IDBI Bank: Concerns unlikely to ease soon

Issues relating to capitalisation and asset quality will keep the stock in check

IDBI Bank (IDBI) shares have fallen 18 per cent in the past month (down 36 per cent since July), underperforming the S&P BSE Sensex. One reason is the bank’s Rs 2,000-crore exposure to  companies impacted by the Supreme Court's coal block ruling last month. This might affect the borrowers' ability to service existing debt, hitting the bank's asset quality.

P Sitaram, chief financial officer, IDBI Bank, says: “The impact will be significant only in those cases where projects are fully dependent on coal mines and also those companies, which cannot pass on the additional costs. If the economic cycle improves, companies’ ability to pass the higher costs will also improve.”

He expects the bank’s slippages to be better in FY15 compared to FY14. The real impact of the coal mine verdict on the borrowers, though, will be crucial for the bank’s asset quality, believe analysts.

Below-sector loan growth in FY15, weak return ratios and potentially high equity dilution (to bring its tier-I capital at par with Basel-III requirements) over the next two-three years are the other factors adding pressure on the stock. The bank is going slow on its loan growth in FY15 as it focuses on meeting its target for direct agri lending. Currently, direct agri forms five per cent of IDBI Bank’s total loans and the target is to double this in the next couple of years. For this, it plans to add 600 branches in FY15 mostly in rural areas. Sitaram expects loan growth to be 12-13 per cent in FY15, largely driven by direct agri, and expects it to pick up in FY16. Analysts are factoring in 14-15 per cent loan growth for FY16.

The more fundamental concerns around the bank are its capitalisation and low return ratios. At the June quarter, its tier-1 capital stood at 7.9 per cent, a tad ahead of the seven per cent requirement by March 2015. The bank will have to continuously raise funds over the next three years to meet the Basel-III requirement and to fund loan growth.

IDBI Bank’s return on equity (RoE) and return on assets ratios stood at five per cent and 0.3 per cent, respectively in FY14, lower than most peers, which enjoy RoEs of above 10 per cent and RoAs of at least 0.5 per cent. The management believes meaningful improvement in these ratios is possible only when the provision coverage ratio reaches 70 per cent levels from the 54 per cent prevailing.

Given these challenges, most brokerages remain cautious on the stock.