Capital quest for IDBI Bank

The stock of IDBI Bank has been on a roll following announcement of capital infusion plans and recent initiatives to boost the share of low-cost deposits. These are expected to improve the bank’s margins.

The bank, which had received close to Rs3,100 crore by way of capital infusion from the government, currently has total capital adequacy of 13.67% with 8.5% Tier-I capital and 5.17% Tier-II capital. This gives it sufficient headroom to raise further capital by way of bonds.

In fact, IDBI Bank plans to raise Rs1,500 crore in Tier-II capital by the end of this fiscal.

The lender, which has 65% government shareholding, may also look at dilution to raise further capital by next year.
The bank has therefore lowered its total deposit growth target to concentrate on growing its current and savings account (CASA) ratio.

The public sector bank had earlier this month done away with all the service charges related to CASA accounts including removal of charges for non-maintenance of minimum balance. Also, the bank is looking to increase its branch network from the current 728 to around 1,000 by the end of this fiscal, which would further help increase its reach to retail customers. These moves would help the bank increase its CASA ratio from 14.59% in the last fiscal to around 20% by the end of this year.

The bank, which has seen its cost of deposits drop from 7.35% for FY10 to 6.64% in Q1FY11 as it dropped costlier bulk deposits, would now be able to reduce it further on account of low-cost deposits. The net interest margin (NIM) has seen significant improvement from 1.27% last fiscal to 1.64% in the last quarter on the back of favourable interest rate movement. The NIMs are set to rise on account of lower cost of funds. The bank expects to grow its advances as well as deposits at around 20% this fiscal.

As per analysts’ estimates, the net profits are expected to grow at a compounded annual growth rate of 25% over the next two years.
On the negative side, the waiver of various service charges would weigh on the bank’s non-interest income slightly. Also, asset quality remains a concern for the bank as its net NPA ratio (non-performing assets or bad loans to net advances) stood at 1.19 as on June 30.

The stock of IDBI Bank gained 4.33% on Thursday to close at Rs139.70 on the Bombay Stock Exchange. Analysts remain positive on the stock though short-term upside remains restricted after the sharp run-up of 15% since the start of this month. Investors can consider the stock on declines.