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1 RESEARCH REPORT 15 th May 2017 IDFC BANK LIMITED NSE : IDFCBANK Sector: BANKING BSE: View - BUY CMP : Rs. 64 Target Price: Rs. 87 (In next 12 to 15 mths) BUSINESS BACKGROUND Demerged from IDFC, IDFC bank has formed and forayed into banking business from It has started its journey by launching 23 branches across India on October Since 2015, IDFC Bank has expanded its branches and took the total number of branches to over 300, having presence in 20 states and servicing to 1.4 million customers. On 6th November 2015, IDFC bank shares were listed in Indian bourses and paved the way for the investors to unlock the value of their investments. The bank is equipped with professional management having rich experience in banking and finance space KEY DATA FACE VALUE Rs DIVD YIELD % WK HI/LOW 83/44 NSE CODE IDFCBANK BSE CODE IDFCBANK INVESTMENT HIGHLIGHTS Stable Q4 & FY17 Performance MARKET CAP RS CRS IDFC Bank s (IDFCBK) PAT rose 7% YoY to Rs1.76b (12% beat), led by lower than estimated opex and provisioning. Total income was largely stable YoY at Rs5.6b driven by 21% YoY growth in NII to Rs5b, offset by a 59% decline in non-interest income to Rs563m. The decline in non-interest income was on account of Rs258m of trading losses, as against Rs782m of trading gains in 4QFY16. C/I ratio remained largely stable YoY at 53%. GNPL fell 57% QoQ to Rs15.4b, resulting in GNPL ratio declining sequentially from 7% to 3%. This reduction is due to sale of Rs40b NPLs to an ARC. Loan book growth remains sluggish. Advances grew 8% YoY (+5% QoQ) to Rs494b. Total deposits increased 49% QoQ to Rs 402b. CASA deposits more than doubled QoQ to Rs20.9b vscore: vscore (Value Score) is our proprietary company rating system f IDFC Bank is building a strong franchisee Recently formed, IDFC Bank has beefed up teams with lateral hiring from banks & NBFCs to scale up its business. Currently, the bank has 8613 Points of Presence (PoP) in 20 states. Out of 8613 PoP, 74 are branches, 306 branches are from acquisition of Grama Vidiyal and 1000 Micro ATMs. Bank has 14 lac customers base while, the bank has 663 corporate customers of which the bank added new 119 customers during FY17. Bank s management has expressed intention to target mass affluent customers which majority of banking system is ignoring & lower penetrated. IDFC bank is expected to capitalize on IDFC s corporate relationships to add new business lines, diversifies into retail business (mortgages/rural lending) and gathers PSL. The CASA ratio of the bank currently stands at 5.20% as of Q4FY17 but the management has rapidly increased its focus on retail share in Assured total advances across all customer segments in order to raise average asset yield and pursue cost effective acquisition at scale especially of mass affluent Long and mass term retail Drivers customers for DHFL for deposit look mobilization, good in view which of the would following bring down deve the cost of funds SHAREHOLDING PATTERN PROMOTERS - 53% BANKS, MFs & DIIs - 3% FIIs - 20% PUBLIC - 24% KEY FUNDAMENTALS YE FY17 FY18 FY19 Income Gr% EBIDTA Gr% PAT Gr% BV Rs EPS (Rs) Precise P/E (x) P/BV (x) Advice

2 Bank s retail segment constitutes 20% of banks total advances and 12% of total deposits and IDFC bank intends to increase its retail share further. The funding mix is predominantly through bonds and FD but the share is rising. Management Commentary / Outlook going ahead Net Retail and Corporate Assets Net Assets (Rs666 bn) grew by 36% YoY with loan book growing at 8% YoY and credit investments (Rs172 bn) growing at 451% YoY. Retail Assets Bank has achieved its target of Retail being 25% of its Net Assets via organic and inorganic growth, its book now amounting Rs160 bn. Its organic book (Rs30 bn) is mainly PSL lending and has started disbursing Rs5bn per month. Its aims to grow its retail book in 3 years i.e. by FY20 to Rs550 bn i.e % of Net Assets via organic and inorganic growth by acquisitions of companies which includes SME and JLG financing as well Corporate Assets Bank has reduced its exposure to Infra sector to 54% from earlier 71.4%. Also bank has not seen any pressure in its telecom book exposure of Rs115bn which is majorly to AA rated customers. Liabilities CASA Ratio stood at 5.2% (Rs209bn) from 3.3% (Rs90bn) in Q3FY17. CA continues to grow well supported by SME & Emerging corporates. Distribution Network Management aims to increase its core branches from 74 to 200 by FY20 by increasing presence in top 25 cities and also via rural branches. It also aims to increase its BC/GV branches from 350 to 2000 and increase its micro ATMs from 8600 to 100,0000 by FY20. Customers Bank aims to increase its customer base from 1.4mn to 10mn by FY20. It has currently been acquiring 50 60k customers every month with 60% of customers belonging to rural and semi rural retail group NIMs/Funding cost: Margins fell by 10bps QoQ/YoY to 2% due to pressure in yields in corporate book and PSL lending with major part of its long term liability in fixed rates. Margins will remain under pressure for some time ahead before improving on the back of improving retail growth. Fees/Opex: Fees Bank aims to improve its franchise fees via better relationships and network expansion. Currently fee income forms 10% of operating income which the bank wants to improve. Opex Opex will continue to be elevated on increasing PoP and increasing employee base for direct sales and cross sell. In Q4FY17, employee cost was lower as bank carried some excess costs from Q3FY17. Asset quality: Stressed assets GNPA has fallen from 7.03% in Q3FY17 to 2.99% in Q4FY17 and NNPA has fallen from 2.57% in Q3FY17 to 1.14% in Q4FY17 mainly on account of sale of assets to ARC. Bank has sold 14 assets gross amounting to Rs40bn on which 50% provisioning had been made. Slippages in Q4FY17 were only Rs3.65bn which moved from RSA. Overall stressed assets continued to be stable and management believes provisions are adequate on these assets

3 Strategic acquisitions to drive growth Since, the starting of its banking business IDFC bank has made two strategic acquisitions. The bank bought 10% stake in Dhaka based ASA Int l India for Rs 8.5 crs. The most important move was, when IDFC bank acquired Tamil Nadu based Micro finance company Grama Vidiyal Microfinance. In the history, this is the first time that an Indian bank acquired a micro finance institution. This acquisition has given IDFC bank a 20 fold surge in customer base. Grama Vidiyal has over 12 lakh customers and an asset book of Rs 1,502 crs which would be transferred to IDFC Bank. Further, Grama Vidiyal s network is spread over 319 branches across seven states and 65 districts of Tamil Nadu, Kerala, Karnataka, Puducherry, Maharashtra, Gujarat and Madhya Pradesh, and has over 3,000 employees with yearly profit of Rs 60 crore and has strong loan recovery rate of 99.99%. The acquisition would give an extraordinary reach in a very short period of time to a very large customer base and it creates a platform for growth for IDFC Bank s retail banking business. Bank plans to raise the customer base from 60,000 now to 150,000 by Mar-17, including the recent acquisition of Grama Vidiyal (MFI) with 110,000 clients. Digitization to hold key IDFC Bank plans to leverage digital platforms to grow customer base and will use micro-atms and Aadhaar (UID) to reach out to customers. In fact, management has guided that the intensity to aggressively open new branches will be slower and it plans to add only 9 branches over the rest of FY17. It has currently 65 branches, 14 ATMs and 330 Micro ATMs now. While this will limit the rise in operating costs, branches are also key to customer acquisitions. Loan growth is expected to be strong at 30% in FY17, partly boosted by buyouts of priority loans to meet norms, albeit with lower NIMs/ ROA IDFC Bank has also launched an app called Aadhaar Pay that is designed to help the millions of Indian citizens without a smartphone to make digital purchases using only their fingerprint, according to a report by Mashable. To offer Aadhaar Pay, merchants throughout the country will be able to download the app on their Android smartphones and attach a fingerprint scanner device. To make payments, consumers simply select their bank name, enter their unique Aadhaar number and scan their fingerprint, which authorizes the payment directly from their bank account linked to their Aadhaar card. There are currently over one billion people in India who have an Aadhaar card, while 400 million of the 1.12 billion bank accounts are linked to Aadhaar cards. However, the Indian government is planning to link all savings bank accounts in the nation with an Aadhaar card. If successful, Aadhaar Pay could help transition the country over to cashless digital payments regardless of whether the person has internet connectivity, is illiterate, and has a smartphone. A recent report by marketing research firm Counterpoint finds that out of India s 1.3 billion population, approximately 268 million people had a smartphone at the end of Q Additionally, not all of these citizens have a device that is connected to the internet. IDFC Banks FY2020 strategy is to increase customer base significantly IDFC Bank has charted out strategy till FY20 for taking customer base from current 1.4mn to 10mn, Retail mix from current 25% to 50 60% (from Rs160bn to Rs550bn) by both organic & inorganic way, double franchisee based fees and multi fold increase in branch presence (from 74 branches to 200). We believe, this strategy will clearly augur well to improve ROEs in the medium term, reduce the drag on margins and improve cost ratios as bank has upfronted most capex.

4 Business Mix to See gradual change for IDFC Bank IDFC Bank plans to grow its infrastructure book when the opportunities come and expects retail and Bharat banking (micro-finance) to grow faster on a low base, as a result of which, the share of corporate lending is expected to go down further from 74% at present. As per its 2020 vision, it expects to reach a balance sheet size of Rs bn of which Bharat Banking and Bharat Plus (retail) will constitute 50% of loan book. On liability front, CASA is expected to be Rs 100bn forming 15% of deposits in FY20 (5.2% at present) and bond borrowings are expected to be Rs bn. The bank is on its way to achieve a RoAA of % and see RoAE improving from FY18E onwards IDFC Bank enjoys a healthy Capital Position Capital Adequacy Ratio stood strong at 18.9% with Tier I capital ratio at 18.5%. The bank does not plan to raise Tier I capital atleast for the next 2 years. Impressive Branch Turnaround time The branch strength stood at 74 and that of its wholly owned subsidiary IDFC Bharat Ltd stood at 350. The average break-even of new branches is 4-6 months, the lowest in the industry. It expects to reach a branch size of 200 in the next 2-3 years. It is targeting around 6mn customer base in 2020, of which 5 mn will be in Bharat Banking and 1 mn in Bharat Plus. However, rather than the older system of branches for customer expansion, the bank will depend on partners to grow its network. The points of presence are targeted to grow to 1 lakh from 8,000 at present. Other Growth Levers in the MFI Segment The bank has stake of 5% and 10% in Suryoday Microfinance (small finance bank license holder) and North East based ASA International, where it is planning to grow through franchise / referral arrangements. The bank management has also indicated that it may fully acquire another microlender. Retail business showing healthy traction IDFC reported CASA of 20 bn (2.2%) with retail CASA of 15 bn. IDFC Bank has highlighted that they are acquiring 50,000 customers/month in which about 20,000 are in urban areas largely driving its SA accounts. Retail loans are now 25% of its total loans ( 170 bn) in which about 30 bn (4.5% of total loans) are originated in house. In this, about 60% of the loans are in the microfinance segment, acquired from Gram Vidyal. The company is disbursing 5 bn of loans/months (tenure of loans is not clear and hence difficult to predict loan growth traction). NIM to Improve in future The reported Q4FY17 NIM fell to 2% from 2.2% in Q4FY16, as the bank had to add lower yielding portfolio in order to meet its PSL targets. Over the long term, IDFC Bank expects some improvement in NIMs as higher cost bond borrowings get substituted with lower cost retail deposits over a period of time and retail book sees expansion.

5 The blended cost of funds is expected to be lower at 8% over the next one year. However, as a result of shorter term liabilities being added, there will be some ALM pressure till major part of asset duration remains longer maturity infrastructure assets Business Outlook & Stock Valuation Newly launched IDFC Bank has been aiming to gain pan India presence through inorganic route. Bank s recent acquisition of Micro finance institution would give access to large customer base which would in turn strengthen its retail banking. IDFC Bank s vision to become a mass retail bank in 5 years by leveraging loyal customer base of 1 million, cross selling products and increasing profitability by getting access to lower cost of funds. Bank has reported stable RoA of 1% during FY17, which is expected to improve on the back of business initiatives taken by the management such as focusing on increasing CASA ratio and fee based income. Besides, the bank also has strong views on corporate banking through tie-ups. Currently, the bank is valued at P/BV of 1.4x and P/B of 1.33x on FY18BV and FY19BV which is quite compelling and attractive in private banking sector. IDFC bank has just started its journey and better growth prospect, improving asset quality, better operational metrics improving RoA and higher profit growth is going to rerate the stock price and its valuation multiple in the years to come. However in the near-term earnings are likely to remain volatile due to transition cost, trading gains volatility and portfolio acquisitions (to fulfill PSL requirements). Stress loans too remain high. Over the medium-to-long term,higher leverage, low cost-to-assets and higher share of infra bonds will lead to higher sustainable RoA/RoE Hence, we hold a positive view on the stock and advise investors to BUY from a long term perspective valuing at P/BV of 1.8x for a price target of Rs 87 over the next 12 to 15 months. FINANCIALS For the Year Ended March RsCrs FY16A FY17A FY18E FY19E Net Interest Income EBIDTA Profit After Tax Diluted EPS (Rs) Book Value (Rs) Equity Capital Networth Source Company our Estimates

6 KEY CONCERNS Slowdown in the economy and decline in loan growth. Increase in cost to income ratio. Worsening of asset quality DISCLAIMERS AND DISCLOSURES This document has been prepared by Joindre Capital Services Limited and is meant for the recipient only for use as intended and not for circulation. This document should not be reproduced or copied or made available to others. Recipients may not receive this report at the same time as other recipients. The information contained herein is from the public domain or sources believed to be reliable. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be relied upon as such. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Opinions expressed are current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis, the information discussed in this material, Joindre Capital Services Limited,its directors, employees are under no obligation to update or keep the information current. Further there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Joindre Capital Services Limited, its directors and employees and any person connected with it, will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non-acting on any information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behaviour of investors or recipients or provide any investment/tax advice. This report is for information only and has not been prepared based on specific investment objectives. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis. Trading in stocks, stock derivatives, and other securities is inherently risky and the recipient agrees to assume complete and full responsibility for the outcomes of all trading decisions that the recipient makes, including but not limited to loss of capital. Opinions, projections and estimates in this report solely constitute the current judgment of the author of this report as of the date of this report and do not in any way reflect the views of Joindre Capital Services Limited, its directors, officers, or employees. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. CONTACT DETAILS Mr. Avinash Gorakshakar (Research Head) Tel.: , avinashg@joindre.com COMPLIANCE TEAM Mr. A. P. Shukla (President & COF) Tel.: shuklaap@joindre.com Mrs. Sujata Poojary (Sr. Executive ) Tel. : compliance@joindre.com Mrs. Nikita Shah (Sr. Executive) Tel. : compliance@joindre.com