Monday, March 2, 2009


IDBI BANK Ltd - Hold

Battling macroeconomic headwinds:
Despite a robust growth in the net interest income, IDBI Bank reported a moderate 26.6% yoy growth in Q3'09 net profit, primarily due to a decline in the non-interest income. We hold a cautious near-term outlook for the Bank on account of its heavy dependence on corporate banking, a decline in treasury profits despite falling interest rates, and a lower RoE. However, the low CASA ratio should improve as the Bank plans to enhance its network by 200 branches during the next 6–9 months. Our SOTP valuation suggests a fair value of Rs. 55, indicating a potential upside of 11% over the current stock price. Thus, we give a Hold rating to the stock.

Fee income growth to decline in the short term:
The Bank reported a 27.3% yoy decline in the non-interest income to Rs. 2.7 bn; however, fee income increased 143.4% yoy to Rs. 2 bn. Non-interest income declined primarily due to lower treasury profits; this is a matter of concern as other Banks reported a growth in treasury profits on account of falling interest rates during the same time. We expect fee income growth to fall as the Bank would generate less income through loan processing. This is because the declining growth rate of advances and falling equity markets are likely to steer investors from insurance and mutual fund products, thereby adversely affecting third-party distribution. Thus, we expect the non-interest income to decline by around 30% in FY09.

To see full report: IDBI