IDBI Bank –Buy- Sharekhan

IDBI Banks Q4FY2011 results came in above our estimates in terms of the profit after tax (PAT), which grew by 62% year-on-year (y-o-y) to Rs. 516.3 crore. The growth in the profit was driven by a sharp reduction in the provisions and a 51% sequential growth in the non-interest income. However, the growth in the net interest income (NII) was lower than estimated at 46% y-o-y; the NII declined by about 8% sequentially. This was mainly due to the contraction in the margin (down 18 basis points sequentially to 2.1%). The gross non-performing assets (NPAs) declined to 1.76% from 2.22% in Q3FY2011 led by aggressive write-offs (Rs449 crore in Q4FY2011).

During Q4FY2011, IDBI Banks advances grew by 16.8% quarter on quarter (q-o-q) while its deposits grew by 20.1% q-o-q. However, on a year-on-year (y-o-y) basis, the advances and deposits grew by 13.7% and 7.6% respectively as the bank had grown at a slower rate till Q3FY2011.

The NII declined by 8% sequentially to Rs1,109 crore, mainly due to deterioration in the margin. The margin declined by 18 basis points Q-o-q to 2.1% led by an increase in the cost of funds (7.45% compared to 7.1% in Q3FY2011). For FY2011, the banks margin improved to 2.1% from 1.57% in FY2010.

IDBI Banks current account-savings account (CASA) ratio improved to 21% mainly contributed by the end-of-the-period (EOP) deposits. The core CASA ratio has shown an improvement of about 100 basis points on a sequential basis to about 16%.

The banks non-interest income increased by 51% y-o-y, mainly due to a strong growth in the fee income, which increased by 51% q-o-q. Further, the growth in the non-interest income was aided by earnings of Rs. 73 crore from recovery (the written-off accounts) and Rs. 48 crore from treasury profits.

The gross NPAs declined significantly to 1.76% from 2.22% in Q3FY2011 led by aggressive write-offs (Rs 449 crore) during the quarter. However, the slippages remained high (Rs 650 crore compared to Rs690 crore in Q3FY2011) which is a cause for concern. The provision coverage including the written-off accounts declined to 74.7% from 75.6% in Q3FY2011.

We expect a slower business growth ahead due to an increased focus on the qualitative parameters (margins, CASA, asset quality etc). The bank targets to increase its margin to about 2.5%, its CASA ratio to 22% and its return on asset to 1% by FY2013. Though its asset quality deteriorated in FY2011, we expect the same to improve in FY2012. Going forward, the growth in its profits will be driven by an improvement in the margin and a reduction in the NPA provisions. We maintain our target of Rs182 (1x FY2012 book value [BV] for the bank and Rs30 per share for investments) and BUY recommendation on the stock.