>IDBI BANK (FIRST GLOBAL)

Significant improvement across all key parameters
continues…

Increase in return ratios expected to assign higher multiples to
stock…valuation at 0 .8x Book appears very enticing…

The Story

A few quarters back, we had subscribed to IDBI Bank Ltd.’s (IDBI.IN)/(IDBI.BO) long-term growth story, based on its improving return ratios and technology driven expansion plans, despite some legacy issues.

Quote:
“IDBI isn’t a growth stock, so don’t look for eye-popping growth here. It’s a good, old-fashioned
value play, the way value plays ought to be. And we don’t see much price downside from hereon. “

Unquote:
(From First Global’s, “IDBI Bank Ltd. (IDBI.IN)/ (IDBI.BO): Contours of a turnaround are visible,”
dated July 30, 2008).

The price of the IDBI stock was Rs.77 then…hasn’t done too badly at all, for a value play…

IDBI has been exhibiting a significant improvement across all key parameters, such as growth,
margins and asset quality. The bank’s net interest margin, which had remained below industry
average, has also begun showing signs of improvement and was up from 0.80% in FY07 to
1.06% in FY09. According to management, IDBI is targeting a net interest margin of 1.2% for
FY10. Of late, the bank has been focusing aggressively on the retail segment, with its retail
advances increasing by 47% Y-o-Y to Rs.249 bn and agricultural advances recording a stellar
growth of 314% Y-o-Y to Rs.63 bn in FY09.

IDBI is targeting the retail segment both to garner higher deposits, as well as increase its loan
disbursements. The Net NPA ratio stood at 0.92% in FY09, as against 1.12% in FY07. At the end of August 2009, IDBI has 578 branches and 1006 ATMs spread across 360 centres and intends to set up more branches over the next year, thus taking its total number of branches to 750 by March 2010. This will help garner more of Current Account and Savings Account (CASA) deposits. In FY09, IDBI Fortis Life Insurance Company Limited (a joint venture with a holding of 48%) recorded a Gross Written Premium of Rs.3.19 bn, as against Rs.119 mn in FY08. IDBI is also looking to extend its operations beyond the domestic market and has already received approval for setting up a wholesale bank branch at Bahrain, an offshore banking unit at Singapore, a category-I branch at Dubai International Financial Centre (DIFC) and a representative office at Shanghai. Going forward, management has targeted a growth of 25-28% in advances, which, we believe, is achievable, given the strong pick up in demand in the infrastructure segment, where IDBI is well positioned due to its established client relationships and strong appraisal skills. Management has targeted a growth of 32-35% in deposits for FY10.

Outlook and Valuation
We expect IDBI to post an earning per share (EPS) of Rs.3 for Q2 FY10 and Rs.13.6 in FY10. The stock currently trades at a forward P/E multiple of 7.9x FY10 earnings and a forward P/B multiple of 0.8x FY10 book value, as against an average of 5.9x and 1.0x for public sector banks. More importantly, IDBI has a number of strategic investments (apart from the investments in Subsidiaries that have significant potential value, which we believe, could fetch a value of around Rs.10 per share over and above its book value. Taking into account the additional value of these investments, IDBI is available at an attractive price to book value of 0.7x its FY10 book value, as compared to its peers in the public sector and private sector that are quoting at a price to book value of 1.0x and 1.5x respectively. We expect IDBI’s improving return ratios to assign higher multiples to the stock and therefore, reinitiate coverage with a rating of Outperform.

To see full report: IDBI BANK