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X Bank Ltd (XBL) Case Study

Background

X Bank Ltd (XBL) is a South-based, small-sized, old private sector bank. The bank had its

presence spread across around 500 branches with majority of its network located in one

particular state of Southern India.

Asset quality parameters

XBL has large exposure to Infrastructure, Textiles, NBFCs and Gems and Jewellery sector.

Slippages in a few large accounts led to deterioration in the asset quality during FY12.

Moreover XBLs re-structured assets increased to Rs.1,898 cr as on March 31, 2012

(Rs.1,665 cr as on March 31, 2011) and restructured asset to net worth stood at 73% as on

March 31, 2012 increasing from 69% over a year ago. The restructured assets further

increased to Rs.2,250 cr as on June 30, 2012. Textiles & Power sectors accounted for major

share of restructured assets. At the same time, the banks recovery efforts have helped

improve recovery during FY12 and Q1FY13.

Profitability

XBL has been improving its net interest margin (NIM) consistently from FY10 backed by

improvement in core spread as XBL has been successful in mobilizing and maintaining a

stable low-cost deposit (CASA as at June 30, 2012 stood at 23.64%) and its advances have

been generating better yields with the banks increased focus on retail advances (whose share

improved from 42.51% of advances in March 31, 2011 to 44.27% as on March 31, 2012).

This along with improved credit to deposit ratio (at 66% as on March 31, 2012) led to

improvement in margins in FY12 even as cost of deposits increased to 7.7% in FY12 from

6.6% (in FY11). Bank has low reliance on bulk deposits. Improvement in NIM is hindered to

certain extent by large RIDF investment (as XBL was not meeting the targeted priority sector

lending). The average yield on RIDF deposits for Q1FY13 was 4.20% as against its cost ofdeposits of 8.13% for the same period. At the same time, incremental investment in RIDF

bonds is expected to be low as the bank has narrowed the gap in meeting its priority sector

lending in FY12.

Despite improvement in NIM during FY12, higher provisioning for NPAs and depreciation

on investments impacted the profitability. The banks ROTA is at 0.72x in FY12 (0.70% in

FY11). During Q1FY13, banks ROTA stood at 0.90% (annualised).

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Capital adequacy

The banks capital adequacy stood at 12.84% with Tier I CAR at 10.86% as on March 31,

2012, however marginally reducing from its level as on March 31, 2011 (13.33%). In FY11,

the banks CAR stood at 12.37% (as on March 31, 2010) following Rs.457 crore rights issue.

Asset growth

XBL achieved growth in advances of around 19% during FY12 in line with the industry.

Retail loan constituted about 44% of the banks advances as on March 31, 2012 with the

balance exposure to corporates. The share of retail loan portfolio has been increasing over the

years. The banks top industry exposures were to infrastructure, trading, textile and NBFCs.

The banks investment portfolio showed an increase of over 13% in FY12. XBL maintains

excess SLR of around 2.5% as at March 31, 2012. HTM constitutes the major portion of the

investment portfolio, which has increased to 78% as at March 31, 2012 from 70% a year ago.

The modified duration of the AFS portfolio was high and stood at 2.66 years as on March 31,

2012 as compared to 2.10 years as on March 31, 2011.

Liquidity Profile

The liquidity profile of the bank was comfortable with no cumulative negative mismatches up

to 1 year.

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K ey Financials

(Rs cr)Year ended / As on March 31, 2010

12m, A

2011

12m, A

2012

12m, A

Interest Income 1,976 2,371 3,113Non Interest Income 379 292 334

Total Income 2,355 2,663 3,447

Interest Expenses 1,708 1,758 2,369

Operating Expenses (Incl. Depreciation) 386 549 568

Provisions (excl tax) 71 120 222

PAT 167 205 246

Deposits 23,731 27,336 31,608

Tangible Net worth 1,833 2,429 2,598

Advances14,436 17,348 20,721Investments 9,992 11,506 12,841

Total Assets 27,022 31,693 36,322

Key Ratios (%)

Interest Spread 1.16 2.24 2.22

Net Interest Margin (NIM) 1.08 2.09 2.19

Cost to Income 59.68 60.71 52.69

Cost of Deposits 7.54 6.60 7.70

Yield on Advances 10.58 10.75 12.47

Core Spread (Yield on Advances - Cost of

Deposits) 3.04 4.15 4.77

ROTA 0.67 0.70 0.72

RONW 9.83 9.60 9.79

Capital Adequacy Ratio 12.37 13.33 12.84

Tier I Capital Adequacy Ratio 9.98 11.27 10.86

Credit/Deposit ratio (times) 0.61 0.63 0.66

Net NPA to Net Advances 1.31 1.62 2.10

Net NPA to Tangible Net worth 10.29 11.54 16.75

Gross NPA to Gross Advances 3.73 3.97 3.27

Provision coverage % 55.60 60.08 47.18