QFY12, whereas PCR (incl technical write-off) stood at 68%. GNPA ratio declined in all segments with GNPA ratio in agriculture segment declining to 2.2% v/s 3.1% in 3QFY12, partially led by strong loan growth in the segment. Restructured loans amounted to INR15b in 4QFY12 During the quarter, the bank restructured loans amounting to INR15b on a gross basis (80bp of overall loan). Net of repayment, addition to restructured portfolio stood at INR5.7b (30bp of overall loans). Some accounts like Air India (INR7.6b), Vijay Electrical (INR1b), 3i Infotech (INR2b) and other two large accounts (INR1.8b) were restructured in 4QFY12. Overall, net restructured loan book stood at INR86b (4.8% of overall loans). Going forward, the management does not expect large-scale restructuring. 24 April

3 Daily average CASA ratio up 70bp QoQ CASA grew 45% QoQ and 34% YoY, led by strong growth in CA deposits (up 77% QoQ and 33% YoY), a seasonal phenomenon. Growth in SA deposits was an impressive 12% QoQ and 37% YoY. As a consequence, CASA ratio at end of 4QFY12 improved to 24.1% from 19.7% in 3QFY12. The focus on consolidating its balance sheet and improving liability profile has started yielding results. Traction in acquisition of new customer accounts remains strong (now over 6m+v/s 4.4m in FY11) and the average daily CASA ratio improved to 16.5% from 15.8% in 3QFY12 and 14.8% in 4QFY11. Sharp improvement in fee-based income growth Seasonal factors, coupled with the strong growth in syndication-related fees, led to strong growth in fee-based income (up 81% QoQ and 20% YoY). However in FY12, overall fee income declined 3% to INR17.2b. Trading profits stood at INR270m v/s INR400m in 3QFY12 and INR480m in 4QFY11. Recoveries from written-off accounts stood at INR560m v/s INR190m in 3QFY12 and INR730m in 4QFY11. Management expects fee income to be weak and has guided flat growth in FY13. Other highlights Operating expenses grew 19% QoQ and 29% YoY led by the 30% QoQ and 26% YoY increase in employee expenses. Management mentioned the increase in employee expense was largely due to higher provisions for gratuity and pensions (INR1.3b) due to a change in actuarial valuations. CRAR at 14.8%: During 4QFY12, the Government converted tier-1 bonds of INR.21.3b into equity shares and infused further capital of INR8.1b. LIC infused equity of INR3.8b, taking cumulative equity infusion to INR33.2b, resulting into equity dilution of ~30% on a pre-diluted basis. However, despite fresh capital infusion of INR11.9b and including full year FY12 profits, tier I capital still remains at 8.4% v/s 7.5% in 3QFY12. Tax rate stood at 16.3% v/s 41% a year ago. However, tax expenses for the quarter include a reversal of deferred tax liability of INR1.8b. Adjusting for this, the effective tax rate was ~36%. The bank has declared dividend of INR3.5 per share for FY12, translating into a dividend yield of 3.3%. Valuation and view Structurally IDBI s operational performance remains weak in FY12. Despite lower tax of 23% (higher deferred tax write-back), RoA stood at 0.75% due to (1) lower NIM (~2%), (2) volatile fee income growth (flat in FY12), and (3) increased pressure on asset quality (slippage ratio of ~2%). In case of normalized tax rate of 33%, RoA would have been lower at 0.65%. IDBI will be a key beneficiary of interest rate reversal (50%+ of its deposits are bulk deposits). Currently only 33% of its loans are to the PSL segment, which it needs to increase to 40% by end of FY13 as per RBI guidelines. Thus, the management guidance of 15% loan growth implies that bulk of the lending in FY13 would be the PSL and corporate segments where it has prior commitment. This is negative for incremental yield on loans, thereby limiting the benefit of interest rate reversal on margins. 24 April

4 Further, re-pricing of loans with reduction in base rate would pressurize yields on loan and higher dependency on bulk deposits would lead to volatility in margins. Management has guided margin of 2-2.2% in FY13 v/s 2% in FY12. We model in ~15bp expansion in margin for FY13 (10bp benefit of capital infusion) and stable margin in FY14. Though slippages declined significantly in 4QFY12 (INR3.8b v/s INR27.8b in 9MFY12), asset quality has been very volatile in past few quarters. Continuous improvement in asset quality will be a key driver of stock re-rating, in our view. We expect the bank to report RoA of % and RoE of ~13% over FY IDBI has some strategic investments, which we have not considered in our valuations. While valuation looks inexpensive at 0.7x FY13BV, we would prefer (1) OBC at 0.6x FY13E BV which has similar RoAs and most negatives in respect of asset quality are already priced in, or (2) UNBK at 0.8x FY13 BV. Maintain Neutral. IDBI Bank: One year forward P/E IDBI Bank: One year forward P/BV 24 April

5 Quaterly trends Loans grew 16% QoQ and 15% YoY Avgerage daily CASA ratio at 16.5% v/s 15.8% in 3QFY12 Incremental growth was driven by 14% and 58% sequential growth in corporate and agriculture segment Margin performance impressive (%) CASA grew 45%+ QoQ and 34% YoY, led by 77% QoQ and 33% YoY growth in CA deposits Fee income picks up sharply QoQ (INR b) Despite tight liquidity in 4QFY12 margin improved 18bp sequentially Slippages decline sharply QoQ (INR b) Fee income grew 81% QoQ and 20% YoY led by seasonal factors and strong growth in syndication related fees Asset Quality improve a key thing to watch for Gross slippages in 4QFY12 stood at INR3.8b, however post recovery & up-gradations, net slippages were -ve INR860m In % terms GNPA and NNPA declined 45bp and 35bp QoQ to 2.5% and 1.6% respectively 24 April

6 Quarterly Snapshot FY11 FY12 Variation (%) Cumulative Numbers 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY FY11 FY12 YoYGr (%) Profit and Loss (INR m) Net Interest Income 8,512 11,249 12,040 11,068 11,524 11,220 10,595 12, ,868 45,448 6 Other Income 4,662 5,352 4,472 6,772 4,309 4,791 4,318 7, ,258 21,188 (0) Trading profits ,220 1, Exchange Profits ,900 1,730 (9) Recoveries N.A ,440 1,410 (2) Others (Ex non core) 3,822 4,662 3,262 4,952 3,279 3,821 3,268 6, ,698 16,488 (1) Total Income 13,174 16,600 16,512 17,841 15,833 16,011 14,913 19, ,126 66,636 4 Operating Expenses 4,862 6,345 5,167 6,173 5,525 5,947 6,670 7, ,547 26, Employee 2,336 3,423 1,658 3,045 2,440 2,657 2,941 3, ,462 11, Others 2,526 2,922 3,509 3,128 3,085 3,290 3,728 4, ,085 14, Operating Profits 8,312 10,255 11,345 11,668 10,308 10,065 8,243 11, ,579 40,562 (2) Provisions 5,018 4,414 6,520 2,819 4,257 3,206 4,064 2, ,770 14,265 (24) PBT 3,294 5,841 4,825 8,849 6,051 6,859 4,179 9, ,809 26, Taxes 785 1, ,687 2,700 1, ,500 N.A ,307 5,981 (5) PAT 2,509 4,291 4,540 5,163 3,351 5,159 4,098 7, ,503 20, Asset Quality GNPA 26,402 24,716 30,205 27,847 32,878 38,895 46,399 45, NNPA 16,057 15,488 16,095 16,779 19,328 24,429 30,579 29, GNPA (%) NNPA (%) PCR (Calculated, %) Ratios (%) Fees to Total Income Cost to Core Income Tax Rate CASA (Reported) Loan/Deposit Margins (%) - Reported Yld. on int.earning assets Cost of funds Spreads (46) Margins (5) Balance Sheet (INR B) Loans 1,353 1,302 1,345 1,571 1,550 1,559 1,562 1, Investment Deposits 1,572 1,543 1,502 1,805 1,763 1,744 1,771 2, CASA Deposits CA Deposits SA Deposits Borrowings Total Assets 2,247 2,249 2,211 2,534 2,496 2,504 2,717 2, Franchise Branches ATM 1,228 1,295 1,319 1,370 1,459 1,496 1,518 1, For %age change QoQ and YoY is bp Source: Company/MOSL 24 April

7 Stock Info EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY year Sensex Rebased IDBI Sensex - Rebased Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter Domestic Inst Foreign Others Apr-11 Jul-11 Oct-11 Jan-12 Apr April

8 Financials and Valuation 24 April

9 Financials and Valuation 24 April

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