Why IDBI Bank will find recovery an uphill task

It has  Rs 20,500 crore of standard stressed pool outstanding as of June 2018. Thus, the entire stressed book (net NPAs and standard stressed pool) is nearly two times its net worth.

While the LIC deal is a lifesaver for IDBI Bank, its financial position - as reflected in the April-June quarter (of FY19) result - is weak and recovery is an uphill task.

Amid higher non-performing asset (NPA or bad loan) provisioning in Q1, the bank posted a loss of  Rs 2,410 crore.

Unlike many other public-sector banks, which witnessed an improvement in gross NPAs (GNPAs) in Q1 on a sequential basis, IDBI Bank’s gross NPAs increased by 4 per cent, sequentially, and 15.2 per cent year-on-year to  Rs 57,810 crore, and its net NPAs stood at  Rs 30,000 crore.

It has  Rs 20,500 crore of standard stressed pool outstanding as of June 2018. Thus, the entire stressed book (net NPAs and standard stressed pool) is nearly two times its net worth.

“A sharp rally in the stock (21 per cent) since the last month has factored in possible positive benefits from the LIC deal.

"IDBI’s weak balance sheet position shows that it is losing business and confidence. It will take a lot of time for the bank to recover,” says G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

To add to its woes, besides decline in deposits, IDBI’s gross advances fell by 6 per cent, sequentially, and 10 per cent year-on-year to  Rs 1.9 trillion in Q1.

This worsened the NPA picture, with GNPAs, as a percentage of gross advances, expanding by 283 basis points (bps) sequentially to 30.8 per cent.

So, what helped IDBI Bank show an improvement in top line (net interest income or NII) by 17 per cent to  Rs 1,640 crore, and operating profit by 28 per cent to  Rs 1080 crore is recovery from an account under the National Company Law Tribunal (NCLT) resolution, for which the bank booked a  Rs 330 crore interest income in Q1.

Otherwise, NII would have declined by 7 per cent and operating profit by 11 per cent, year-on-year. It means, the bank actually fared poorly even on the operational front.

“Against this backdrop, IDBI is not a good bet, even as its valuation is not demanding. Other fundamentally good mid-sized banks such as Indian Bank are more attractive,” Chokkalingam adds.

Photograph: PTI Photo