Playing Its Cards Right - IDBI Bank

When the world is facing one of the worst financial crisis post the 1930 depression, does it make sense to invest in a financial sector and that too in a public sector bank? We feel that if the bank's valuation is attractive we must invest. IDBI Bank is currently available at a pretty attractive valuation and we feel that it is the right time to invest in this scrip at its current market price of Rs 82.95.

For banks it is their price to book (PB) value which is used as a yardstick to determine its attractiveness. Currently, IDBI's PB value at 0.88 is quite low compared to the overall PB of BSE bank index, Bankex, which stands at 1.88 times. When we compare IDBI's PB with other public sector banks such as, for instance, Indian Overseas Bank, which has PB of 1.21 times, and State Bank of India which is at 2.03 we find that it is cheaply available for grabs.

After a decent performance in the last fiscal, IDBI Bank continued with its good performance this quarter. The net interest income went up by 46.3 per cent to Rs 92 crore from Rs 62.9 crore during the same quarters last year. Its net profit increased by 3.8 per cent on the YoY basis to Rs 160 crore from Rs 153 crore. The bank's profit did not increase commensurate to its net interest income because it has shifted its entire government security AFS (Available For Sale) portfolio to HTM (Hold Till Maturity). For this, the bank had to take a hit of Rs 31 crore. The bank's gross NPA also saw a decline on the YoY basis. This quarter gross NPA stands at 1.98 per cent while it was 2.06 per cent last year during the same quarter. But the net NPA increased this quarter to 1.36 per cent from 1.15 per cent Q1FY08.

The bank is trying to shift its focus to retail and SME (Small & Medium Enterprises) sector and is intentionally allowing some of the corporate advances where the yield was low to call off. This can be seen from its current quarter segmental results where retail banking segment increased the most - by 46 per cent- and even improved its share in overall revenue to 26 per cent from 20 per cent in the same quarter last year.

Currently the company's yield on advances is 10.2 per cent and on total assets it is 9 per cent, including investments. Looking ahead, the management expects it to increase to 9.5 per cent this year. This will help the bank to improve its net interest margin (NIM). For this quarter (Q1FY09) the bank's NIM was 0.32 which improved from 0.28 in Q1FY08. IDBI has one of the lowest NIM among public sector banks and one can envision a huge scope of improvement in the NIM.

The bank is aggressive about its expansion plans. This quarter it opened its 500th branch and has got approvals for opening of branches in Bahrain and Dubai. The bank has also maintained a good capital base which is indicated by its Capital Adequacy Ratio of 12.02 per cent against the RBI stipulated norm of 9 per cent. We feel that all the negativities such as low NIM, deteriorating NPAs has already been discounted in the price and the potential for better returns out weighs the risk. Therefore, we would advise our readers to invest in the scrip with long term horizon and perspective.