Source: Company Data; PL Research

Transcription

1 Bank License Not much to lose, but not easy to gain either! April 02, 2014 Adarsh Parasrampuria Pritesh Bumb Rating Accumulate Price Rs128 Target Price Rs130 Implied Upside 1.6% Sensex 22,551 Nifty 6,753 (Prices as on April 02, 2014) Trading data Market Cap. (Rsbn) Shares o/s (m) 1, M Avg. Daily value (Rs m) Major shareholders Promoters 0.00% Foreign 51.39% Domestic Inst % Public & Other 17.59% Stock Performance (%) 1M 6M 12M Absolute (13.1) Relative (31.5) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: IDFC.BO, BB: IDFC IN) (Rs) Apr 13 Jun 13 Aug 13 Source: Bloomberg Oct 13 Dec 13 Feb 14 Apr 14 IDFC has been granted an in principle Bank License. Our analysis of IDFC s return ratios post 5 6 yrs of transition pain indicates that ROEs at best could move back to 11 14% levels factoring in some success on CASA mobilisation. IDFC s valuation at 1.1x Mar 15 book is undemanding given the bank License optionality but delivering on CASA/PSL in a cost efficient manner will be very challenging given significant transition period risk. Hence any benchmarking of valuations to new generation private banks would be a stretch and valuation discount to names like ING Vysya will need to be adjusted for lower book accretion. We maintain ACCUMULATE Payback too back ended...: We expect IDFC s ROEs to come back to 11 14% by FY20 21 after dipping to single digits in the first 3 4 yrs. We believe the benefits of the positives like (1) Ability to leverage (from 5.5x to ~10 11x) (2) Raise CASA deposits and (3) Earn non fund based fees will not outweigh the negatives of (a) CRR/SLR (b) PSL compliance and (c) Significant increase in Opex, though it does provide some more sustainability to IDFC s current wholesale model....and that too with a lot of Ifs and Buts : Our ROA/ROE estimates are also based on delivery on certain metrics which would also not be easy (1) We assume CASA/branch of Rs250mn/branch for IDFC (similar to Kotak/IIB) We see challenges not only in SA but also CA mobilisation for a term lender. (2) Ability to leverage is a big benefit but growth will likely be slow initially to limit transition period pain. (3) Limited experience in running any retail franchise. Undemanding valuations but offset to some extent by lower book accretion: Though we remain circumspect on IDFC s ability to deliver industry level ROEs, valuations at 1.1x Mar 15 book is undemanding. On a relative basis, IDFC s valuations is at par with regional banks and ~25% discount to banks like ING Vysya but we believe investors should evaluate this discount along with significantly lower book accretion (7 8% per annum for IDFC v/s 11 12% for smaller private banks and 15 16% per annum for larger private banks). Key Financials (Y/e March) E 2015E 2016E Net interest income (Rs m) 25,420 26,980 29,238 32,949 Growth (%) Non interest income (Rs m) 9,050 10,065 11,609 12,755 Operating Profit (Rs m) 29,176 31,296 34,391 38,505 PAT (Rs m) 18,368 21,156 22,441 25,424 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & valuation E 2015E 2016E Spreads / Margins (%) RoAE (%) RoAA (%) P/E (x) P/BV (x) P/ABV (x) Net dividend yield (%) Source: Company Data; PL Research Event Update PrabhudasLilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 IDFC: Pro forma FY20 ROA/ROE Payback too back ended Exhibit 1: IDFC FY20 exit ROA/ROE based on growth assumptions and dividend payout We believe NIMs will be negatively impacted due to CRR/SLR/PSL related costs by ~93bps and then there will be some impact on margins related to higher leverage depending upon organic/inorganic growth that IDFC manages NIMs will be positively impacted due to CASA impact We factor in CASA/branch of RS300mn which is relatively high Netnet we expect IDFC to have margins of % depending upon the leverage levels We expect IDFC to have a cost of ~1.5% of assets assuming CASA/branch of Rs mn. Overall considering current dividend payout we get ROEs of 11 14% after 5 6 yrs for IDFC with 15% ROEs at ~11 12x leverage This is after significant transition risk in terms of single digit ROEs and also risk of failing on CASA execution April 02,

3 CASA challenges Easier said than done: Current accounts not easy to garner: In our recent detailed report CASA 1O1 we highlighted a BCG study that indicated that current account relationships are not easy to build for term/project finance Lenders and hence garnering significant CA deposits from their existing relationship for IDFC may not be that easy. Exhibit 2: Current account is a prime relationship or a corporate with a bank and has limited connections with term lending Exhibit 3: Term lender does not get to keep the current account in >50% of the cases Source: BCG Report on Productivity in Indian Banking,2013 Source: BCG Report on Productivity in Indian Banking,2013 Savings account: Penetration levels of SA accounts in Metro and Urban India has increased to >50% and increasingly it has been difficult for new private banks to gain market share KMB/IIB/Yes has ~70% lower market share than what Axis/HDFCB had when they were of similar vintage and the going will only get tougher. Exhibit 4: Comparison of CASA success of Banks of various vintages IDFC will be climbing a steep cliff 6.00% 5.00% HDFCB Axis KMB Yes 4.00% 3.00% 2.00% 1.00% 0.00% SA share at end of 8th yr from inception Incremental SA share at end of 8th yr since inception CA share at end of 8th yr from inception April 02,

4 Exhibit 5: First mover advantage has proved beneficial which will be absent with IDFC Current Account: Private banks CA share (%) 14.84% 28.9% 32.3% Private banks CA incremental share (%) 37.1% 36.9% Penetration levels have increased meaningfully in Urban and developed states and with no Rural presence or experience building a SA franchise will be difficult for IDFC PSU banks CA market share 85.16% 71.15% 67.73% ICICI/HDFCB mkt share ~20yrs since inception 7.27% 16.30% 15.59% Axis Bank ~15yrs since active participation 2.04% 6.01% 7.07% Kotak/IIB/Yes 8 10yrs since inception 0.73% 1.81% 4.04% Savings Account: Private banks SA share (%) 7.4% 16.7% 19.3% Private banks SA incremental share (%) 22.5% 21.2% Average SA Balance (Rs / account) 11,028 18,768 22,853 Saving a/c penetration (%) 27.2% 37.3% 56.6% SA penetration in Better developed states (%) 35.1% 49.3% 72.5% Branches per 100K ppl Total India Branches per 100K ppl Developed states PSU banks SA market share 92.58% 83.35% 80.66% ICICI/HDFCB mkt share ~20yrs since inception 3.21% 9.60% 10.52% Axis Bank ~15yrs since active participation 0.54% 2.94% 3.86% Kotak/IIB/Yes 8 10yrs since inception 0.09% 0.42% 1.23% April 02,

5 Valuations will provide downside support; but benchmarking to large new generation private banks also not justified Exhibit 6: IDFC trades in line with regional banks, ~25% discount to ING ICICI Yes Axis ING IDFC J&K Fedrl SIB FY15 P/B (x) Exhibit 7: Book value accretion will be the lowest over next 4 5 yrs 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Yes IIB J&K Axis SIB Fedrl ING ICICI IDFC Exhibit 8: IDFC s P/BV Valuations have come off and that is a saving grace! Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 April 02,

6 Income Statement (Rs m) Int. Inc. / Opt. Inc. 72,178 78,744 82,989 92,411 Interest Expenses 46,758 51,764 53,751 59,462 Net interest income 25,420 26,980 29,238 32,949 Growth (%) Non interest income 9,050 10,065 11,609 12,755 Growth (%) Net operating income 34,470 37,046 40,847 45,704 Expenditure Employees 2,916 3,033 3,397 3,737 Other expenses 2,378 2,717 3,059 3,462 Depreciation Total expenditure 5,294 5,750 6,456 7,199 PPP 29,176 31,296 34,391 38,505 Growth (%) Provision 3,496 2,115 3,438 3,437 Other income Exchange Gain / (Loss) Profit before tax 25,680 29,181 30,953 35,068 Tax 7,311 8,025 8,512 9,644 Effective tax rate (%) PAT 18,368 21,156 22,441 25,424 Growth (%) Quarterly Financials (Rs m) Y/e March Q1FY14 Q2FY14 Q3FY14 Q4FY14E Int. Inc. / Operating Inc. Income from securitization Interest Expenses Net Interest Income 6,860 6,860 6,640 6,727 Growth Non interest income 3,350 2,040 1,870 2,550 Net operating income 10,210 8,900 8,510 9,277 Growth (8.1) Operating expenditure 1,390 1,380 1,290 1,555 PPP 8,820 7,520 7,220 7,722 Growth (10.0) Provision Exchange Gain / (Loss) Profit before tax 8,230 7,020 6,850 7,122 Tax 2,660 2,140 1,860 2,065 Prov. for deferred tax liability Effective tax rate (%) PAT 5,570 4,880 5,010 5,057 Growth (3.9) Balance Sheet (Rs m) Sources of funds Equity 15,147 15,147 15,147 15,147 Reserves & Surplus 121, , , ,685 Networth 136, , , ,832 Growth (%) Loan funds 535, , , ,541 Growth (%) Others Minority Interest Deferred Tax Liability 31,493 34,358 37,494 40,990 Total 710, , , ,862 Application of funds Net fixed assets 3,445 3,366 3,250 3,100 Advances 557, , , ,351 Growth (%) Net current assets 2,627 3,153 3,783 4,464 Investments 110, , , ,316 Growth (%) Other Assets 37,116 37,897 38,732 39,631 Total 710, , , ,750. Key Ratios CMP (Rs) Eq. Shrs. O/s. (m) 1,515 1,515 1,515 1,515 Market Cap (Rs m) 193, , , ,582 Market Cap to AUM (%) EPS (Rs) Book Value (Rs) Adjusted Book Value (Rs) P/E (x) P/BV (x) P/ABV (x) DPS (Rs) Dividend Yield (%) Asset Quality Gross NPAs (Rs m) 851 4,474 8,169 12,281 Net NPAs (Rs m) 562 2,684 4,493 6,386 Gross NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) Profitability (%) NIM RoAA RoAE April 02,