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IDBI BANK LTD

RESEARCH
EQUITY RESEARCH August 25, 2010

RESULTS REVIEW IDBI Bank HOLD


Share Data Good Performance
Market Cap Rs. 91.2 bn
For the quarter ended 30 June 2010, IDBI Bank reported net profit of Rs.
Price Rs. 125.8
BSE Sensex 18,179.6 2.5 bn, indicating a healthy growth of 45.9% yoy. This is attributable to the
Reuters IDBI.BO robust growth in its Net Interest Income, which grew 171% yoy to Rs. 8.5
Bloomberg IDBI IN bn. However, we remain concerned about the Bank's CASA ratio, which
Avg. Volume (52 Week) 1.37 mn stood at 13.0% in Q1'11 and is quite low, as compared to its peers. Our
52-Week High/Low Rs. 140.0 / 96.7
SOTP valuation suggests a fair value estimate of Rs. 138, indicating a
Shares Outstanding 725 mn
limited upside potential of 9.5% over the current stock price. Thus, we
Valuation Ratios (Standalone) maintain our Hold rating for the stock.
FY11E FY12E Margins to improve: The Bank's NIM inceased by 84 bps yoy to 1.64% in
EPS (Rs.) 17.5 21.8 Q1'11 due to a sharp rise in Net Interest Income, which grew 171% yoy to
+/- (%) 23.1% 24.6%
Rs. 8.5 bn. The Bank's CASA ratio also increased from 11.7% in Q1'10 to
PER (x) 7.2x 5.8x
13.0% in Q1'11. However, its CASA ratio declined sequentially from 14.6%
P / PPP (x) 2.6x 2.0x
P / ABV (x) 1.0x 0.9x
in Q4'10 to 13.0% in Q1'11. We expect the Bank's CASA ratio to improve
in the coming quarters as it is focussed on expanding its presence in the
Shareholding Pattern (%)
retail, and the micro, small and medium enterprises (MSME) segments.
Promoter 53
FIIs 7 The Bank set up 156 branches between Q1'10 and Q1'11, which took its
Institutions 20 total branch network to 722. The Bank plans to increase its branch network
Public & Others 20 to around 970 by the end of FY11. This will have a positive impact on the
Bank's NIM.
Holding >1% (Non-Promoter)
Healthy growth in advances: Advances grew at a robust pace of 38.1%
Life Insurance Corporation of India 6.4
LIC of India - Market Plus yoy to Rs. 1,353 bn in Q1'11. We expect advances to grow at a healthy
3.7
Small Industries Development Bank pace in the coming quarters, driven by credit demand from the
of India 1.8
infrastructure sector where the Bank already has a strong presence. The
LIC of India Money Plus 1.6
Bank has recently raised Rs. 31.19 billion through a preferential issue of
United India Insurance Company Ltd 1.2
Key Figures (Standalone)
Relative Performance Quarterly Data Q1'10 Q4'10 Q1'11 YoY% QoQ% FY'09 FY'10 YoY%
(Figures in Rs mn, except per share data)
150 Net Interest Income 3,145 7,600 8,512 170.6% 12.0% 12,353 22,564 82.7%
Net Optng. Income 10,723 13,070 13,174 22.9% 0.8% 27,163 45,584 67.8%
120 Pre-Prov Optng. Profit 7,564 6,940 8,312 9.9% 19.8% 13,784 27,272 97.9%
Net Profit 1,721 3,180 2,509 45.8% (21.1%) 8,590 10,311 20.0%
90
Cost/Optng. Income 29.5% 46.9% 36.9% - - 49.3% 40.2% -
60 Net Interest Margin 0.80% 1.57% 1.64% - - 0.99% 1.27% -
NPA ratio 1.23% 1.02% 1.19% - - 0.92% 1.02% -
May-10
Aug-09

Nov-09

Apr-10

Aug-10
Sep-09
Oct-09

Dec-09
Jan-10
Feb-10
Mar-10

Jun-10
Jul-10

Per Share Data (Rs.)


PPP per share 10.4 9.6 11.5 10.0% 19.6% 19.0 37.6 98.1%
IDBI IN Rebased BSE Index EPS 2.4 4.4 3.5 46.0% (21.2%) 11.8 14.2 20.2%
BVPS 104.7 113.1 116.5 11.4% 3.1% 102.3 113.1 10.5%

Please see the end of the report for disclaimer and disclosures. -1-
IDBI BANK LTD
RESEARCH
EQUITY RESEARCH August 25, 2010

equity shares to the Government of India and plans to raise an additional


$1 billion from the overseas market by the end of the current financial year.
The amount raised will help in improving its CAR, which stood at 11.9% in
Q1'11, and will enable the Bank undertake aggressive credit expansion.
The branch opened by the Bank in the Dubai International Financial Centre
(DIFC), Dubai, which began operations in January 2010, will also serve as
a base for the Bank to expand its overseas clientele and also raise foreign
currency resources.

Result Highlights

• For the quarter ended 30 June 2010, IDBI reported a net profit of Rs.
2.5 bn, indicating a healthy growth of 45.9% yoy. This is attributable to
the robust growth in its Net Interest Income, which grew 171% yoy to
Rs. 8.5 bn.

• The rise in Net Interest Income is attributable to the strong growth in


advances, which grew 38.1% yoy to Rs. 1,353 bn, in Q1'11 and a
healthy rise in the Bank's NIM, which inceased by 84 bps yoy to 1.64%
in Q1'11.

• The Bank's other income declined sharply by 38.5% yoy to Rs. 4.7 bn
in Q1'11. This was due to a sharp fall in profit on the sale of
investments, which declined 97.8% yoy to Rs. 0.1 bn. However, there
was healthy growth in fee-based income, which increased 52.8% yoy
to Rs. 3.9 bn. The major component of fee-based income was
commission, exchange and brokerage income, which comprised
83.1% of the Bank's fee based income in Q1'11. Commission,
exchange and brokerage income increased by 50.2% yoy to Rs. 3.2 bn
in Q'11.

• There was a yoy deterioration in the asset quality of the Bank as


indicated by its gross NPA ratio, which increased from 1.77% in Q1’10
to 1.94% in Q1’11. A majority of the slippage came as a result of
restructured loans wherein two large accounts of over Rs. 100 crores
slipped into the NPA category. Total restructured loans stood at 7% of
the Bank's loan book in Q1'11. The provision coverage, including

Please see the end of the report for disclaimer and disclosures. -2-
IDBI BANK LTD
RESEARCH
EQUITY RESEARCH August 25, 2010

technical write-off's, stood at 73.64% in Q1'11, as against the RBI's


mandatory requirement of 70% by 30 September 2010.

• The credit-to-deposit ratio increased to 86.1% in Q1'11, as against


84.8% in Q1'10, as advances grew by 38.1% yoy to Rs. 1,353 bn , as
compared to deposits that grew 36.0% yoy to Rs. 1,572 bn.

• The Bank’s deposits also continued to grow at a robust pace of 36.0%


yoy to Rs. 1,572 bn in Q1'10. The Bank's CASA ratio increased from
11.7% in Q1'10 to 13.0% in Q1'11. However, the Bank's CASA ratio
declined sequentially from 14.6% in Q4'10 to 13.0% in Q1'11. We
remain concerned about the Bank's CASA ratio, which is one of the
lowest in the industry.

• The basic and diluted EPS for Q1'11 increased to Rs. 3.5, up
marginally from Rs. 2.4 in Q1'10.

• The Bank's CAR declined to 11.9% in Q1'11, versus 12.3% in Q1'10.


The Tier-I capital ratio was 6.7% in Q1'11, as compared to 7.1% in
Q1'10.

Valuation

We have valued IDBI Bank using the sum-of-the-parts (SOTP)


methodology. The standalone Bank has been valued by using the three-
stage Discounted Equity Cash Flow model. Our fair value estimate of the
standalone bank is Rs. 113, assuming a 17.0% cost of equity and a 11.7%
terminal growth rate. The Bank’s subsidiaries and equity investments in
ARCIL, NSE, SIDBI, IDFC, and IFCI have been valued at about Rs. 24.8
per share. Our final SOTP valuation of Rs. 138 provides an upside
potential of 9.5% from the current market price of Rs. 125.8. Hence, we
reiterate our Hold rating for the stock.

Sensitivity Analysis of the Estimate of the Standalone entity

Cost of equity
Terminal growth

113 16.50% 16.75% 17.00% 17.25% 17.50%


11.19% 115 108 102 97 92
11.44% 121 114 107 102 96
11.69% 128 120 113 107 101
11.94% 135 127 119 112 106
12.19% 144 134 126 118 111

Please see the end of the report for disclaimer and disclosures. -3-
IDBI BANK LTD
RESEARCH
EQUITY RESEARCH August 25, 2010

Income Statement FY09 FY10 FY11E FY12E Key Ratios FY09 FY10 FY11E FY12E

(Rs mn, Yr. ending March 31)

Interest Income 115,410 152,610 188,687 231,666 Per share data (Rs.)

Interest Expense 103,057 130,047 153,308 185,912 Shares outstanding (mn) 725 725 725 725

Net Interest Income 12,353 22,564 35,379 45,754 Basic EPS 11.8 14.2 17.5 21.8

YoY Growth (%) 82.6% 82.7% 56.8% 29.3% Diluted EPS 11.8 14.2 17.5 21.8

Other Income 14,810 23,020 26,232 28,673 Book value per share 102.3 113.1 147.3 158.1

Net Operating Income 27,163 45,584 61,611 74,427 Adj. book value per share 102.3 113.1 126.8 141.7

YoY Growth (%) 20.3% 67.8% 35.2% 20.8%

Operating Expense 13,379 18,312 26,501 29,553 Valuation ratios (x)

Pre-Provisioning Profit 13,784 27,272 35,110 44,874 P/PPP 6.6x 3.3x 2.6x 2.0x

Provisions and Contingencies 3,923 16,823 17,703 23,178 P/E 10.6x 8.8x 7.2x 5.8x

Profit Before Tax 9,861 10,449 17,407 21,696 P/B 1.2x 1.1x 0.9x 0.8x

Tax 1,271 138 4,709 5,870 P/ABV 1.2x 1.1x 1.0x 0.9x

Net Profit 8,590 10,311 12,698 15,826

YoY Growth (%) 17.8% 20.0% 23.1% 24.6% Performance ratio (%)

Return on avg. assets 0.6% 0.5% 0.5% 0.5%

Balance Sheet FY09 FY10 FY11E FY12E Return on avg. net worth 12.1% 13.1% 12.2% 14.3%

(Rs mn, as on March 31)

Cash and balances with RBI 112,200 145,820 120,694 143,779 Balance Sheet ratios (%)

Investments 500,480 733,450 908,554 1,099,621 Advances to deposits 92.0% 82.4% 83.6% 82.6%

YoY Growth (%) 52.6% 46.5% 23.9% 21.0% Borrowings to advances 42.9% 34.5% 32.9% 32.1%

Advances 1,034,440 1,382,020 1,737,689 2,112,087 Investments to assets 29.0% 31.4% 31.9% 31.9%

YoY Growth (%) 25.8% 33.6% 25.7% 21.5% Investments to deposits 44.5% 43.7% 43.7% 43.0%

Fixed Assets (Net) 28,240 29,970 23,726 21,894 Tier I capital adequacy 6.8% 6.2% 6.3% 5.8%

Other Assets 48,665 44,460 56,170 69,089

Total Assets 1,724,025 2,335,720 2,846,833 3,446,470 Productivity ratio (Rs. mn)

Opt. expense per employee 1.3 1.3 1.6 1.5

Deposits 1,124,010 1,676,670 2,079,071 2,557,257 Net profit per employee 0.8 0.7 0.8 0.8

YoY Growth (%) 54.0% 49.2% 24.0% 23.0% Asset per employee 169.0 161.9 174.3 180.7

Borrowings 444,170 477,090 571,744 677,673

YoY Growth (%) 15.0% 7.4% 19.8% 18.5% Operating ratios (%)

Other Liabilities & Provisions 61,608 80,330 89,214 96,947 Operating cost to net income 49.3% 40.2% 43.0% 39.7%

Total Liabilities 1,629,788 2,234,090 2,740,029 3,331,877 Operating cost to avg. assets 0.9% 0.9% 1.0% 0.9%

Share Capital 7,250 7,250 7,250 7,250 Source: Bank data, Indiabulls research

Reserves & Surplus 86,987 94,380 99,554 107,343 Note: Some ratios are as per Indiabulls definitions and may not match figures

Total Equity & Liabilities 1,724,025 2,335,720 2,846,833 3,446,470 declared by the Bank
Note: Standalone IDBI numbers

Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666 -4-
IDBI BANK LTD
RESEARCH
EQUITY RESEARCH August 25, 2010

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objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments
and strategies discussed herein and also seek the advice of your financial adviser.

Past performance is not a guide for future performance. The value of, and income from investments may vary because of
changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance.

This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete,
and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to
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Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666 -5-