In Q1FY2010, IDBI Bank recorded an impressive growth in its core operating profit (up ~275% year-on-year [y-o-y]) on the back of marked improvement in various operating parameters (viz. year-on-year [y-o-y] improvement in margins, lower cost to income, strong core fee income growth, healthy advances growth).
However, the same could not trickle down to the bottom line on account of multi-fold increase in provisioning expenses (bulk of which relates to Dabhol Power Plant) during the quarter.
Consequently, the net profit growth was contained at 7.6% y-o-y (well below our expectation).
The net interest income (NII) for the quarter at Rs316.4 crore, though significantly higher than that of Rs90.6 crore in the same quarter of the last year, was below our expectation of Rs377.3 crore.
The weaker-than-expected NII growth resulted from a lower-than-expected net interest margin. Moreover, the year-ago numbers have been revised, which points towards a possible change in the accounting policy pertaining to recoveries.
However, the surge in the non-interest income more than made up for the weakness in the NII. The non-interest income for Q1FY2010 came in at Rs755.6 crore, more than double the amount in the same quarter of the last year (Rs339.9 crore).
The surge was primarily driven by the treasury income (up 230% y-o-y) and robust fee income (which doubled y-o-y).
The operating expenses grew by around 50% y-o-y to Rs315.9 crore as a result of aggressive recruitment and branch expansion (29 new branches in Q1FY2010) carried out by the bank in the recent months.
Despite that, the cost-income (ex-treasury) ratio improved substantially to 52% for the quarter from 73.2% for the year-ago quarter and 61.0% in the previous quarter.
Consequently, at the operating profit level (ex-treasury), the bank registered an impressive growth of ~275% to Rs 291.2 crore.
However, the strong operating performance could not trickle down to the bottom line, as the provisions spiked by 15 times to Rs560.3 crore.
The spike in the provisions is on the back of completion of restructuring of advances to Dabhol Power Plant, which resulted in the diminution in the fair value.
Consequently, the bottom line was contained at Rs171.8 crore (up 7.5% yoy) vs our expectation of Rs221.9 crore. The bank continued to pay its taxes based on minimum alternate tax with effective tax rate for Q1FY2010 at 12.3%.
At the current market price of Rs100, IDBI Bank trades at 5.4x FY2011E earnings per share, 2.6x 2011E pre-provisioning profit and 1.0x FY2011E price-adjusted book value.
We maintain our BUY recommendation.