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IDBI: The right step
Emcee in Mumbai |
July 30, 2004 10:05 IST
Meleveetil Damodaran has finally pulled it off. He had already accomplished half the task once the government agreed to transfer Rs 9,000 crore (Rs 90 billion) of IDBI's non-performing assets to a special purpose vehicle, thus cleaning up its books and laying to rest the troubled legacy of the past.
The next logical step was a merger with IDBI Bank, thereby mapping out the road for the future.
No two institutions could be more different, as is strikingly brought out by their June quarter results. While IDBI Bank made a profit of Rs 36 crore (Rs 360 million) on a total income of Rs 260 crore (Rs 2.60 billion), its parent made Rs 23 crore (Rs 230 million) from total income of Rs 1,379 crore (Rs 13.79 billion).
Operating margin was 7.9 per cent in IDBI, and 49 per cent in IDBI Bank. Non-performing assets at the bank were 0.2 per cent of customer assets, compared to IDBI's net NPAs of 14.2 per cent as at end-March last year, which was when they last declared the NPA levels.
Cost of funds was 3.9 per cent for the bank, while IDBI's incremental cost of funds was 5.6 per cent. IDBI is a retail bank, while its parent gives term loans for projects.
IDBI will get access to low-cost deposits, exposure to the fast-growing retail finance market, a modern technology platform and a private sector culture. IDBI Bank will get over the uncertainty, and it will get capital to expand.
How do the valuations compare? With NPAs transferred to the SPV, IDBI's adjusted book value per share is likely to exceed Rs 100 by September this year, when it finalises its accounts. IDBI Bank's book value per share is Rs 30.40, but that doesn't tell the whole story.
Earnings per share for the June quarter were Rs 1.70 for IDBI Bank and Rs 0.36 for IDBI. IDBI Bank grew its profits by 64 per cent, IDBI's profits fell 55 per cent.
Also, the IDBI scrip already reflects, on a consolidated basis, the bank's valuation. Clearly, IDBI shareholders stand to gain far more from the merger than IDBI Bank shareholders, and the swap ratio needs to recognise that fact.