Weak at the core - Sell

High NPAs and dismal core performance are likely to weigh on the bank’s earnings

In the past month, the massive scam unravelling at India’s second largest public sector bank — Punjab National Bank — has taken a toll on all PSB stocks, except one. The stock of IDBI Bank is up nearly 26 per cent, while most other PSB stocks have shed 14-20 per cent in trade. There are two key reasons (in public domain) for the rally in IDBI Bank stock.

One, as part of its ongoing effort to monetise non-core investments, the bank recently sold its entire 30 per cent stake in NSDL e-governance Infrastructure (NEGIL). While the amount is not disclosed in the exchange filing, some news reports suggest the sale amount could be around ₹1,100 crore. Two, there are also talks of a possible stake sale by the Centre in the bank; the Government’s holding in IDBI Bank was 77.8 per cent as of December 2017.

 

 

True, offloading some of their own non-core investments can help capital-crunched PSBs cut their losses. In December 2017, IDBI Bank had also sold its 7 per cent stake in NSDL. From 30 per cent earlier, IDBI Bank’s stake is now down to 23 per cent. The bank also has other non-core investments it can monetise, going ahead.

While these are positives, they do not warrant a sharp rally in the stock. For one, the bank has the highest GNPA (gross non-performing assets) ratio of 24.7 per cent in the industry. Its stressed assets are about ₹26,600 crore, 13 per cent of gross advances. Accounts under IBC amount to ₹28,700 crore. Hence, provisioning on such stressed assets is likely to remain elevated.

The substantial (highest among PSBs) capital allocated by the Centre of ₹10,600 crore to the bank in the current fiscal, is likely to be just enough to absorb losses on account of high provisioning.

While offloading stakes in other non-core investments could act as a buffer, the value per share of IDBI Bank’s non-core businesses is still minuscule in comparison to the intrinsic (fair value) price of the stock.

Investors sitting on a tidy profit can exit the stock.

Weak core performance

IDBI Bank posted losses for the fifth quarter in a row in the latest December quarter. It reported a loss of ₹1,524 crore in the December quarter, sharply up from a loss of ₹198 crore in the September quarter. Provisioning for bad loans for the bank went up significantly from ₹2,862 crore in the September quarter to ₹3,650 crore in the December quarter.

While net interest income doubled in the December quarter to ₹1,666 crore (from the previous year), it was only because of a very low base. Gross advances have shrunk by 12 per cent Y-o-Y in the December quarter.

Weak core income and high provisioning are likely to weigh on the bank’s earnings in the coming quarters.

Non-core investments

IDBI Federal Life Insurance is a life insurance company in which IDBI Bank has 48 per cent stake. The insurance company has seen a 10.6 per cent Y-o-Y growth in new business premium between April 2017 and Jan 2018, lower than the industry (private players) growth of 17 per cent. Its share among private players is just about 1.4 per cent.

Since the embedded value of IDBI Federal is not available, we considered the deal value pegged for the company in 2015, when there were reports that Ageas was going to pick up 20 per cent stake in IDBI Federal for ₹800 crore. The value per share of IDBI Federal for IDBI Bank amounts to about ₹7.

IDBI Bank also has a 23 per cent stake in NSDL (promoted by NSE), which is one among the two depositories in India. CDSL, the other depository that is listed, trades at a valuation of about 31 times consensus FY18 earnings estimate. Considering a much lower multiple of 25 times, the bank’s 23 per cent stake in NSDL could be valued at about ₹2 per share.

IDBI Bank also has a 100 per cent stake in IDBI AMC. The AMC, however, ranks low among the fund houses in terms of AUM (₹10,690 crore as of December 2017) and hence deserves a lower valuation than the listed Reliance Nippon Life Asset Management. IDBI Bank’s stake in IDBI AMC works out to about ₹1 per share.

IDBI Bank’s core performance has been dismal. Hence, at 0.5 times its book value (as of December 2017), the value per share would work out to about ₹45-50. The other non-core investments would add about ₹10 to the bank’s core value. The current market price is ₹80 per share. Hence, it is overvalued.

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