>IDBI BANK (SHAREKHAN)

At an inflexion point

Key points

Operating performance to get a boost: IDBI Bank, which had been operating on a wafer thin net interest margin (NIM) of around 1% in the past, is expected to see some improvement on the margin front, as ~69% of its deposits are likely to get re-priced at lower rates in the current fiscal. The bank is also substituting its high-cost borrowings with deposits in order to contain its cost of funds. Not only that, it has also stepped up efforts to increase the share of its high-yielding retail loans. Thus, the bank’s operating performance is expected to improve in FY2010 even in the face of challenges like low CASA and weak margins.

More impetus from capital infusion: At 11.6% IDBI Bank’s capital adequacy ratio is above the regulatory requirement but lower than the preferred level of 12%. Since the bank evidently has little room to grow its balance sheet without raising capital, the government proposes to infuse capital into it. A capital infusion will be a major catalyst for the bank as it would facilitate the bank’s efforts to achieve higher growth and profitability, and thus lead to the re-rating of the stock.

Investments, the hidden wealth: What’s more, the bank’s huge portfolio of quoted and unquoted investments could be another major source of funds when needed. The bank could unlock value from these investments and boost its profitability. Some of the companies in which IDBI Bank holds a significant stake include NSE, LIC, IDFC, IFCI, NSDL, CARE, ARCIL and SIDBI. These major investments collectively contribute about Rs42 to our SOTP valuation of the bank.

Attractive valuations: IDBI Bank is expected to improve its core business gradually as its NIM expands from 1.06% in FY2009 to 1.3% in FY2010 on a conservative basis. We expect the bank’s RoE (excluding revaluation reserves) to increase from 12.1% in FY2009 to 13.8% in FY2010 and to 14.3% in FY2011. At the current market price of Rs106, the stock is trading at 5.8x its FY2011E EPS, 0.8x its FY2011E BV and 1.0x its FY2011E ABV. We have valued IDBI Bank using the SOTP valuation method as per which its core business of banking is valued at Rs118 per share (at 1.1x its FY2011E ABV). Considering this along with the value of the bank’s investment portfolio and subsidiaries we arrive at a price target of Rs169 over a period of 12-18 months. This implies an upside of ~60% from the current levels. We initiate coverage on IDBI Bank with a Buy recommendation.

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