Stock Market Result Update on IDBI Bank for 2QFY2012

Stock Market Result Update on IDBI Bank for 2QFY2012 with an Neutral recommendation.

For 2QFY2012, IDBI Bank reported 20.2% yoy growth in its net profit to `516cr, which was well above our as well as street estimates, primarily on account of lower-than-estimated provisioning and operating expenses and a lower effective tax rate. A marginal qoq compression in NIM despite strong traction in CASA balances and continuation of the deteriorating asset-quality trend were the key highlights of the result. We maintain our Neutral view on the stock.

Healthy CASA traction; asset quality continues to deteriorate: For 2QFY2012, the bank’s advances grew marginally by 0.6% qoq (up 19.7% yoy). Deposits declined marginally by 1.0% qoq (up 13.0% yoy). CASA deposits growth continued to be healthy at 42.2% yoy (up 9.9% qoq), leading to a 393bp yoy improvement in CASA ratio to 19.2%. The surge in CASA deposits was led by robust 67.2% yoy growth in saving account deposits. In spite of the increase in share of CASA in the funding mix, reported NIM of the bank contracted, albeit marginally, by 7bp qoq to 2.0%. On the asset-quality front, the deteriorating trend continued with the annualised gross slippage ratio rising to 2.4% from 1.6% in 1QFY2012. Slippages in 1HFY2012 have been on the higher side considering that the bank had already switched over to system-based NPA recognition platform. Consequently, gross and net NPA ratios rose to 2.5% and 1.6%, respectively, and provision coverage ratio including technical write-offs fell to 70.1% (74.0% in 1QFY2012). Profitability in 2QFY2012 was aided by a lower effective tax rate (at 24.8%) as against management’s guidance of 30-32%.

Outlook and valuation: We believe the bank is set to improve its credit and deposit mix going forward on the back of its strong branch expansion plans. The bank has been amongst the fastest-growing banks in terms of CASA deposits over the past few years even when compared to private banks and has a market share of 2.1%  (as of FY2011). At the CMP, the stock is trading at attractive valuations of 0.9x FY2013E P/ABV adjusting for SASF (0.7x without adjusting). However, considering the near-term cyclical headwinds to the asset quality, we remain Neutral on the stock.