Stock Pick From Banking Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

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IDBI is a commercial bank that provides personalised banking and financial solutions to its clients in the retail and corporate banking spaces through its network of branches and ATMs, spread across India.

 Recently, the Reserve Bank of India (RBI) had invoked its prompt corrective action (PCA) framework on IDBI Bank because of its high net NPAs and negative return on assets. According to the state-owned lender, such a step by the RBI will not have any material impact on the performance of the bank and it will contribute to improving the internal controls of the bank and improvement in activities.

 On the financial front, IDBI Bank’s revenue decreased 2.74 per cent to  Rs. 8048 crore in Q4FY17 as compared to Rs.8275 crore in Q4FY16. The company’s net loss increased 84.33 per cent to Rs.3200 crore in Q4FY17 as compared to Rs. 1736 crore in Q4FY16. The operating profits for Q4FY17 declined 12.85 per cent to  Rs.1,390 crore as compared to Rs.1595 crore in Q4FY16.

The net interest income (NII) for the Q4FY17 rose by 14.51 percent to Rs.1,634 crore. The net interest margin which is a key measure of profitability has increased by 8 basis points y-o-y to 1.75%.

The government holds more than 80 per cent stake in IDBI Bank directly and through public sector entities like Life Insurance Corporation. There are problems with banking operations and assets, but it has substantial real estate assets. Therefore, the government is considering the strategic sale of its stake in IDBI Bank by divesting to under 50 per cent.

 The gross NPAs jumped to Rs.44,752 crore i.e. 21.25% in Q4FY17. The net NPAs stood at Rs.25,206 crore i.e. 13.21% in Q4FY17.

 Life Insurance Corporation of India (LIC) is going to infuse Rs.406.90 crore in IDBI Bank on a preferential allotment basis. Therefore, the stake of LIC will increase from 13.76 per cent to 14.25 per cent in the state-owned lender. The objective of the preferential issue is to augment the capital adequacy of the bank computed in terms of the guidelines issued by Reserve Bank of India.

 The bank's capital adequacy ratio stood at 10.70 per cent with tier I of 5.64 per cent, while its capital conservation buffer (CCB) stood at 0.14 per cent against a regulatory requirement of 1.25 per cent. The return on asset stood at -1.39% in FY17.

 Mahesh Kumar Jain, who was MD & CEO at Indian Bank, now holds the same position at IDBI Bank. Therefore, under the new leadership, the bank is expected to raise money from the market through a follow-on public offer (FPO), or a qualified institution placement (QIP).

 Also, IDBI bank is likely to be privatised in the near future which will empower the bank with long-promised autonomy and enable it to reduce its NPAs and put an end to its financial woes.

 On the valuation front, the share price of IDBI Bank is trading at PB of 0.79x, as compared to peers such as Canara Bank (0.77x) and IDFC Bank (1.40x). We recommend our reader-investors to BUY the stock.