There should be machinery at the regional offices to entertain complaints from the borrowers if the branches do not follow these guidelines, and to verify periodically that these guidelines are scrupulously implemented by the branches.
AMENDMENTS
These guidelines are subject to any instructions that may be issued by the RBI from time to time
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 41 Company profile
Government of India (GoI) Undertaking & Historical Events
IDBI Bank Ltd. (IDBI) is one of India's larger commercial Banks and for over 40 years it has essayed a key nation-building role, first as the apex Development Financial Institution (DFI) (July 1, 1964 to September 30, 2004) in the realm of industry and thereafter as a full-service commercial Bank (October 1, 2004 onwards). Post merger of erstwhile IDBI Bank with its parent company (IDBI Ltd.) and The United Western Bank Ltd. undertook the entire gamut of banking activities while continuing to play its secular DFI role.
New Initiative
IDBI is poised to become one of the 'TOP 5' banks in terms of asset size with reorganization of business model by FY12. Moving towards this goal, IDBI has taken several steps like focusing on retail segment and leveraging government and industrial relationships for future business growth. IDBI has reorganized its businesses around nine verticals consisting of six customer verticals and three business verticals, each focusing on distinct customer segments. To increase its global presence IDBI has set up an overseas branch at Dubai and also plans to open representative offices across the globe.
IDBI formed subsidiaries & joint ventures across diverse areas of Banking & Financial System.
IDBI Capital Market Services
A wholly owned subsidiary, offers a full suite of financial products. Its business includes stock broking, distribution of financial products, Portfolio management of Pension / PF funds &
Research services, etc.
IDBI Gilts Ltd.
A wholly owned subsidiary presently focuses on Bond trading, underwriting in auctions of G-sec and T-bills.
IDBI Intech Ltd.
A wholly owned subsidiary, deals in the Information Technology Services, Information Security Practice, Knowledge Management Services.
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 42 IDBI Home Finance
A wholly owned subsidiary, deals in the Home finance arena.
IDBI Asset Management
Asset Management Company of IDBI Mutual Fund is a whollyowned subsidiary of IDBI Bank Ltd. Its mission is to promote financial inclusion, by assisting in investment choices, through mutual funds.
IDBI Federal Life Insurance Company Ltd.
A joint venture with Federal Bank and Fortis Insurance International. It primarily deals in Life insurance space.
Management Brief
MR. R.M Malla who has track record of turning around IFCI from serious liquidity crisis to comfortable liquidity position and helping SIDBI's business to increase three fold during his tenure, has been appointed as a new CMD of IDBI Bank Ltd. Mr. Malla is supported by Mr. B.
P. Singh who is the Deputy Managing Director and Mr. P. Sitaram the CFO of IDBI Bank Ltd.
Industry Outlook Sector at Glance
Over the last few years Indian banks in comparison to its global peers have performed well on growth, asset quality and profitability. To strengthen the banking sector, policy makers have made some notable changes in policy and regulation, which has helped it to overcome the global financial crisis. Following the financial crisis, new deposits have gravitated towards public sector banks which account 50.5% of the aggregate deposits. With respect to gross bank credit also, nationalized banks hold the highest share of 50.5% in the total bank credit. Other scheduled commercial banks at 17.8%, foreign banks and regional rural banks had a share of 5.5% and 2.5% respectively in the total bank credit.
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 43 Favourable economic conditions for Indian banking industry
The macro picture for India has been constructive with GDP (8.8% in Q1FY11) and industrial production (13.8% in July 2010) registering a stronger growth. Indian economy is expected to register ~8.5% in FY11 (IMF forecast of 9.7%) and double digit growth in next 5-10 years which will support the banking industry. In future the increase in domestic consumption demand will strengthen the growth of banking industry.
Infrastructure sector to boost growth
According to BCG report, Infrastructure debt will surpass INR 45 tn (2020) half of which will be on bank's books. It will touch the Asset Liability Management (ALM) limits of banks and will require a significant upgrade of banks' risk management systems. Also banks to discover the importance of the Small and Medium Enterprises (SME) segment for profitability and growth and new models to serve SME segment will be found
Evolving Indian income demographics
According to BCG report evolving income demographics will spur new demand for banking industry and rapid accumulating of wealth will drive weal the management business to 10X size.
Channel penetration to drive business growth
In comparison to the other countries channel (interms of branches & ATMs) penetration in India is low. This will accentuate the demand for low cost banking solutions, branches and ATMs need to grow 2x and 5x (Source BCG).This provide huge opportunity for banking industry to expand its business.
Low Channel Penentration in India
The strong credit growth of ~20% in the industry is expected to continue in future on the back of strong demand for capex, infrastructure and agriculture. Banks are on expansion spree as the RBI has sanctioned licenses to banks which will be focusing more on rural and unbanked areas. By expanding branch network banks are expected to improve their margins by increasing their
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 44 CASA base. Moreover recapitalization measures (infusing INR 165 Bn) initiated by the government will improve balance sheet strength of the weaker banks, which will help them to expand their business and provide stability to the banking system. Also the introduction of Basel III norms (FY13-16) is unlikely to impact the Indian banking industry, given the current high capital adequacy norms.
Capital Infusion to drive business growth
Tier I capital of IDBI Bank as on 31st March 2010 stands at 6.2% is far below the RBI's stipulated level of 8%. To raise the Tier I capital within RBI limit, the government of India infused INR 31 Bn in IDBI through preferential placement of equity at the prevailing market price of INR 120. This infusion will increase the Tier I capital to 8% and Government of India's (GoI) holding to ~65%. Moreover, the increase in government holding would provide headroom for the bank to raise further capital through FPO, there by maintaining the required minimum government holding at the previous levels of 52%. However, management has stated that FPO would depend on internal capital requirement of the bank and market conditions. This also provides an opportunity for bank to raise capital through Tier II and innovative perpetual debt instruments. Capital infusion might dilute the EPS, but it will help in improving the margins and achieve its lending targets and to strengthen IDBI's balance sheet.
Capital Adequacy Ratio
With the capital infusion, IDBI would be in position to grow its business above the industry average. We believe that the total business of IDBI will grow at CAGR of 29% from FY09 to FY12E.
We expect strong growth prospects in the infrastructure sector supported by the government spending of INR 1 Turnover FY17E. IDBI loan book substantially consists of corporate lending and we expect IDBI to continue to focus on corporate segment with infrastructure lending as major growth driver. IDBI is also focusing more on Agriculture, Micro Small and Medium Enterprises (MSME) and Retail segment to exploit potential of these high yielding segments.
Also IDBI will continue to invest in retail business which would begin to gain traction over the medium to long term and further diversify the fee based revenue streams. IDBI's business model of tapping wholesale banking potential to generate revenues while continuing to invest in long gestation retail liability franchisee is remarkable. This has enabled IDBI to scale up its balance sheet and infrastructure and at the same time deliver impressive return ratios, giving comfort on both near term profitability as well as long term growth potential.
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 45 IDBI to roll out more branches
In FY11, bank is expected to open ~260 branches and 80% of these banks will be opened in the CASA rich northern and southern region of the country. These branches are expected to focus more on Agriculture and MSME segment in a bid to accelerate revenue growth in future. Branch expansion will enable to improve its CASA ratio and will help IDBI to achieve financial inclusion as well and increase its CASA per branch ratio.
In order to increase its geographical presence, IDBI has opened a branch at Dubai, which will provide a full range of corporate banking services including financial advisory and syndication of credit. The branch will meet the corporate financing needs of not only its vast Indian clientele but also clients in the Middle-East. This will provide a strong foothold for IDBI to increase its global presence going forward. It has initiated the process of setting up branch offices at Singapore and representative office at Shanghai.
Focus on Current Account and Saving Account (CASA) growth - near inflexion point IDBI's CASA ratio remains one of the lowest in the industry at 14.6% during FY10. Historically, IDBI has been depending on borrowings to support its lending business. With change in its strategy IDBI is emphasizing on deposits to support its lending business. We expect deposits of IDBI to grow at CAGR of 29% over FY09-12E and this will result in lower costs as CASA deposits would be the target. The CASA ratio we estimate to increase from 14.78% in FY09 to 22% by FY12E.
CASA growth drivers
We believe that 100% Core banking solution (CBS) provided by the bank will help it to bring more current account deposits. Moreover, waiving of all charges on a host of services will increase low cost of deposits. These efforts will not only retain customers but also increase its customer base which in turn will improve CASA deposits. Also management is trying to build stronger product portfolio and increase its service quality. Near doubling of branch network will act as a major contributor in the growth of low cost deposits over medium to long term.
Solving legacy Issues
IDBI has brought forward many non performing assets from its erstwhile domestic financial institution business to its current business model, which was weighing a little heavy on its
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 46 balance sheet. Periodically, legacy NPA accounts have showed on the profitability of the bank, but with sustain efforts bank has been able to reduce these NPAs considerably. Going forward, we believe IDBI will be taking care of these accounts inorder to clean up its balance sheet and improve asset quality. We expect Gross NPAs & Net NPAs to decline to 1.46% and 0.77% in FY12E from 1.54% and 1.02% in FY10 respectively.
New Management to act as a catalyst to growth
We believe that one of the key strength of IDBI bank has been experienced management team which has the ability to scale IDBI's business model. Also, recent change in the management to bring fresh approach to IDBI's business model; will get reflected positively over long term.
Improved Productivity
IDBI has consistently improved its performance through optimum utilization of staff and branches. Also IDBI has highest Business per employee ratio which we expect it to continue in future. To further improve staff productivity, various steps have been taken by the bank: like specialized training, recruitment of specialized officers & new talent, incentive schemes, customer centric grooming etc.
Business per Employee
IDBI's total business per employee improved to INR 250 Mn in FY10 from 211 in FY09 and profit per employee maintained at 0.84 Mn in FY10. Going forward, we expect business per employee to increase to INR 333 Mn in FY12E and profit per employee toimprove to 1.61 Mn in FY12E.
Per Employee Profitability
They expect IDBI bank to post a 38% CAGR (FY09-12E) growth in bottom line driven by a 25% CAGR (FY09-12E) in total assets, healthy NIMs, superior fee income. We have forecasted improvement in CASA which we believe has the potential to surprise positively. We expect Net Interest Income to grow by 73%, while operating profit to grow 62% CAGR (FY09-12E) respectively
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 47 NIMs
Bank's thrust to garner more shares of CASA deposits in its total deposits which will enhance its NIMs. This will largely be helped by reducing cost of deposits which is currently at 6.5%, we expect a further reduction by 40 bps in cost of deposits and lead to an expansion in NIMs to 1.8% in FY11E and 2.31% in FY12E from 1.23% in FY10.
ROE & ROAA
Due to better yields, growth in advances and improving profitability and better NIM see expect, return on equity (RoE) to improve to 11.78% in FY11E and 14.57% in FY12E respectively from 10.53% in FY10. Also return on average assets (RoAA) to improve to 0.57% & 0.74% in FY11E
& FY12E respectively from 0.51% in FY10.
Operating Costs as percentage of assets
Operating costs as a percentage of total assets are likely to trend higher on back of investments made in expanding branch network and staff. Further higher focus no retail assets would also increase bank's overhead costs. However, in future these investments will result in higher profits for IDBI.
GNPA & NNPA
Asset quality has been a concern for IDBI due to legacy issues. Going forward, we expect IDBI to take appropriate measures to reduce its NPA levels. We expect Gross NPAs to reduce to 1.46% in FY12E from 1.54% in FY10 and Net NPAs to reduce considerably to 0.77% in FY12E from 1.02% in FY10
Investments
IDBI has been maintaining a steady growth in its investment book, in FY10 74% of the total book has been held in HTM category, 21% in AFS and 4% in HFT category. We expect the investment book to grow at a CAGR of 24% between FY09 to FY12E. In terms of amount, this growth translates to increase in the book size from INR 500 bn in FY09 to INR 943 bn in FY12E.
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 48 Economic downturn to increase NPAs
Any further downturn in the economy and of hardening interest rates may lead to an increase in NPAs and thereby require more provisioning to be made, which will impact IDBI's future profitability.
Concentrated asset book
IDBI's advances tilted towards few segments mostly infrastructure sector which largely depend on the performance of the Indian economic growth. Also there are still inherent risks of higher asset quality risk in having a less diverse portfolio. However, given the strong banking norms in the country, emphasis on infra funding with favourable policy support and strong resilience of Indian banking industry during the economic crisis is likely to offset this risk.
Inability to deliver on growth
We assign premium multiples to IDBI Bank primarily on expectation that it would perform on all growth parameters. Inability of the bank to deliver growth along expected levels on a sustained basis could impact stock performance.
Relative Valuation
Company Price (INR)
Market Cap (INR
mn) RoA* ROE* P/E* P/BV*
IDBI Bank Ltd 171 15,745 0.67 14.57 7.4 1
ICICI Bank Ltd 1131 129,685 1.41 11.26 20 2.2
Union Bank of India 417 20,336 1.15 23.14 6.9 1.5
Oriental Bank of
Commerce 502 12,290 0.98 18.58 6.6 1.2
Central Bank of India 238 9,046 0.73 22.53 5 1.2
Corporation Bank 788 10,540 1.1 21.51 6.2 1.2
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 49 Valuation and Outlook
We believe that with thrust on improving NIMs, CASA ratio, better core operating income and return ratios, IDBI would be one of the fastest growing Indian banks over next few years. At the CMP of INR 171 the stock trades at 1.1x FY12E adjusted book value (ABV) and 7.4 of its FY12E EPS. Currently at INR 171, the stock is available at price to book value (P/BV) of 1x of FY12E. We expect margins to improve from here on for the bank i.e. ROE to reach to 14.57% in FY12E from 10.5% in FY10. Thus, we value the bank's business at 1.3x FY12E P/BV, thereby evaluating it at INR 228. We initiate coverage on IDBI Bank India Ltd with a price recommendation of INR 228, an upside of 34% from the current market price.
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 50 IDBI Bank Product & Services
1. Preferred Banking
PowerPlus Account
Preferred Banking
Royale Account 2. Deposits
Regular Savings Account
Corporate Payroll Account
Core Current Account
Premium Current Account
Premium Special Current Account
Suvidha Fixed Deposit
Suvidha tax saving fixed deposit 3. Loans
Home Loan
Loan Against Property
Education Loan
Personal Loan
Auto Loan
Loan Against Securities
Reverse Mortgage Loan
Corporate Banking 4. CARDS
Cash at POS facility on Debit Cards
Online payment through Debit Cards
International Debit Cum ATM Cards
Gold Debit cum ATM Cards
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 51 5. 24 Hours Banking
Phone Banking
Mobile Banking
Account Alert
Internet Banking
Mobile Payment Services (PayMate) 6. Corporate Banking
Project Appraisal
Debt Syndication
Advisory Services
Environmental services
Secu and Structured product services
Film Financing Scheme
Carbon Credit
Cash Management services
Trade Finance
TAX Payments
TUFS for Textiles Industry
Foreign Currency Product 7. Investment Advisory
Mutual Fund
Life Insurance
New Pension Scheme 8. SME Finance
9. NRI Services 10. Lockers
11. Foreign Currency Products 12. Treasury
13. Services
Dynamic Currency Conversion Services At ATM‟s
Study and Analysis Bank Finance in Agriculture Sector (Contract Farming) Page 52 Agri Finance through IDBI Bank
Agri Business Group
IDBI Bank's total agriculture advance was Rs.1387 Cr for year ended March 2007. It has gone up by Rs.6924 Cr (around 500%) to Rs.8311 Cr as on March 31, 2009.
India is a nation of villages. Agriculture and allied activities have been the main source of livelihood of our rural populace since times immemorial. The sector provides source of employment and livelihood to over 60% of the population. Its linkages with industry are growing with increasing stress on food and agri processing industry on account of changing demand patterns for processed food by consumers. With this background Corporate India has started finding new opportunities in Agriculture.
Priority Sector constitutes Agriculture and allied activities. The emergence of modern economic system has institutionalized agriculture sector on business models. Agribusiness is a broad term that encompasses a number of businesses in agriculture including food production, farming, agrochemicals, farm machinery, warehousing, wholesale and distribution, and processing, marketing and sale of food products.
IDBI Bank constantly emphasizes on lending to Agricultural sector. Bank has several Agri products viz. Loan against crop receivables, Warehouse receipt, Contract farming etc. to uplift the socio–economic status of rural population.