IDBI Bank: Too early to rejoice

Analysts don't see immediate gains from govt moves to accord higher operational freedom, essential for the stock's sustainable re-rating

The IDBI Bank scrip has rallied a huge 28 per cent in the past four trading sessions' to close at Rs 73 on Wednesday. This rally was triggered by Finance Minister Arun Jaitley's statement that public sector banks such as IDBI Bank should be given more operative freedom, possibly with a structure on the lines of Axis Bank (where government indirectly holds a large stake), and gradually reduce the government's stake from the 76 per cent prevailing.

Additionally, the Street believes that as there will be resolution to the financial problems of state electricity boards (SEBs), power generating companies would benefit leading to easing asset quality pressure for players like IDBI Bank. However, as these are easier said than done, this rally could soon fizzle, believe analysts. Asset quality is a key concern, which could also prove a major hurdle for any stake sale.

Suresh Ganapathy, financial analyst at Macquarie Capital, says, "Given the presence of many murky assets in the books, we believe there might not be many buyers in the system for the IDBI scrip. The government will find it difficult to reduce its stake in the bank." At the end of the June quarter, IDBI Bank's stressed loans (gross non-performing assets, along with restructured assets) formed 16.8 per cent of its overall loans, and were at the higher end compared to peers.

Implementation of power sector reforms could have a positive impact on the asset quality of IDBI Bank, as about 15 per cent of its loan portfolio is from the power sector. However, the reforms will happen at a very gradual pace and, hence, near-term pain is likely to continue. Also, the company's direct exposure to SEBs is very limited. Hence, even if SEBs are financially restructured and reforms are unleashed, significant benefits for power generators to whom IDBI Bank has lent might not accrue immediately.

But, operationally, if the bank is given a free hand (as available to private sector peers), it could help improve sentiments. Analysts say higher incentivisation of the workforce and more focus on sales should lead to higher profitable growth. Nevertheless, analysts prefer to wait for things to materialise before rushing in to buy the stock.

Vaibhav Agrawal, VP Research - Banking, Angel Broking, says, "Reduction of government's stake in the bank will provide room for foreign investments to increase. While there is scope for sustained re-rating in the stock, post privatisation, improvement in its performance is a pre-requisite. This would not be easy to achieve. Thus, we will look at buying the stock only after the event takes place, otherwise it will be a speculative bet." He has a 'hold' rating on the stock.

One can draw inferences from Axis Bank's journey after becoming a private bank. The bank had a large investment book leading to high volatility in earnings on account of treasury income. Companies formed a large part of its loan book in those days and the stock traded at one time forward price/book ratio. Over the years, the bank has ramped up is retail book rapidly and its stock currently trades at 2.4 times FY16 estimated book value. Analysts believe even if the government significantly reduces its stake in IDBI Bank, it will take three-four years to reflect on its financials, as competition from existing and new banks in the business is also rising.

In this backdrop, most analysts are not in a hurry to revise their ratings. Their average target price of Rs 74.75 indicates a marginal upside of 2.3 per cent from the current levels.