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Please see the end of the report for disclaimer and disclosures. -1-

IDBI Bank

RESEARCH

EQUITY RESEARCH July 29, 2008

Quarterly performance below expectations

IDBIs net profit for Q109 increased by a mere 4% on account of a 77%

fall in provisioning. We downgrade our rating for the Companys stock

from Buy to Hold because of the following reasons:

Asset quality deteriorating: Asset quality continued to deteriorate

as gross NPAs increased by 11 basis points qoq and the Bank

reduced its provisions by 28% qoq. IDBI has been reducing its

provisions on a sequential basis for the past four quarters. This

strategy is not sustainable in the long term and the Bank will have to

increase its provisions in order to protect its bottom line.

Heavy dependence on volatile income: Non-interest income

contributed 78% to the net income in Q1FY09. The non-interes

income is heavily dependent on volatile profit from investments. Fee

income and brokerage, core to banking operations; forms less than a

fourth of other income. In Q1FY09, the Banks investment porfolio

which consists of government and corporate securities, witnessed

losses of Rs. 480 million. We expect this trend to conitnue as bond

spreads are rising.

Advances likely to decline: There was a sequential decline in

advances as high interest rates started affecting advances. As a

result, advances declined from Rs. 822 billion in Q108 to Rs. 781

billion in Q109. We expect the growth in advances to slow down

further to 13.7% in FY09 as high interest rates are likely to continue

due to soaring inflation.

RESULTS REVIEW

Share DataMarket Cap Rs. 53.7 bn

Price Rs.74.05

BSE Sensex 13,791.54

Reuters IDBI.BO

Bloomberg IDBI IN

Avg. Volume (52 Week) 2.4 mn

52-Week High/Low 177.7 / 60.6

Shares Outstanding 724.8 mn

Valuation Ratios

Year to 31 March 2009E 2010E

EPS (Rs.) 7.6 8.7

+/- (%) -24.0% 13.7%

PER (x) 9.7x 8.5x

P / PPP (x) 4.8x 4.1x

P / ABV (x) 0.7x 0.7x

Shareholding Pattern (%)

Promoter 53

FIIs 3

Institutions 21

Public & Others 23

Relative Performance

55

75

95

115

135

155

175

195

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

IDBI Rebased BSE Index

Key Figures (Standalone)

Quarterly Data Q1'08 Q4'08 Q1'09 YOY % QOQ% FY07 FY08 YOY %

(Figures in Rs. mn, except per share data)

Net Interest Income 629 2,360 920 46.4% (61.0)% 6,579 6,564 (0.2)%

Net Operating Income 4,631 6,144 4,135 (10.7)% (32.7)% 16,851 22,919 36.0%

Pre-Prov Operating Profit 2,574 3,050 2,016 (21.6)% (33.9)% 9,066 13,331 47.0%

Net Profit 1,531 2,450 1,598 4.3% (34.8)% 6,303 7,294 15.7%

Cost/Net Operating Income( 44.4% 50.4% 51.2% - - 46.2% 41.8% -

Net Interest Margin 0.28% - 0.32% - - 0.80% 0.68% -

NPA ratio 1.15% 1.30% 1.36% - - 1.12% 1.30% -

Per Share Data (Rs.)

PPP per share 3.5 4.2 2.8 (21.7)% (34.0)% 12.5 18.4 46.9%

EPS 2.1 3.4 2.2 4.3% (34.9)% 8.7 10.1 15.6%

IDBI Bank Hold

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IDBI Bank

RESEARCH


Result Highlights

Net interest income jumped 46.4% yoy to Rs. 920 million on account of a

sharp 61.5% rise in interest income from investments. However, a 62 bps

rise in the cost of funds led to an 88 bps fall in the net interest margin, to

0.52%.

Non-interest income (other income) decline 20% yoy to Rs. 3.2 billion as

the Bank shifted its entire government security AFS portfolio to HTM due

to rising interest rates, which resulted in a Rs. 310 million loss.

Total operating expenses increased 3.0% yoy to Rs. 2.11 billion as

employee cost moved up 7.3% while other operating expenses remained

almost flat with a nominal 0.3% increase.

The Banks total business grew 42% yoy growth to Rs. 1,508.32 billion as

the rising interest rates led to a 56% surge in deposits.

Asset quality deteriorated as the gross NPA ratio increased 12 bps QoQ

to 1.98%; however, the Bank decreased its provisions by 28% qoq to

shore up its bottom line.

Net profit improved 4.3% yoy on the back of a handsome jump in ne

interest income, a moderate increase in expenses, and a decrease in

provisions and contingencies.

Bond portfolio pulled downnon-interest income

Asset quality deterioratedfurther while provisionsdecreased

0

150

300

450

600

750

900

1Q'08 2Q'08 3Q'08 4Q'08 1Q'09

Rs

.bn

0.8%

1.0%

1.2%

1.4%

Percentage

Advances Net NPA ratio

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IDBI Bank

RESEARCH


Prospects

Moving towards diversification

The Bank has been taking several initiatives to expand its business. It has

finalised an agreement with Stock Holding Corporation of India Ltd

(SHCIL) for providing stamp certificate issuance services on a pan-India

basis and for collecting money on the latters behalf by using its branches

as authorised collection centres.

Insurance business generates first premium income

IDBI Fortis Life Insurance Company has generated first premium income

of about half a billion rupees and has sold over 10,000 polices in the last

three months. It intends to increase its number of branches from the

present 30 to 100 by the end of 2008, out of which 28 branches will be

based in North India. Currently, it uses 1,000 branches of IDBI Bank and

Federal Bank to distribute its insurance products. Furthermore, the

Company plans to increase the number of advisors to 21,000 by March

2009, from the existing sales force of 1,500. IDBI holds a 48% stake in

this joint venture among three players: IDBI, Federal Bank, and Fortis

Insurance.

Outlook

For FY09, we anticipate a relatively slower growth in interest income

Also, we believe that the growth in deposits will outpace the growth in

advances due to the rising interest rates. This, in turn, would exert

pressure on the net interest income.

Also, we expect a fall in non-interest income as well, due to the corporate

bond portfolio losses in FY09. However, non-interest income should rise

in the long term, as IDBIs new insurance venture will start fetching

significant returns. The insurance venture is likely to break even in 6-7

years.

IDBI Fortis LIC is expandingacross the country

Bank is moving towardsbecoming a diversifiedfinancial institution

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IDBI Bank

RESEARCH


Valuation

Our target price of Rs. 80 for FY09E for IDBI is based on the sum-of-the-

parts valuation methodology. We have arrived at a per-share value of Rs

42 for the standalone banking business by using the three-stage

discounted Equity Cash Flow method. For this, we have assumed a 15%

cost of equity and an 8.71% terminal growth rate.

The Companys stake in its various subsidiaries has been valued at Rs

38, which leads us to a total target price of Rs. 80. Hence, we downgrade

our rating on the stock from Buy to Hold.

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IDBI Bank

RESEARCH


Income Statement Key Ratios

(Rs.M, Yr. ending March 31) FY07 FY08 FY09E FY10E FY07 FY08 FY09E FY10EInterest Income 63,454 80,208 98,354 121,396 Per share data (Rs.)

Interest Expense 56,875 73,644 86,901 106,358 Shares outstanding (M) 724.4 724.7 724.7 724.7

Net Interest Income 6,579 6,564 11,453 15,038 Basic EPS 8.7 10.1 10.7 13.1

YOY Growth (%) 73.2% -0.2% 74.5% 31.3% Diluted EPS 8.7 10.1 10.7 13.1

Other Income 10,272 16,355 14,719 16,927 Book value per share 114.6 121.7 130.0 140.1

Net Operating Income 16,851 22,919 26,172 31,965 Adj. book value per share 86.1 93.3 101.5 111.6

YOY Growth (%) 1.5% 36.0% 14.2% 22.1%

Operating Expense 7,785 9,588 11,516 14,065 Valuation ratios (x)

Pre-Provisioning Profit 9,066 13,331 14,656 17,901 P/PPP 6.2x 4.2x 3.8x 3.1x

Provisions and Contingencies 2,240 3,291 5,685 6,926 P/E 8.9x 7.7x 7.2x 5.9x

Profit Before Tax 6,826 10,040 8,972 10,975 P/B 0.7x 0.6x 0.6x 0.6x

Tax 523 933 1,211 1,482 P/ABV 0.9x 0.8x 0.8x 0.7x

Net Profit 6,303 9,108 7,761 9,493

YOY Growth (%) 12.4% 44.5% -14.8% 22.3% Performance ratio (%)

Return on avg. assets 0.7% 0.8% 0.6% 0.6%

Balance Sheet Return on avg. net worth 8.6% 10.6% 8.5% 9.7%

(Rs.M, as on March 31) FY07 FY08 FY09E FY10E

Cash and balances with RBI 69,111 87,588 (1,565) (14,935) Balance Sheet ratios (%)

Investments 256,753 328,029 385,325 520,076 Advances to deposits 144.1% 112.6% 104.6% 94.0%

YOY Growth (%) 1.3% 27.8% 17.5% 35.0% Borrowings to advances 67.9% 47.0% 30.0% 25.0%

Advances 624,708 822,127 1,008,032 1,222,625 Investments to assets 24.7% 25.1% 26.3% 28.6%

YOY Growth (%) 18.5% 31.6% 22.6% 21.3% Investments to deposits 59.2% 44.9% 40.0% 40.0%

Fixed Assets (Net) 27,784 27,660 27,716 27,730 Net Worth to assets 8.0% 6.8% 6.4% 5.6%

Other Assets 60,037 41,540 48,166 65,009

Total Assets 1,038,393 1,306,944 1,467,674 1,820,505 Productivity ratio (Rs.M)

Opt. expense per employee 1.0 0.9 0.8 0.8

Deposits 433,540 729,980 963,312 1,300,189 Net profit per employee 0.8 0.8 0.6 0.6

YOY Growth (%) 66.7% 68.4% 32.0% 35.0% Asset per employee 138.8 120.5 108.2 107.4

Borrowings 424,044 386,126 302,410 305,656

YOY Growth (%) -10.8% -8.9% -21.7% 1.1% Operating ratios (%)

Other Liabilities & Provisions 97,810 102,619 107,750 113,137 Operating cost to operating income 46.2% 41.8% 44.0% 44.0%

Total Liabilities 955,395 1,218,724 1,373,471 1,718,983 Operating cost to avg. assets 0.8% 0.8% 0.8% 0.9%

Share Capital 7,244 7,248 7,248 7,248 Source: Bank data, Indiabulls research

Reserves & Surplus 75,755 80,972 86,955 94,275 Note: Some ratios are as per Indiabulls definitions and may not match figures

Total Equity & Liabilities 1,038,393 1,306,944 1,467,674 1,820,505 declared by the Bank

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Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666 -6-

IDBI Bank

RESEARCH


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This material is for the general information of the authorized recipient, and we are not soliciting any action based upon itThis report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of IndiabullsSecurities Limited. It does not constitute a personal recommendation or take into account the particular investmentobjectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investmentsand strategies discussed herein and also seek the advice of your financial adviser.

Past performance is not a guide for future performance. The value of, and income from investments may vary because ochanges in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance.

This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete,and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject tochange without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employeesreserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions orinformation in this report change. In addition, ISL has no obligation to continue to publish reports on all the stockscurrently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limitednor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage thatmay arise to any person from any error in the information contained in this report.

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