30 January 2016 3QFY16 Results Update Sector: Financials IDFC Bank BSE SENSEX S&P CNX 24,871 7,564 Bloomberg IDFCBK IN Equity Shares (m) 3,392.6 M.Cap.(INRb)/(USDb) 178.1/2.6 12-Week Range (INR) 74 /43 Financials & Valuations (INR b) Y/E March 2H2016E 2017E 2018E NII 8.1 21.5 28.4 OP 8.0 18.3 24.4 NP 5.0 11.6 15.3 NIM (%) 2.6 2.9 EPS (INR) 3.4 4.5 EPS Gr. (%) 32.1 BV/Sh. (INR) 40.4 43.1 46.5 ABV/Sh. (INR) 39.5 41.8 44.8 RoE (%) 8.2 10.1 RoA (%) 1.2 1.4 Payout (%) 20.0 20.0 20.0 Valuations P/E(X) 15.4 11.6 P/BV (X) 1.2 1.1 P/ABV (X) 1.3 1.2 Div. Yield (%) 1.3 1.7 CMP: INR53 TP: INR70 (+33%) Buy Maiden quarter: Good start (ROA of 1.2%) to a long journey IDFC Bank (IDFCBK) reported PAT of INR2.4b, with 1.2% RoA led by trading gains (INR1.7b), which contributed ~45% to PBT. With the pick-up in balance sheet, core operations are likely to contribute meaningfully to profits from 2HFY17. Near-term profitability is likely to be driven by trading gains (significant excess liquidity is built up on the balance sheet). IDFCBK started with trough NIM of 2%. However, loan NIMs were 3.2% as the bank has built up significant excess liquidity (investments: +32% QoQ) lowering overall NIMs. Current quarter NIMs include the full impact of negative carry on CRR (~11bp) and SLR (~11bp, assuming investment yield of ~7.5%). We expect NIMs to expand from the current levels, led by redeployment of excess liquidity, moderating borrowing costs and low-cost deposit mobilization. Stressed loans unchanged: No slippages were reported in 3Q and overall stressed loans (including unrecognized portion) were unchanged at INR88b (20.5% of loans). Also, while it may not be stress as defined by regulatory body, interest earned is accounted only on cash basis which compresses overall NIM C/I ratio stood at 35.6%. The bank opened just one branch during 3Q; however, it expects to add 50-60 branches in next couple of quarters. Management also reiterated that major investment related to technology is already done. The investment is reflected in capital WIP in the balance sheet and its impact will be visible in P&L in the ensuing quarters. Other highlights: 1) Loans grew 3% QoQ to INR430b and customer assets stood at INR469b (of which credit substitutes were ~2%). 2) Requirement of PSL of INR150b, assuming Dec-15 base. 3) Tier 1 ratio remains healthy at 19.6%. Valuation and view: In the near term, quarterly trends are not relevant, considering that bank is stabilizing operations. Over time with higher leverage, low cost-to-assets and higher share of infra bonds will lead to higher sustainable ROE. Buy with a target price of INR70 (1.6x FY17 Residual Income Growth Model) Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415 Dhaval Gada (dhaval.gada@motilaloswal.com); +91 22 3982 5505 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/institutional-equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Exhibit 1: Investments are ~40% of assets vs peers of 22-23%. Significant excess liquidity built in the balance sheet Other assets 5.3 CRR 2.3 Cash and Bank 2.5 SLR 12.5 Exhibit 2: Infra bonds ~15% of liabilities and ~18% of NDTL leading to lower regulatory requirements of CRR and SLR (%) Others 15.5 CASA 0.5 TD 1.9 Infra Bonds 14.7 Loans 50.3 Investment 27.1 Short term 19.3 Bonds / Debentures 48.1 Exhibit 3: Early days: Significant contribution from non-core income (%) 1.01 0.61 1.94 0.09 0.48 0.06 0.68 1.22 NII Fees Non-core income Staff costs Other Opex Provisions Tax RoA Exhibit 4: Banks asset quality position remains stable (INR b) 55 44 15 18 44 GNPA RL Additional nonregulatory stress Provisions held Bank's expected recovery 30 January 2016 2
Valuation and view on IDFC bank Customer assets CAGR of 24% over FY16-20: Considering the low hanging fruits and less than 1% market share, we expect growth to be strong at 22%+. Pick-up in the infrastructure segment and pick up macro-economic environment can push growth to 25%+. Near term growth in customer assets is likely to be driven by a) PSL (~INR150b) and b) wholesale banking (non-infra corporate (working capital as well as term) loans). Gradual improvement in ROAs on cards: Near term earnings are likely to be moderate as bank would focus on acquiring relationships (on cost of margins although we believe current quarter margins are at through reallocation of assets to help improve margins), higher up-fronting of technology related cost, opening up of high street branches, higher marketing expenses, addition of top to middle management in the initial phase (high cost and lower productivity as new business lines are being set up). With the operating leverage kicking in, fee income starts contributing and stability in the business we expect ROAs to improve to ~1.6% by FY20 from 1.1-1.2% levels in FY17. ROEs are likely to be function of growth. Buy with a TP of INR70: In the near term, quarterly trends are irrelevant considering that IDFC is creating a cushion (build-up of SLR book, prudent provisioning and moderate growth) in a bid to start full-fledged banking operations an approach that we like. Higher leverage, low cost to assets and higher share of infra bonds (less regulatory drag) will lead to higher sustainable ROE v/s infrastructure lending business. The bank has started operations with strong CET I capital of ~20%. We value the bank at 1.6x FY17 BV. This is lower than 2x valued before de-merger, reduction in our target multiple is to factor in moderate growth and increased uncertainty in the macro environment. Our target multiple is derived on the residual income growth model with the key assumptions are a) Cost of equity 14.3% b) average growth FY17-35 - 17% and c) Terminal growth rate of 5%. Execution challenges remain a key risk Exhibit 5: We expect RoA/RoE to progressively move higher led by higher operating profitability and leverage 1.2 RoE 1.4 1.5 RoA 1.6 1.7 8.2 10.1 11.3 13.1 14.4 2017E 2018E 2019E 2020E 2021E 30 January 2016 3
Conference call highlights P&L Related Entire trading gains for the quarter related to debt market and not for equity market Bank has rolled out CWG offering in 8 cities; offers all fund based and non-fund based business. In the first quarter non-fund based contributed 5% of total exposure Expect to achieve 50-60 branches over next couple of quarter. Bulk of the branch opening in the rural areas. Internet banking is live and mobile banking will go live in April 2016 Major investments related to technology has been incurred Bharat Banking business offering out of 16 branches in 4 districts in M.P Total personal and business banking customers at 1530 largely internal employee Balance Sheet Related Requirement of PSL INR150b assuming base will be 31 st December 2015 If the credit risk is acceptable, bank will be open to grow through credit substitutes as well. In the last quarter it grew by INR10b Will continue to grow in infrastructure if the opportunity arises On the MFI business A) Buying out of portfolio B) Partnering with MFI and C) MFI does not get SFB license then can get access to IDFC bank platform Improvement in rating during the quarter largely driven by new acquisition Asset Quality Have not received anything from RBI regarding 150 accounts to be recognized INR88b of stress guidance remains unchanged. Interest accounting on stress loan portfolio is on the cash basis. Impact of that could be ~INR800m (not clearly quantified) for the quarter No Significant development in Infrastructure segment. Beyond Thermal power, seeing revival in renewal energy. Developments have taken place in road sector. Some activity on the spectrum side in telecom segment Other highlights Not much merit on the RBS portfolio acquisition As long as IDFCB remains a sub of IDFC ltd there will not be double dividend taxation 30 January 2016 4
Exhibit 6: Dupont analysis : Higher revenues and operating leverage to drive RoE expansion Y/E MARCH 2H2016 2017E 2018E 2019E 2020E 2021E Net Interest Income 1.92 2.32 2.58 2.72 2.85 2.93 Fee income 0.24 0.54 0.68 0.76 0.85 0.88 Fee to core Income 8.0 15.6 17.9 19.1 20.5 20.7 Core Income 2.15 2.86 3.26 3.48 3.70 3.81 Operating Expenses 1.09 1.48 1.59 1.63 1.57 1.47 Cost to Core Income 50.4 51.8 48.8 46.7 42.3 38.7 Employee cost 0.60 0.73 0.81 0.86 0.83 0.79 Emp to total exp (%) 55.2 49.1 51.1 53.2 53.1 53.9 Technology 0.24 0.19 0.14 0.11 0.09 0.07 Others 0.25 0.57 0.64 0.65 0.65 0.61 Core Operating Profit 1.07 1.38 1.67 1.86 2.14 2.33 Non-Interest income 1.07 1.13 1.23 1.27 1.33 1.31 Trading and others 0.83 0.59 0.55 0.51 0.47 0.43 Operating Profit 1.90 1.97 2.22 2.36 2.61 2.77 Provisions 0.08 0.11 0.14 0.18 0.22 0.27 NPA 1.44 0.47 0.47 0.49 0.51 0.51 Others -1.37-0.37-0.33-0.31-0.29-0.25 PBT 1.82 1.87 2.08 2.18 2.38 2.50 Tax 0.63 0.62 0.69 0.72 0.79 0.82 Tax Rate 34.5 33.0 33.0 33.0 33.0 33.0 RoA 1.19 1.25 1.39 1.46 1.60 1.67 Leverage (x) 6.1 6.5 7.2 7.8 8.2 8.6 RoE 7.3 8.2 10.1 11.3 13.1 14.4 30 January 2016 5
Exhibit 7: Financials: Valuation metrics 66 Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%) (INR) (USDb) FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 ICICIBC* Buy 230 20.2 22.2 26.7 7.3 5.6 147 166 1.10 0.90 1.39 1.44 13.4 14.4 HDFCB Buy 1,049 39.8 58.9 70.9 17.8 14.8 330 385 3.18 2.73 1.88 1.86 19.2 19.8 AXSB Buy 408 14.7 40.0 47.7 10.2 8.6 250 290 1.63 1.41 1.68 1.68 17.0 17.6 KMB* Neutral 682 18.9 24.7 31.3 27.6 21.8 206 237 3.31 2.88 1.38 1.54 13.9 14.8 YES Buy 747 4.7 74.5 92.3 10.0 8.1 385 458 1.94 1.63 1.70 1.71 21.0 21.9 IIB Buy 927 8.3 49.8 62.8 18.6 14.8 336 390 2.76 2.38 1.98 2.01 15.8 17.3 IDFCBK Buy 53 2.7 3.4 4.5 15.4 11.6 43 47 1.22 1.11 1.25 1.39 8.2 10.1 DCBB Under Review 78 0.3 6.9 7.7 11.3 10.2 68 75 1.16 1.04 0.93 0.85 10.8 10.8 FB Neutral 46 1.2 4.7 5.7 9.7 8.0 52 56 0.89 0.82 0.83 0.87 9.5 10.7 JKBK Neutral 72 0.5 18.0 21.6 4.0 3.3 152 168 0.47 0.43 1.02 1.07 12.4 13.5 SIB Buy 19 0.4 3.1 3.7 6.0 5.0 31 34 0.60 0.55 0.58 0.61 10.3 11.4 Private Aggregate 109.0 14.8 12.3 2.21 1.94 SBIN (cons)* Buy 180 21.2 31.0 38.7 5.4 4.3 254 286 0.66 0.59 0.78 0.84 12.7 14.3 PNB Under Review 91 2.7 22.8 27.7 4.0 3.3 235 259 0.39 0.35 0.64 0.69 10.1 11.2 BOI Neutral 100 1.2 9.3 19.5 10.8 5.1 350 366 0.29 0.27 0.10 0.19 2.7 5.4 BOB Buy 126 4.4 19.3 23.7 6.5 5.3 191 209 0.66 0.60 0.55 0.60 10.5 11.8 CBK Under Review 194 1.5 57.3 74.6 3.4 2.6 610 667 0.32 0.29 0.46 0.52 9.8 11.7 UNBK Buy 130 1.4 43.1 51.8 3.0 2.5 344 386 0.38 0.34 0.66 0.69 13.2 14.2 OBC Under Review 112 0.5 50.0 66.9 2.2 1.7 505 556 0.22 0.20 0.56 0.66 10.3 12.6 INBK Buy 91 0.7 29.5 37.1 3.1 2.5 300 328 0.30 0.28 0.62 0.69 10.2 11.8 CRPBK Neutral 39 0.1 18.7 21.6 2.1 1.8 152 169 0.26 0.23 0.57 0.59 12.9 13.4 ANDB Buy 52 0.5 22.8 27.9 2.3 1.9 196 216 0.27 0.24 0.62 0.65 12.2 13.6 IDBI Neutral 59 1.7 5.6 6.9 10.5 8.6 137 142 0.43 0.41 0.28 0.31 4.2 4.9 DBNK Neutral 36 0.3 10.0 15.6 3.6 2.3 128 141 0.28 0.26 0.38 0.53 8.0 11.6 Public Aggregate 36.1 5.7 4.5 0.54 0.49 HDFC* Buy 1,178 28.1 39 44 18.9 14.9 186 212 3.92 3.06 2.41 2.40 21.9 22.0 LICHF Buy 476 3.6 42 47 11.3 10.0 216 254 2.21 1.88 1.54 1.45 21.2 20.2 DEWH Buy 184 0.8 32 40 5.7 4.6 203 234 0.91 0.78 1.25 1.30 16.9 18.6 IHFL Buy 706 4.6 68 82 10.4 8.6 302 336 2.34 2.10 3.85 3.69 23.6 25.7 GRHF Buy 261 1.4 8 11 31.5 24.9 28 35 9.26 7.46 1.98 2.26 27.8 33.2 REPCO Buy 643 0.6 35 43 18.6 15.1 182 219 3.54 2.93 2.28 2.14 20.7 21.3 RECL Under Review 193 2.9 57 59 3.4 3.3 345 391 0.56 0.49 2.45 2.17 17.6 16.0 POWF Under Review 175 3.5 52 50 3.4 3.5 323 358 0.54 0.49 2.63 2.17 17.2 14.6 SHTF Buy 842 2.9 73 92 11.5 9.2 515 587 1.64 1.43 2.29 2.57 15.0 16.5 MMFS Buy 207 1.8 13 17 15.5 12.2 118 130 1.76 1.59 1.94 2.24 11.8 13.5 BAF Buy 5,908 4.8 276 340 21.4 17.4 1,582 1,867 3.73 3.17 2.92 2.79 18.8 19.7 MUTH Buy 191 1.2 24 31 8.0 6.2 155 175 1.23 1.09 2.85 3.12 16.1 18.6 SKSM Buy 529 1.0 34 46 15.4 11.5 142 177 3.73 2.99 5.25 5.46 27.5 28.8 NBFC Aggregate 58.1 12.7 11.5 2.06 1.84 *Multiples adj. for value of key ventures/investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries 30 January 2016 6
Financials and Valuations Income Statement (INR Million) Y/E March 2H2016 2017E 2018E 2019E 2020E 2021E Interest Income 36,180 80,821 95,422 112,996 132,737 156,297 Interest Expense 28,109 59,294 67,009 78,187 90,488 105,557 Net Interest Income 8,072 21,527 28,413 34,809 42,249 50,740 Change (%) 32.0 22.5 21.4 20.1 Non Interest Income 4,500 10,500 13,500 16,250 19,675 22,710 Fee income 1,000 5,000 7,500 9,750 12,675 15,210 Change (%) 50.0 30.0 30.0 20.0 Other Income 3,500 5,500 6,000 6,500 7,000 7,500 Net Income 12,572 32,027 41,913 51,059 61,924 73,450 Change (%) 154.8 30.9 21.8 21.3 18.6 Operating Expenses 4,575 13,745 17,529 20,810 23,251 25,492 Change (%) 200.4 27.5 18.7 11.7 9.6 Pre Provision Profits 7,997 18,282 24,384 30,248 38,673 47,958 Change (%) 33.4 24.0 27.9 24.0 Provisions (excl tax) 323 990 1,546 2,314 3,322 4,632 Credit Cost (%) 0.2 0.2 0.3 0.3 0.4 0.4 PBT 7,674 17,292 22,839 27,935 35,351 43,326 Tax 2,647 5,706 7,537 9,218 11,666 14,298 Tax Rate (%) 34.5 33.0 33.0 33.0 33.0 33.0 PAT 5,026 11,586 15,302 18,716 23,685 29,029 Change (%) 32.1 22.3 26.5 22.6 Equity Dividend (Incl tax) 1,176 2,711 3,581 4,380 5,542 6,793 Core PPP* 4,497 12,782 18,384 23,748 31,673 40,458 Change (%) 43.8 29.2 33.4 27.7 *Core PPP is (NII+Fee income-opex) Balance Sheet (INR Million) Y/E March FY16E FY17E FY18E FY19E FY20E FY21E Share Capital 33,926 33,926 33,926 33,926 33,926 33,926 Reserves & Surplus 103,255 112,130 123,851 138,188 156,331 178,567 Net Worth 137,182 146,056 157,778 172,114 190,257 212,493 Deposits 33,000 81,180 144,906 224,122 327,778 464,134 Change (%) n.a. 78.5 54.7 46.3 41.6 CA 16,500 24,354 33,811 44,824 59,000 77,356 SA 900 3,938 9,844 19,294 32,248 49,268 Borrowings 627,000 730,620 821,136 896,487 983,334 1,082,979 Change (%) 16.5 12.4 9.2 9.7 10.1 Infra Bonds 100,000 196,200 307,368 430,608 568,094 722,389 Other borrowings 527,000 534,420 513,768 465,879 415,240 360,590 Other Liabilities & Prov. 45,000 54,000 64,800 77,760 93,312 111,974 Total Liabilities 842,182 1,011,856 1,188,620 1,370,483 1,594,681 1,871,580 Current Assets 35,254 43,335 40,771 41,287 49,606 65,781 Investments 315,235 359,917 388,030 388,177 397,743 409,104 Change (%) 14.2 7.8 0.0 2.5 2.9 G Sec 240,000 204,000 214,200 214,200 224,910 236,156 RIDF and PTC 60,235 133,417 142,330 133,027 119,598 103,743 Other investments 15,000 22,500 31,500 40,950 53,235 69,206 Loans 441,693 548,604 687,819 854,618 1,043,653 1,272,279 Change (%) n.a. 24.2 25.4 24.3 22.1 21.9 Other Assets 50,000 60,000 72,000 86,400 103,680 124,416 Total Assets 842,182 1,011,856 1,188,620 1,370,483 1,594,681 1,871,580 Asset quality GNPA (INR m) 14,887 20,744 27,567 35,810 45,740 57,465 NNPA (INR m) 4,466 6,223 8,270 10,743 13,722 17,240 GNPA Ratio 3.26 3.64 3.85 4.02 4.20 4.32 NNPA Ratio 1.01 1.13 1.20 1.26 1.31 1.36 PCR (Excl Tech. write off) 70.0 70.0 70.0 70.0 70.0 70.0 30 January 2016 7
Financials and Valuations Ratios Y/E March FY16E FY17E FY18E FY19E FY20E FY21E Spreads Analysis (%) Avg. Yield-Earning Assets 9.7 9.6 9.7 9.9 10.0 Avg. Yield on loans 11.0 10.9 10.9 10.8 10.8 Avg. Yield on Investments 7.5 7.2 7.2 7.3 7.4 Avg. Cost-Int. Bear. Liab. 8.1 7.5 7.5 7.4 7.4 Interest Spread 1.6 2.1 2.3 2.4 2.6 Net Interest Margin 2.6 2.9 3.0 3.1 3.2 Profitability Ratios (%) RoE 8.2 10.1 11.3 13.1 14.4 RoA 1.25 1.39 1.46 1.60 1.67 Int. Expense/Int.Income 73.4 70.2 69.2 68.2 67.5 Fee Income/Net Income 15.6 17.9 19.1 20.5 20.7 Non Int. Inc./Net Income 32.8 32.2 31.8 31.8 30.9 Efficiency Ratios (%) Cost/Income 42.9 41.8 40.8 37.5 34.7 Empl. Cost/Op. Exps. 49.1 51.1 53.2 53.1 53.9 Cost per Empl. (INR m) 2.6 2.4 2.2 2.1 2.0 of which for ex-infra bus. INR M 2.0 1.9 1.8 1.7 1.6 NP per Empl. (INR Mn) 4.5 4.1 3.7 4.0 4.1 Valuation Book Value (INR) 40.4 43.1 46.5 50.7 56.1 62.6 Change (%) 8.0 9.1 10.5 11.7 Price-BV (x) 1.3 1.2 1.1 1.0 0.9 0.8 Adjusted BV (INR) 39.5 41.8 44.8 48.5 53.2 59.1 Change (%) 7.3 8.3 9.8 10.9 Price-ABV (x) 1.3 1.3 1.2 1.1 1.0 0.9 EPS (INR) 1.5 3.4 4.5 5.5 7.0 8.6 Change (%) 32.1 22.3 26.5 22.6 Price-Earnings (x) 35.4 15.4 11.6 9.5 7.5 6.1 Dividend Per Share (INR) 0.7 0.9 1.1 1.4 1.7 Dividend Yield (%) 1.3 1.7 2.1 2.7 3.3 E: MOSL Estimates 30 January 2016 8
N O T E S 30 January 2016 9
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