Despite a robust growth in the net interest income, IDBI Bank reported a moderate 27.6% y-o-y growth in Q4’09 net profit, primarily due to a decline in the non-interest income and higher provisioning.
The Bank showed a satisfactory growth in advances, which increased by 25.8% y-o-y to Rs. 1.0tn. During the quarter, the Bank also showed robust increase in deposit, which increased 54% y-o-y to Rs. 1.1tn. This led to a decrease in incremental credit/deposit to ~50%.
However, we believe the management will need to slow down the growth in advances because of the lower Tier 1 capital adequacy, which currently stands at 6.8%.
We expect advances to grow by around 14% for FY 2010. For FY 2011, we expect this growth to fall to around 10% unless the Bank raises fresh capital.
Despite the high cost of funds and the declining CASA ratio, the Bank was able to increase its NIM to 1.06% for FY 2009 from 0.71% in FY 2008.
We believe margins are likely to go up in the future, as the Bank will repay its high-cost bulk deposits.
In addition, the Bank is planning to increase its network by 200 branches in the current financial year, which should increase the CASA ratio and thereby boost margins. Thus, we expect the NIM to remain in the range of 1.1–1.2% till FY2011.
We have valued IDBI Bank’s stock by using the sum-of-the-parts methodology. The standalone Bank has been valued by using the three stage Discounted Equity Cash Flow model.
Our fair value estimate of the standalone Bank is Rs. 65, assuming a 16.24% cost of equity and a 8.45% terminal growth rate. The Bank’s subsidiaries and equity investments in ARCIL, NSE, SIDBI, IDFC, and IFCI have been valued at about Rs. 13 per share.
Our final SOTP valuation of Rs78 shows an upside of only 5% from the current price. Thus, we maintain our HOLD rating for the stock.