RESULTS REVIEW IDBI Bank Hold Share Data Market Cap Rs. 53.7 bn Price Rs.74.05 BSE Sensex 13,791.54 Reuters IDBI.BO Bloomberg IDBI IN Avg. Volume (52 Week) 2.4 mn 52-Week High/Low 177.7 / 60.6 Shares Outstanding 724.8 mn Quarterly performance below expectations IDBI s net profit for Q1 09 increased by a mere 4% on account of a 77% fall in provisioning. We downgrade our rating for the Company s stock from Buy to Hold because of the following reasons: Asset quality deteriorating: Asset quality continued to deteriorate as gross NPAs increased by 11 basis points qoq and the Bank reduced its provisions by 28% qoq. IDBI has been reducing its provisions on a sequential basis for the past four quarters. This Valuation Ratios Year to 31 March 2009E 2010E EPS (Rs.) 7.6 8.7 +/- (%) -24.0% 13.7% PER (x) 9.7x 8.5x P / PPP (x) 4.8x 4.1x P / ABV (x) 0.7x 0.7x Shareholding Pattern (%) Promoter 53 FIIs 3 Institutions 21 Public & Others 23 strategy is not sustainable in the long term and the Bank will have to increase its provisions in order to protect its bottom line. Heavy dependence on volatile income: Non-interest income contributed 78% to the net income in Q1FY09. The non-interest income is heavily dependent on volatile profit from investments. Fee income and brokerage, core to banking operations; forms less than a fourth of other income. In Q1 FY09, the Bank s investment porfolio, which consists of government and corporate securities, witnessed losses of Rs. 480 million. We expect this trend to conitnue as bond spreads are rising. Advances likely to decline: There was a sequential decline in Relative Performance advances as high interest rates started affecting advances. As a 195 175 155 135 115 95 75 55 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 result, advances declined from Rs. 822 billion in Q1 08 to Rs. 781 billion in Q1 09. We expect the growth in advances to slow down further to 13.7% in FY09 as high interest rates are likely to continue due to soaring inflation. Key Figures (Standalone) Quarterly Data Q1'08 Q4'08 Q1'09 YOY % QOQ% FY07 FY08 YOY % (Figures in Rs. mn, except per share data) IDBI Rebased BSE Index Net Interest Income 629 2,360 920 46.4% (61.0)% 6,579 6,564 (0.2)% Net Operating Income 4,631 6,144 4,135 (10.7)% (32.7)% 16,851 22,919 36.0% Pre-Prov Operating Profit 2,574 3,050 2,016 (21.6)% (33.9)% 9,066 13,331 47.0% Net Profit 1,531 2,450 1,598 4.3% (34.8)% 6,303 7,294 15.7% Cost/Net Operating Income(%44.4% 50.4% 51.2% - - 46.2% 41.8% - Net Interest Margin 0.28% - 0.32% - - 0.80% 0.68% - NPA ratio 1.15% 1.30% 1.36% - - 1.12% 1.30% - Per Share Data (Rs.) PPP per share 3.5 4.2 2.8 (21.7)% (34.0)% 12.5 18.4 46.9% EPS 2.1 3.4 2.2 4.3% (34.9)% 8.7 10.1 15.6% Please see the end of the report for disclaimer and disclosures. -1-
Result Highlights Net interest income jumped 46.4% yoy to Rs. 920 million on account of a sharp 61.5% rise in interest income from investments. However, a 62 bps rise in the cost of funds led to an 88 bps fall in the net interest margin, to 0.52%. Bond portfolio pulled down non-interest income Non-interest income (other income) decline 20% yoy to Rs. 3.2 billion as the Bank shifted its entire government security AFS portfolio to HTM due to rising interest rates, which resulted in a Rs. 310 million loss. Total operating expenses increased 3.0% yoy to Rs. 2.11 billion as employee cost moved up 7.3% while other operating expenses remained almost flat with a nominal 0.3% increase. The Bank s total business grew 42% yoy growth to Rs. 1,508.32 billion as the rising interest rates led to a 56% surge in deposits. Asset quality deteriorated further while provisions decreased Asset quality deteriorated as the gross NPA ratio increased 12 bps QoQ to 1.98%; however, the Bank decreased its provisions by 28% qoq to shore up its bottom line. Net profit improved 4.3% yoy on the back of a handsome jump in net interest income, a moderate increase in expenses, and a decrease in provisions and contingencies. 900 1.4% 750 Rs. bn 600 450 300 1.2% 1.0% Percentage 150 0 1Q'08 2Q'08 3Q'08 4Q'08 1Q'09 Advances Net NPA ratio 0.8% Please see the end of the report for disclaimer and disclosures. -2-
Prospects Bank is moving towards becoming a diversified financial institution Moving towards diversification The Bank has been taking several initiatives to expand its business. It has finalised an agreement with Stock Holding Corporation of India Ltd (SHCIL) for providing stamp certificate issuance services on a pan-india basis and for collecting money on the latter s behalf by using its branches as authorised collection centres. IDBI Fortis LIC is expanding across the country Insurance business generates first premium income IDBI Fortis Life Insurance Company has generated first premium income of about half a billion rupees and has sold over 10,000 polices in the last three months. It intends to increase its number of branches from the present 30 to 100 by the end of 2008, out of which 28 branches will be based in North India. Currently, it uses 1,000 branches of IDBI Bank and Federal Bank to distribute its insurance products. Furthermore, the Company plans to increase the number of advisors to 21,000 by March 2009, from the existing sales force of 1,500. IDBI holds a 48% stake in this joint venture among three players: IDBI, Federal Bank, and Fortis Insurance. Outlook For FY09, we anticipate a relatively slower growth in interest income. Also, we believe that the growth in deposits will outpace the growth in advances due to the rising interest rates. This, in turn, would exert pressure on the net interest income. Also, we expect a fall in non-interest income as well, due to the corporate bond portfolio losses in FY09. However, non-interest income should rise in the long term, as IDBI s new insurance venture will start fetching significant returns. The insurance venture is likely to break even in 6-7 years. Please see the end of the report for disclaimer and disclosures. -3-
Valuation Our target price of Rs. 80 for FY09E for IDBI is based on the sum-of-theparts valuation methodology. We have arrived at a per-share value of Rs. 42 for the standalone banking business by using the three-stage discounted Equity Cash Flow method. For this, we have assumed a 15% cost of equity and an 8.71% terminal growth rate. The Company s stake in its various subsidiaries has been valued at Rs. 38, which leads us to a total target price of Rs. 80. Hence, we downgrade our rating on the stock from Buy to Hold. Please see the end of the report for disclaimer and disclosures. -4-
Income Statement Key Ratios (Rs.M, Yr. ending March 31) FY07 FY08 FY09E FY10E FY07 FY08 FY09E FY10E Interest Income 63,454 80,208 98,354 121,396 Per share data (Rs.) Interest Expense 56,875 73,644 86,901 106,358 Shares outstanding (M) 724.4 724.7 724.7 724.7 Net Interest Income 6,579 6,564 11,453 15,038 Basic EPS 8.7 10.1 10.7 13.1 YOY Growth (%) 73.2% -0.2% 74.5% 31.3% Diluted EPS 8.7 10.1 10.7 13.1 Other Income 10,272 16,355 14,719 16,927 Book value per share 114.6 121.7 130.0 140.1 Net Operating Income 16,851 22,919 26,172 31,965 Adj. book value per share 86.1 93.3 101.5 111.6 YOY Growth (%) 1.5% 36.0% 14.2% 22.1% Operating Expense 7,785 9,588 11,516 14,065 Valuation ratios (x) Pre-Provisioning Profit 9,066 13,331 14,656 17,901 P/PPP 6.2x 4.2x 3.8x 3.1x Provisions and Contingencies 2,240 3,291 5,685 6,926 P/E 8.9x 7.7x 7.2x 5.9x Profit Before Tax 6,826 10,040 8,972 10,975 P/B 0.7x 0.6x 0.6x 0.6x Tax 523 933 1,211 1,482 P/ABV 0.9x 0.8x 0.8x 0.7x Net Profit 6,303 9,108 7,761 9,493 YOY Growth (%) 12.4% 44.5% -14.8% 22.3% Performance ratio (%) Return on avg. assets 0.7% 0.8% 0.6% 0.6% Balance Sheet Return on avg. net worth 8.6% 10.6% 8.5% 9.7% (Rs.M, as on March 31) FY07 FY08 FY09E FY10E Cash and balances with RBI 69,111 87,588 (1,565) (14,935) Balance Sheet ratios (%) Investments 256,753 328,029 385,325 520,076 Advances to deposits 144.1% 112.6% 104.6% 94.0% YOY Growth (%) 1.3% 27.8% 17.5% 35.0% Borrowings to advances 67.9% 47.0% 30.0% 25.0% Advances 624,708 822,127 1,008,032 1,222,625 Investments to assets 24.7% 25.1% 26.3% 28.6% YOY Growth (%) 18.5% 31.6% 22.6% 21.3% Investments to deposits 59.2% 44.9% 40.0% 40.0% Fixed Assets (Net) 27,784 27,660 27,716 27,730 Net Worth to assets 8.0% 6.8% 6.4% 5.6% Other Assets 60,037 41,540 48,166 65,009 Total Assets 1,038,393 1,306,944 1,467,674 1,820,505 Productivity ratio (Rs.M) Opt. expense per employee 1.0 0.9 0.8 0.8 Deposits 433,540 729,980 963,312 1,300,189 Net profit per employee 0.8 0.8 0.6 0.6 YOY Growth (%) 66.7% 68.4% 32.0% 35.0% Asset per employee 138.8 120.5 108.2 107.4 Borrowings 424,044 386,126 302,410 305,656 YOY Growth (%) -10.8% -8.9% -21.7% 1.1% Operating ratios (%) Other Liabilities & Provisions 97,810 102,619 107,750 113,137 Operating cost to operating income 46.2% 41.8% 44.0% 44.0% Total Liabilities 955,395 1,218,724 1,373,471 1,718,983 Operating cost to avg. assets 0.8% 0.8% 0.8% 0.9% Share Capital 7,244 7,248 7,248 7,248 Source: Bank data, Indiabulls research Reserves & Surplus 75,755 80,972 86,955 94,275 Note: Some ratios are as per Indiabulls definitions and may not match figures Total Equity & Liabilities 1,038,393 1,306,944 1,467,674 1,820,505 declared by the Bank Please see the end of the report for disclaimer and disclosures. -5-
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