IDBI Bank - Good Scope Ahead

Given the current scenario, investors may be surprised to see a bank being recommended in our Low Priced Scrip column. PSU banks are facing headwinds like deterioration in asset quality, higher provisioning requirements and a slower growth rate. However, there are many compelling factors that have made us recommend IDBI Bank to our readers. A sustained pace of improvement in the concerned areas may lead to a rebound in the valuations of the bank. With the RBI taking a pause on the rate hike front, the interest rates seem to have peaked out. In addition to this, a favourable change in the loan mix with moderation in loan growth and sustained growth in savings deposits are likely to address issues such as asset-liability management and a low CASA ratio.

The increased branch network is also expected to help in the improvement of the bank’s CASA. The asset quality risk stemming from large restructured accounts may be receding. Last but not the least, on the valuations front, the scrip is trading at 0.65x of its book value. Considering these factors, we recommend investors to buy the scrip with a target price of Rs 105.

If we take a look at the performance of IDBI Bank for H1 FY12, the only good news was a 20 per cent growth in its advances. Many of the other factors were quite negative. For Q2 FY12, the NIM stood at two per cent, resulting in a contraction by 24 bps on a YoY basis and seven basis points on a QoQ basis. Further, as on September 30, 2011, the bank’s net NPAs increased by 0.38 bps to 1.57 per cent on a YoY basis, with a 32 bps  increase on a sequential basis.  

However, that is the past and the scenario is expected to improve going ahead. The first thing to watch out for is the improved deposit mix. For H1 FY12, the contribution of low-cost CASA deposits has gone up to 19.90 per cent as compared to 15.25 per cent in H1 FY11. The bank is planning to increase its number of branches to 1050 by the end of FY12, from the current number of 908, which will add value on the CASA front. This is also likely to result in an improvement in terms of the bank’s NIM. Even the management expects the NIM to be at 2.15 per cent for FY12.

On the NPAs side, FY11 saw some deterioration in IDBI’s asset quality on the back of higher slippages from the bank’s SME portfolio and restructured loans. Further, of its total exposure, that in the power sector is 14 per cent, which is very high and risky. However, the management has stated that the concerns pertaining to exposure to the power sector are of a medium to long-term nature, and the likelihood of the power sector advances turning into NPAs in the short term is very small. Another risk associated with the bank is that it has a high exposure of around Rs 719 crore to Kingfisher Airlines. The impact of this is expected to recede going forward.

The bank’s loan mix is undergoing a favourable change, with a decline in the proportion of term loans for a duration exceeding five years. This is likely to address the issue of asset-liability management, as IDBI has a tilt towards long duration infrastructure loans. Going ahead, the bank deliberately wants to reduce growth in advances to 16 per cent. This will help in improving the asset quality.

On the financial front, the net interest income (NII) of the bank increased by 15 per cent to Rs 2274 crore for H1 FY12, as compared to a similar period last year. Meanwhile, its PAT increased by 25 per cent to Rs 851 crore. With good financial performance and expected improvement in its NIM and asset class, we recommend a ‘buy’ on the counter. However, investors are advised not to jump in with all guns blazing, but to buy in a staggered manner, since some downside movement is expected