IDBI Bank Q2: Continues To Report Loss, Net NPA Falls Sharply

LIC-owned IDBI Bank has been dogged by abysmal capital levels, large bad loan book and prompt corrective action (PCA) status, throwing up big concerns for investors and its benefactors (LIC and the government).

In the latest September quarter, bolstered by the Rs 4,743 crore capital infusion from LIC and Rs 4,557 crore from the government - totalling Rs 9,300 crore - capital concerns for now appear to have eased. The bank has also increased provisions significantly, bringing down its net non-performing assets (gross NPA less provisions) sharply. With higher capital ratios and lower net NPAs, IDBI Bank has now moved out of the RBI’s risk threshold levels under PCA on these parameters (still falls short on the profitability front though with negative returns).

So, is the worst over for the bank?

Much of the relief for the beleaguered bank has come due to the tidy capital infusion by LIC and the Centre. With a higher capital buffer, the bank was able to set aside higher provisions for its bad loans, taking the provision cover up to 91 per cent. But given that the bank is still consolidating its loan book (6 per cent YoY decline in domestic loans), carries a large bad loan and stressed asset book and continues to report loss (Rs 3,459 crore in the September quarter), the issue of capital may surface yet again in the coming quarters.

This once again begs the question: How long can LIC and the Centre rescue IDBI bank?

The good

In the June quarter the bank’s CET 1 (Common Equity Tier-1) ratio and Tier I ratio had slipped to a precarious 5.9 per cent (as against regulatory requirement of 7.375 per cent) and 6.1 per cent (8.875 per cent) respectively. In the September quarter, thanks to the capital infused by the government and LIC, CET1 ratio has moved up to 9.27 per cent and Tier 1 to 9.52 per cent.

Importantly, IDBI Bank’s net NPAs have fallen to Rs 7,919 crore in the September quarter, from Rs 10,963 crore in the June quarter, on the back of higher provisions. This has led to net NPA ratio fall to 5.97 per cent in the September quarter---- the RBI’s first risk threshold level under PCA is net NPAs of over 6 per cent.

The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality, leverage and profitability. It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios.

As of September quarter, IDBI Bank complies with all the parameters but profitability - negative ROAs for four years. In January this year, the RBI had pulled out three PSU Banks out of PCA, citing that complying with the capital and net NPA norms was good enough (even if they reported negative ROA). Hence it needs to be seen, if IDBI Bank will remain under PCA.

Lingering concerns

IDBI Bank’s bad loans have grown by more than four times over the past five years, leading to huge losses. Bad loan provisioning in the September quarter remained elevated at Rs 3,545 crore. Importantly, the bank’s bad loans is still a large Rs 52,000 crore (against market cap of just Rs 25,000 crore!), forming 29.4 per cent of the bank’s loans. In the September quarter, fresh slippages were still high at Rs 2,059 crore.

The bank’s SMA book (special mention accounts where payments are overdue by 1-90 days) has risen too. From Rs 10,272 crore in the June quarter, the SMA book has gone upto Rs 13,465 crore, implying persisting stress in the bank’s books, which can continue to keep slippages and bad loan provisioning elevated in the coming quarters. Importantly, the bank’s SMA2 (overdue by 61-90 days) book has more than doubled to Rs 6,295 crore in the September quarter.

This essentially implies that there could be more stress on the bank’s capital. As such, the bank’s core performance is weak. IDBI Bank’s loans (domestic) shrunk by 6 per cent in the September quarter, with its corporate book declining by 20 per cent, while retail loans growing by a modest 7 per cent. While the bank’s net interest income grew by 25 per cent, it was on a low base (net interest income had fallen by 22 per cent in the September quarter last year).

LIC’s woes

LIC, which acquired a controlling 51 per cent stake in IDBI Bank, has already seen its investment erode by half, the insurer had been allotted shares in the bank at a price of 60-61 per share.

In the September quarter, LIC pumped in Rs 4,743 crore and was issued shares at Rs 35 per share. Continuing to hold 51 per cent stake in the bank, it may have to pump in more capital going ahead. 

The bank has been offloading some of its own non-core investments, to fund its losses. The board has approved the proposal for sale of its entire stake in IDBI Asset Management and IDBI Mutual Fund Trustee. While this can help, IDBI Bank will still have to largely rely on LIC and government for its capital needs.