IDFC Bank/IDFC Ltd 56/ 41

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1 Result Update Rating matrix IDFC Ltd IDFC Bank Rating : Buy Buy Expected Price : Target Period : 12 months 12 months Potential Upside : 40% 16% Demerger Structure effective from Oct 1 st, 2015 Stock data IDFC Bank Market Capitalisation crore GNPA (Q3FY16) 1462 crore NNPA (Q3FY16) 453 crore NIM (Q3FY16) 2.0% 52 week H/L 73.5/43.1 Net worth crore Face value 10 DII holding (%) 5.3 FII holding (%) 23.0 Stock data IDFC Ltd (consol) Market Capitalisation 6431 crore Bank GNPA (Q3FY16) 1462 crore AMC AUM (Q3FY16) crore Alternatives AUM (Q3FY16) crore 52 week H/L 87.6/38.4 Net worth 9997 crore Face value 10 DII holding (%) 14.0 FII holding (%) 47.0 Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com First quarterly results post demerger... February 2, 2016 IDFC Bank/IDFC Ltd 56/ 41 IDFC Bank reported a PAT of crore, higher than our estimate of 193 crore, primarily led by higher non-interest income at crore vs. our estimate of crore. IDFC Bank is reporting its performance for the first quarter, post de-merger; figures are not comparable on a YoY and QoQ basis On the asset quality side, the bank reported GNPA at 1462 crore, with GNPA ratio of 3.09%. Net NPA ratio was at 0.98% in Q3FY16, with absolute NNPA at crore. Total stress as per management stays at 8800 crore though it is ~ 5500 crore on regulatory basis NII was at crore, in line with our estimate of crore in the quarter. Gross loan book was at crore as of Dec 15 Non interest income was up at 218 crore YoY, owing to better treasury gains at 171 crore as the bank has maintained large and excess SLR investment book in G-sec IDFC Ltd The consolidated entity reported a PAT of 176 crore for Q3FY16 better than expected 145 crore, led by strong bank profit Exhibit 1: Entity wise operating results (Q3FY16) IDFC IDFC IDF AMC Alternatives Securities Others/ Consol Operating Income Operating Exp Provisions PBT PAT before Minority & Asso. co Minority Interest / Consol Adj PAT 176 Weak environment impacting performance The bank reported RoE of 7.2%, RoA of 1.2% and NIM of 2% for quarter ended December Total stress as per management was at 8800 crore (though on regulatory basis it is ~ 5500 crore) has flown to the bank with provisions. GNPA, NNPA ratios were at 3.1%, 1%, respectively. With forward return ratios of the bank expected around 6.7% for RoE and 1.1% for RoA by FY18E, the bank is assigned multiple of 1.5x BV. Hence, we assign a target price of 66/share (revised from 84 earlier) for IDFC Bank. As the holding company will own all other businesses including 53% stake in the bank, we value the company providing 40% discount to respective subsidiary valuations. Accordingly, we assign a value of 56/share ( 87 earlier) for IDFC Holding Company. Exhibit 2: SOTP - Shareholder receives one share of both IDFC Bank, IDFC Holding Valn crore Stake Holding Target per Basis (FY17E) Val per share Held (%) co. share ( ) IDFC Bank standalone target 1.5x FY17E BV Valn of IDFC Holding Co. IDFC Holding Co Net worth 1x of NW IDFC Alternatives 9% of AUM IDFC AMC 4% of AUM IDFC Securities 10x PAT IDFC Bank (Holding co.share) ICICI Securities Ltd Retail Equity Research

2 Variance analysis IDFC Bank Crore Q3FY16 Q3FY16E Q3FY15 YoY (%) Q2FY16 QoQ (%) Comments NII NA NA NA NA NIM (%) NA NA NA NA Other Income NA NA NA NA Higher non-interest income led by traction in treasury income Net Total Income NA NA NA NA Opex NA NA NA NA PPP NA NA NA NA Provision NA NA NA NA PBT NA NA NA NA Tax Outgo NA NA NA NA PAT NA NA NA NA PAT came in higher than estimate led by non-interest income Key Metrics GNPA 1,462.3 NA NA NA NA GNPA ratio came in at 3.1%, while net NPA stood at 1% of advances NNPA NA NA NA NA Total Restructured a 1,989.5 NA NA NA NA Net restructured book formed 4.3% of book Variance analysis IDFC Ltd (consolidated) Crore Q3FY16 Q3FY16E Q3FY15 YoY (%) Q2FY16 QoQ (%) Comments Operating Income NA NA NA NA Higher-than-expected operating income led by traction in bank Operating Exp NA NA NA NA Provisions NA NA NA NA PBT NA NA NA NA PBT ahead of estimates primarilly due to higher income PAT before Minority NA NA NA NA Minority Interest / Co NA NA NA NA PAT NA NA NA NA Key Metrics IDFC AMC 54,440.0 NA NA NA NA IDFC Alternatives 16,379.0 NA NA NA NA IDF book NA NA NA NA Balance sheet size 89,259.0 NA NA NA NA ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Transformation into bank Post de-merger IDFC has been structured as a three tier company with IDFC Ltd, the parent and listed entity, remaining at the top of the structure with a non-operating holding financial company (NOHFC) at the second level below the parent. This NOHFC has four subsidiaries engaged in banking (IDFC Bank) and allied business including investment banking, asset management and alternate class business. Existing shareholders received one share of IDFC Ltd and one share of IDFC Bank for every share of IDFC before demerger. There are two listed entities IDFC Ltd and IDFC Bank. Exhibit 3: Post demerger holding structure IDFC Ltd (FII - 48%) 100% 47% - Held by current shareholders of IDFC ltd directly 53% IDFC FHCL (Revenues ( 1719 crore (NOFHC) 75% 100% 100% 100% IDFC Bank (FII-22.4%) IDFC AMC IDFC Alternative IDFC NBFC-IDF Other subsidiaries Under the new structure, IDFC Bank is starting with balance sheet size of crore. An infrastructure development fund (IDF) has been created with 440 crore of networth, 735 crore loan book and can see huge growth potential. IDFC has been given exemption from regulatory requirements including SLR, CRR and PSL to the extent of 30% of eligible infra loans, subject to verification and certification. RBI notification for infrastructure boost via issuance of long term infra bonds (>seven years) for banks allowing them to claim exemption from CRR, SLR and PSL will be based on eligible credit calculations. We believe the exemption will gradually rise and reach ~50% in four or five years. This is expected to enable the bank to reach close to double digit RoE (8.4% in FY20E) in four years. RoA is expected to stay at ~1.1% in first two years till FY18E and reach ~1.4% in FY20E. Investment book for bank is crore and crore is core SLR. Meeting priority sector (PSL) norms is one of the challenges for IDFC as its loan book consists of infra loans. New PSL guidelines, however, have provided further respite for IDFC as it requires new banks to meet 40% lending target to agriculture, education & weaker section by March We expect the loan book to grow at 16% CAGR to crore by FY20E. With focus on meeting PSL norms, advances classified under PSL category will need to grow as till that time, the low yielding RIDF bonds or purchase of assets will lead to a drag on NIM. NII is expected to grow at 15% to 2554 crore by FY20E. NIM is expected to reach 2.4% by FY20E. ICICI Securities Ltd Retail Equity Research Page 3

4 Shareholding pattern to offer room for increased FII participation The new bank has double the equity shares of current IDFC holding company as IDFC shareholders will hold 47% in the bank directly. Parent IDFC will have 53% in the bank through wholly-owned subsidiary; shareholder of the parent holding company, indirectly will own 53% taking the pie to 100%. IDFC Bank will offer room for FII holding to go up to 49% in the bank on day 1, which can further rise to 74% after five years. The government holding will decline to around 7.7% in the bank. IDFC Holding will have to bring down its 53% stake in bank to 40% by 2019 as per RBI guidelines on promoter holding. Exhibit 4: Shareholding pattern of IDFC as on December 2015 Diversified ownership hopefully provided comfort to RBI. The government is the largest shareholder. Its involvement in regular business activity is not there Fis/Insu. Co/Banks, 7% Corporate Bodies, 5% Retail, 17% MF, 7% FII/FDI/NRI, 47% GOI, 17% Foreign ownership of the bank will be under 25% as post the parent becoming domestic, the bank will also be classified domestic. Strong professional management IDFC Bank Rajiv Lall is the current Executive Chairman while Vikram Limaye is MD and CEO. Rajiv Lall will be the banking CEO. Pawan Bansal from E&Y (Citi and ANZ) will be Chief Risk Officer. IDFC shareholders received one share in IDFC Bank, IDFC Holding 1. All financially regulated businesses owned by NoFHC namely IDFC Financial Holding Company. NoFHC will hold 53% in bank 2. The demerger became effective on October 1, 2015 and both the bank and IDFC holding company are already listed and trading on exchanges IDFC Bank has 24 branches. Of these, 15 are rural branches in Hoshangabad, Khandwa and Harda districts of Madhya Pradesh. Eight urban branches are in Pune, Ahmedabad, Hyderabad and Bengaluru. ICICI Securities Ltd Retail Equity Research Page 4

5 IDFC Bank Loan growth expected at 16% CAGR Erstwhile IDFC was engaged in financing infrastructure projects in sectors like energy, telecommunication, transportation, commercial and industrial projects including hospitals, education, tourism and hotels. IDFC s total exposure was crore in Q2FY16, of which energy was highest at 41%, followed by transportation 25%, telecommunication 23% and others 11%. Post transfer to bank, we expect it to have similar sector exposure with overall book at crore. Leaving Bharat Bank classified for retail and rural banking, we believe the infra portfolio may largely be same. This is expected to get gradually diversified. Overall growth is expected at 16.1% CAGR in FY17-20E to crore. Exhibit 5: Believe loan book of old IDFC as of Q2FY16, can reflect current Bank book (o/s disbursements book) 7950, 16% 21634, 44% 8133, 17% 11517, 23% Energy Transport Telecom Others Funding portfolio to move to bank as loan book moves out to bank Funds will remain wholesale even in the next three years as even with banking licence, SA generation will take longer. Branches earlier did not exist for IDFC to reach people. Three large branches and 39 AMC branches were the only presence. Hence, with no legacy of the existing model, IDFC is expected to leverage on technology and concentrate on liability building on the retail side. It has 24 branches and three ATMs. Of these, 15 are rural branches in Hoshangabad, Khandwa and Harda districts of Madhya Pradesh. The eight urban branches are in the four metros, Pune, Ahmedabad, Hyderabad and Bengaluru. Going ahead, with management focus on building its deposit franchise, we expect borrowing to grow 7.5% CAGR in FY17-20E, deposits within are expected to grow at 49.7% CAGR over the same period. ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 6: Funding profile IDFC Bank CASA, 0% Term deposits, 2% Q3FY16 others Infra bond, 15% Bonds 69% Short Term, 19% Source: Company quarterly presentation, ICICIdirect.com Research Incremental CASA to aid NIMs With inheritance of liabilities side from erstwhile IDFC, IDFC Bank, currently is primarily a wholesale funded entity. Going ahead, we expect healthy traction in retail deposits with branch expansion and customer acquisition. Within deposits, CASA is expected to grow at a higher pace, though initial traction could be slow; thereby providing impetus to margins ahead. Currently, NIM came at 2.0% in Q3FY16, which is expected to improve to 2.4% by FY20E. IDFC spreads which were 130 bps have moderated in the bank Asset quality pain in infra portfolio to stay As per IDFC, SLR, CRR can increase costs by 75 bps for loans where it will be needed Asset quality deterioration was sharper and disappointing over last few quarters in financing portfolio. Asset quality side, the bank has reported GNPA at 1462 crore, with GNPA ratio of 3.09%. Net NPA ratio was at 0.98% in Q3FY16, with absolute NNPA at crore. Restructured assets formed 3.7% of loans. Total stress as per management stays at 8800 crore though it is ~ 5500 crore on regulatory basis. Provision reserve has been built at ~10% of loans ( 4600 crore including one time 2500 crore). Hence, 50-60% of 8800 crore stress has been provided and taken to the bank and is not expected to rise in existing infra portfolio as per management. Exhibit 7: Asset quality to remain steady in IDFC Bank ( crore) (%) Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 FY16E GNPA NNPA GNPA (%) NNPA (%) FY17E Source: Company quarterly presentation ICICIdirect.com Research Stability in return ratio past now, expect moderation in banking Historically, IDFC has maintained RoE of 13-14% and leverage of 4-6x. With the banking licence, higher leverage moving from 5-6x to >15x will help generate better return ratios over the long term. We expect RoE and RoA of 8.4% and 1.4%, respectively, in FY20E. ICICI Securities Ltd Retail Equity Research Page 6

7 IDFC Ltd (consolidated) Post de-merger, IDFC Ltd, being parent company holds business divided in four subsidiaries engaged in banking (IDFC Bank) and allied business including investment banking, asset management and alternate class business. Among businesses, IDFC Bank is the major contributor to the financial performance to the extent of nearly 80% of operating income. Non-bank entities includes IDFC AMC (75% stake) engaged in asset management business with its AAUM at crore as of December IDFC Alternatives (100% stake) is a multi-asset class investment management vertical with crore of AUM invested within three distinct asset classes - private equity, infrastructure equity and real estate. IDFC Securities and IDF are other fully owned subsidiaries engaged in investment banking and infrastructure debt management business respectively. Exhibit 8: IDFC AMC & Alternatives major other income contributor (Q3FY16) ( crore) IDFC IDFC IDF AMC Alternatives Securities Others/ Consol Operating Income Operating Exp Provisions PBT PAT before Minority & Asso. co Minority Interest / Consol Adj PAT 176 Non-interest income led by asset management to remain strong IDFC, post de-merger, comprises four business units including AMC segment, own investments and securities business, which provide a basket of fee-based income. Non-interest income (except bank) forms nearly 21.5% of consolidated total income. After IDFC Bank, we expect AMC and alternatives subsidiaries to remain major contributors to overall income for the consolidated entity. Average assets under management (AUM) in the non-mf business (Alternatives) in Q3FY16 were at crore constituting: (i) 5605 crore in private equity, and (ii) 9337 crore in project equity. For IDFC, the business earned 37 crore as operating income. We expect fee-based income to be strong even post conversion as the bank as the same focus, as previously, is expected to continue. Exhibit 9: IDFC Alternatives AUM as on Q3FY16 ( crore) Average AUM (Alternatives) Private Equity 5605 Project Equity 9337 Real Estate 1437 Average AUM (MF) Equity AUM (%) 26 For the acquired MF business from Standard Chartered (SC), AUM in Q3FY16 was at crore, representing 4.1% market share. Debtequity in AUM was at 74% and 26%, respectively. After the bank, IDFC AMC is the second largest contributor in topline with IDFC AMC earning asset management fees of 81 crore in Q3FY16. ICICI Securities Ltd Retail Equity Research Page 7

8 Outlook and valuation IDFC Bank and IDFC Holding The networth, loan book and balance sheet of IDFC Bank were crore, crore and crore, respectively as on October 1, It reported RoE of 7.2% and RoA of 1.2% and NIM of 2% for quarter ended December Total stress as per management was at 8800 crore (though regulatory basis it is ~ 5500 crore) has flown to the bank with provisions. GNPA and NNPA ratio were at 3.1% and 1%, respectively. With forward return ratios of the bank expected around 8.4% for RoE and 1.4% for RoA by FY20E, the bank is expected to trade at multiple of 1.5x BV. Hence, we assign a target price of 66 (revised from 84 earlier) for IDFC Bank. As the holding company will own all other businesses including 53% stake in the bank, we value the company providing a 40% discount to respective subsidiary valuations. Accordingly, we assign a value of 56 per share (from 87 earlier) for the IDFC Holding Company. Exhibit 10: SOTP - Shareholder to have one share of both IDFC Bank and IDFC Holding Valn crore Stake Holding Target per Basis (FY17E) Val per share Held (%) co. share ( ) IDFC Bank standalone target 1.5x FY17E BV Valn of IDFC Holding Co. IDFC Holding Co Net worth 1x of NW IDFC Alternatives 9% of AUM IDFC AMC 4% of AUM IDFC Securities 10x PAT IDFC Bank (Holding co.share) ICICI Securities Ltd Retail Equity Research Page 8

9 Company snapshot (Erstwhile IDFC Ltd) Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Source: Bloomberg, Company, ICICIdirect.com Research Key events Erstwhile IDFC Date Event FY97 Infrastructure Development Finance Company Ltd was incorporated in1997 as a public limited company with their registered office at Chennai FY06 Listed on exchanges FY07 Increased its stake in National Stock Exchange of India Ltd to 8.2% by acquiring an additional 6% stake FY07 Acquired 33.33% stake in SSKI Securities Pvt Ltd (SSKI), which is a domestic mid-size investment bank and an institutional brokerage and research platform May-08 IDFC entered into asset management (MF) by acquiring the AMC business of Standard Chartered Bank in India FY08 Infrastructure boom pushed loan growth to 43% YoY and profits surged 47% YoY, taking stock price to peak FY09 Consolidated growth but remained largest infrastructure finance company for India FY12 Applied for banking licence with RBI Jul-13 Reported large increase in GNPA for first time Mar-14 Received banking licence, saw surge in prices Top 10 Shareholders IDFC Bank Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 IDFC Promoters 31-Dec NA NA 2 GoI 31-Dec NA NA 3 Sipadan Investments (Mauritius) 31-Dec NA NA 4 The Royal Bank Of Scotland 31-Dec NA NA 5 CLSA Global Markets Pte. Ltd. 31-Dec NA NA 6 Orbis Sicav - Asia Ex-Japan Equity Fund 31-Dec NA NA 7 Actis Hawk Limited 31-Dec NA NA 8 HSBC Global Investment Funds 31-Dec NA NA 9 LIC 31-Dec NA NA 10 First State Investments 31-Dec NA NA Top 10 Shareholders IDFC Ltd Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Government of India 31-Dec NA NA 2 Sipadan Investments (Mauritius) Ltd. 31-Dec NA NA 3 The Royal Bank of Scotland 31-Dec NA NA 4 First State Investments 31-Dec NA NA 5 Actis Hawk Limited 31-Dec NA NA 6 Orbis Sicav - Asia Ex-Japan Equity Fund 31-Dec NA NA 7 UTI MF 31-Dec NA NA 8 Life Insurance Corporation Of India 31-Dec NA NA 9 CLSA Global Markets Pte. Ltd. 31-Dec NA NA 10 J.P. Morgan Asset Management 31-Dec NA NA Shareholding Pattern IDFC Bank (in %) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Promoter FII DII Others Shareholding Pattern IDFC Ltd (in %) Sep-14 Dec-14 Jun-15 Sep-15 Dec-15 Promoter FII DII Others ICICI Securities Ltd Retail Equity Research Page 9

10 Financial Summary - IDFC Bank Profit and loss statement - IDFC Bank crore (Year-end March) Q3FY16 2HFY16E FY17E FY18E FY19E FY20E Interest Earned Interest Expended Net Interest Income % growth Non Interest Income Net Income Staff cost Other opex Operating Profit Provisions PBT Taxes Net Profit % growth EPS ( ) Balance sheet IDFC Bank crore (Year-end March) Q3FY16 2HFY16E FY17E FY18E FY19E FY20E Sources of Funds Capital Reserves and Surplus Networth Borrowings Other Liabilities Total 85, , , , , ,169.7 Application of Funds Cash and equivalent Investments SLR RIDF Other Investments Advances PSL Other Assets incl FA Total ICICI Securities Ltd Retail Equity Research Page 10

11 Key ratios IDFC Bank 2HFY16E FY17E FY18E FY19E FY20E Valuation No. of Equity Shares EPS ( ) BVPS ( ) Yields & Margins (%) Yield on assets Avg. cost on funds Net Interest Margins Quality and Efficiency Cost to income ratio Leverage ratio RONW (%) ROA (%) ICICI Securities Ltd Retail Equity Research Page 11

12 ICICIdirect.com coverage universe (Banking) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Bank of India (BANIND) Sell 7, NA Bank of Baroda (BANBAR) Hold 28, Punjab National Bank (PUNBAN) Hold 16, State Bank of India (STABAN) Buy 128, Indian Bank (INDIBA) Buy 3, Axis Bank (AXIBAN) Hold 94, City Union Bank (CITUNI) Buy 4, DCB Bank (DCB) Hold 2, Federal Bank (FEDBAN) Sell 8, HDFC Bank (HDFBAN) 1,060 1,170 Buy 264, IndusInd Bank (INDBA) 925 1,000 Hold 53, Jammu & Kashmir Bk(JAMKAS) Hold 3, Kotak Mahindra Bank (KOTMAH) Hold 125, Yes Bank (YESBAN) Hold 32, IDFC Bank (IDFBAN) Buy 19, ICICI Securities Ltd Retail Equity Research Page 12

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