03-10-2012, 11:06 AM
IDBI BANK LTD
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IDBI was established in 1964 as a wholly owned subsidiary of Reserve Bank of
India. As a premier DFI, IDBI has played key role in sponsoring and supporting
the development of the capital market through setting up of Securities &
Exchange board of India (SEBI), National Stock Exchange of India (NSE), Credit
Analysis and Research Ltd (CARE) and others. In 2005, IDBI transformed itself
into a full service commercial bank after merging itself with IDBI bank. In 2006
amalgamation of United Western Bank (UWB) provided access to 230-branch
network of UWB, thereby widening its deposit franchise. Currently IDBI has
total asset size of Rs.1724 Bn with 620 branches and 1059 ATMs.
KEY HIGHLIGHTS
Consistent improvement in NIM: The bank’s net interest margin has
historically been low as a result of it being a DFI whereby it’s cost of funds
were high. But recently we have seen consistent improvement in NIM (y-oy)
during last four quarters. We expect NIM to improve further to 1.25%
by FY 11 E from 0.88% in FY 09 as 65% of its deposit is bulk deposit and
they are likely to be re-priced at a lower rate. However, given the pressure
on yield on advances and increased investment in G-sec (Q3 FY 10 IDBI to
fall under regulation of maintaining SLR) we believe that NIM to expand
marginally and the benefit of falling cost of funds will be lower. We expect
NIM to improve to 1.05% and 1.25% by FY 10 E and FY 11 E respectively.
CONCERNS
o Slow economic recovery may lead to an increase in NPA’s impacting
profitability, as a result of higher provisioning.
o Reversal of monetary expansion by RBI may result in hardening of
interest rate and may impact banks margin as it relies heavily on
wholesale deposits.
o Delay in branch expansion may lead to slowdown in business growth.
o Valuation of IDBI Bank’s quoted and unquoted equity investments are
exposed to the fluctuation of the capital market. Hence, any adverse
movement in the capital markets may affect the expected valuation
and earnings from the investment portfolio.
VALUATION: With focus of the bank on profitability, this will lead to
significant improvement across all key parameters, such as growth, margins
and asset quality. We expect NIM to improve to 1.25% by FY11 E and EPS
to grow by 14% CAGR over FY 09-11E. In terms of asset quality, we
believe the stress in asset quality will be well cushioned by its huge
investment book. Equity infusion by government may act as a positive
trigger. We value IDBI on SOTP basis with core banking at 1.2x Adj.BV of
FY 11E implying a price of Rs.118 and its investment book at Rs.28 (after
considering a holding company discount of 20%). We recommend
“Accumulate” on the stock for a price target of Rs.146 over next
one year.
VALUATION
The new focus of the bank on profitability has led to significant
improvement across all key parameters such as growth, margins and asset
quality. We expect NIM to improve to 1.25% by FY11 E and EPS to grow by
14% CAGR over FY 09-11E. In terms of asset quality we believe the stress
will be well cushioned by its huge investment book. Equity infusion by
government may act as a positive trigger. We value IDBI on SOTP basis with
core banking at 1.2x Adj.Bv of FY 11E implying a price of Rs.118 and its
investment book at Rs.28 (after considering a holding company discount of
20%). We recommend “ACCUMULATE” on the stock over one
year perspective