Earnings led by large treasury gains; core performance weak July 28, 2017 R Sreesankar rsreesankar@plindia.com / +91 22 66322214 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah vidhishah@plindia.com / +91 22 66322258 Rating Accumulate Price Rs59 Target Price Rs63 Implied Upside 6.8% Sensex 32,383 Nifty 10,021 (Prices as on July 27, 2017) Trading data Market Cap. (Rs bn) 201.2 Shares o/s (m) 3,399.0 3M Avg. Daily value (Rs m) 877.6 Major shareholders Promoters 52.88% Foreign 18.10% Domestic Inst. 2.40% Public & Other 26.62% Stock Performance (%) 1M 6M 12M Absolute 5.8 (5.2) 15.5 Relative 1.2 (21.3) 0.0 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 3.3 3.3 0.1 2019 4.2 4.2 0.1 Price Perf. (RIC: IDFB.BO, BB: IDFCBK IN) (Rs) 90 80 70 60 50 40 30 20 10 0 Jul 16 Sep 16 Source: Bloomberg Nov 16 Jan 17 Mar 17 May 17 Jul 17 IDFCBK s earnings were higher than estimates on higher treasury income booked during the quarter of Rs4.5bn almost contributing to entire amount of PAT of Rs4.37bn. Asset quality deteriorated on the back of one account from restructured slipping to NPA, but bank had no provisioning impact on P&L as it was already provided for during the formation of bank. Also, PPOP miss was largely on high opex growth of 40% YoY. Bank s retail franchise continues to improve but still on slower pace, while margins remain under pressure on corporate book lending yields and will continue to do so going ahead. Margin pressure, lower loan growth and overhang of merger with Shriram group remain high on the stock. We downgrade to Accumulate with Revised TP of Rs63 (from Rs70) based on 1.3x Mar 19 ABV. High treasury gains lead earnings: Bank earnings performance was led by high treasury gains, while core performance remained weak with margins dropping 30bps QoQ to 1.7%, with loan margins dropping 80bps QoQ to 2.4% and this coupled with flat loan growth YoY. Opex growth was also high at 41% YoY leading to core PPOP de growth of ~40% YoY. Management mentioned margin should remain under pressure mainly from lower corporate yields and higher repayments with liabilities mainly remaining fixed in nature. Asset quality deteriorates: GNPAs/NNPAs increased by 114bps/56bps QoQ to 4.1%/1.7% respectively mainly on large a/c from restructured slipping into NPA, while had no large impact on P&L as it held adequate provisions on the book. Post the slippage, net restructured assets stood at 1.0% of loans. Focus towards retail assets & liabilities; but remains a long path: Bank continues to diverse its liability and assets with CASA at 6.8% of deposits up from 5.2%, up 160bps QoQ and core retail assets at 7.4% of advances. Bank expects to improve presence and improve granularity in its retail franchise with multi fold increase in branch presence from 85 branches to 150 by Mar 18 and target to grow retail loans by Rs50bn/year mainly on the higher yielding assets. Key financials ( Y/e March) 2016 2017 2018E 2019E Net interest income 8,473 20,173 24,257 29,046 Growth (%) (66.0) 138.1 20.2 19.7 Operating profit 7,399 17,588 20,370 24,374 PAT 4,669 10,251 11,283 14,128 EPS (Rs) 1.9 3.0 3.3 4.2 Growth (%) (83.4) 60.3 10.6 25.2 Net DPS (Rs) 0.3 0.8 1.0 Profitability & Valuation 2016 2017 2018E 2019E NIM (%) 1.00 2.07 1.99 2.03 RoAE (%) 3.0 7.2 7.3 8.4 RoAA (%) 0.55 1.05 0.93 0.99 P / BV (x) 1.5 1.4 1.2 1.2 P / ABV (x) 1.6 1.5 1.3 1.2 PE (x) 31.6 19.7 17.8 14.2 Net dividend yield (%) 0.4 1.3 1.7 Source: Company Data; PL Research Q1FY18 Result Update Prabhudas Lilladher 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
Exhibit 1: Q1FY18 results Earnings came mainly on treasury gains P&L (Rs million) Q1FY18 Q1FY17 YoY gr. Q4FY17 QoQ gr. Interest Income 21,451 19,755 8.6 22,234 (3.5) Interest Expense 17,571 14,766 19.0 17,213 2.1 Net interest income (NII) 3,880 4,989 (22.2) 5,021 (22.7) Other income 6,488 2,128 204.9 563 1,053.0 Total income 10,369 8,288 25.1 5,584 85.7 Operating expenses 3,894 2,768 40.6 2,981 30.6 Staff expenses 1,654 1,316 25.7 948 74.5 Other expenses 2,240 1,453 54.2 2,033 10.2 Operating profit 6,475 5,520 17.3 2,602 148.8 Core operating profit 1,912 3,178 (39.8) 2,860 (33.2) Total provisions (146) 236 NA 48 NA Profit before tax 6,621 5,284 25.3 2,555 159.2 Tax 2,245 1,465 53.2 795 182.4 Profit after tax 4,376 3,819 14.6 1,760 148.7 Balance Sheet Deposits 4,19,590 1,30,290 222.0 4,02,080 4.4 Borrowings 5,62,500 7,06,670 (20.4) 5,02,620 11.9 Advances 4,62,050 4,59,140 0.6 4,94,017 (6.5) Profitability ratios NIM 1.7 2.4 (70) 2.0 (30) RoAA 1.5 1.2 37 0.6 92 RoAE 11.8 7.7 410 4.9 690 Asset Quality Gross NPL (Rs m) 20,041 30,299 (33.9) 15,421 30.0 Net NPL (Rs m) 8,037 11,106 (27.6) 5,765 39.4 Gross NPL ratio 4.1 6.1 (196) 3.0 114 Net NPL ratio 1.7 2.3 (62) 1.1 56 Coverage ratio 50.1 63.3 (1,323) 62.6 (1,251) Business & Other Ratios Low cost deposit mix 6.8 6.7 10 5.2 160 Cost income ratio 37.6 38.9 (135) 53.4 (1,584) Non int. inc / total income 62.6 29.9 3,267 10.1 5,250 CAR 18.6 20.4 (179) 18.9 (30) Tier I 18.3 19.9 (161) 18.5 (20) July 28, 2017 2
IDFC Bank Q1FY18 Concall Highlights Management Commentary / Outlook: Net Retail and Corporate Assets Net Assets (Rs627 bn) de grew by ~6% QoQ with loan book de growing at 6% QoQ and credit investments (Rs165 bn) degrowing at 4% QoQ. Retail Assets Retail book for bank stands at 26% of Net Assets via organic and inorganic growth, its book now amounting Rs163 bn. They are growing their direct retail book mainly in 6 product segments i.e. 2W, Home loans, LAP, unsecured loans, Micro SME and JLG loans. Outlook: Bank aims to grow its retail book every year by Rs50 bn having yields of 13 15% to improve margins. Corporate Assets Bank has seen some repayment on its corporate book seeing some de growth, while pressure on yields continues with average yield at 9 9.5%. Liabilities CASA Ratio stood at 6.8% (Rs285bn) from 5.2% (Rs209bn) in Q4FY17. Bank has large fixed rate long term bonds in its balance sheet of which 30% of the same will be re priced in next year. Investments Investment book has grown by 37% YoY as bank is playing out treasury gains due to transition in its balance sheet which has skewed income profile towards lower yielding assets and fixed long term liabilities. Bank would continue to have large treasury operations as they build granular asset gradually. Distribution Network Management aims to increase its branches from 85 to 156 in FY18 of which 50 will be Bharat Plus branches and have its presence in top 35 cities. Customers Bank is acquiring 80k customers every month of which 25k customers belong to urban areas having average SA of Rs 21,000. On an average each customer adds Rs 10,000 to SA deposits. NIMs: Margins fell by 30bps QoQ to 1.7% due to pressure in yields in corporate book which are below 9% and PSL lending and also with major part of its long term liability in fixed rates. Margins will remain under pressure for some time ahead until it improves its retail growth. Opex: Opex Opex will continue to be elevated on increasing PoP and increasing employee base for direct sales and cross sell and also on purchasing of PSLC certificates. July 28, 2017 3
Asset quality: Stressed assets GNPA/NNPA has increased by 114/56bps QoQ at 4.13%/1.7% respectively mainly on account of failure of one large restructured asset slipping into NPA. After ARC sale done last quarter, Bank has exposure of Rs50 bn of stressed assets of which Rs20 bn is in NPA and contains almost 50% of provisions on the same. Exhibit 2: Margins came off due to yield pressure in corporate book Exhibit 3: CASA improved slightly yet remains a challenge 2.9% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.5% NIM (%) 2.4% 2.2% 2.1% 2.1% 2.0% 2.0% 1.7% 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 100% 80% 60% 40% 20% 0% Certificate of Deposits CASA Term Deposits 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Exhibit 4: Asset quality slightly deteriorates on failure of one large restructured account Gross NPA (%) Net NPA (%) Coverage Ratio (%) RHS 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 80% 70% 60% 50% 40% 30% 20% 10% 0% July 28, 2017 4
Exhibit 5: We adjust our estimates for lower business growth and yields (Rs mn) Old New % Change FY18E FY19E FY18E FY19E FY18E FY19E Net interest income 25,893 31,619 24,257 29,046 (6.3) (8.1) Operating profit 22,005 26,293 20,370 24,374 (7.4) (7.3) Net profit 12,329 15,384 11,284 14,130 (8.5) (8.1) EPS (Rs) 3.6 4.5 3.3 4.2 (8.5) (8.1) ABVPS (Rs) 45.2 48.3 45.0 47.8 (0.4) (1.1) Price target (Rs) 70 63 (10.3) Recommendation BUY ACCUMULATE Exhibit 6: We reduce our PT to Rs63 (from Rs70) based on 1.3x Mar 19 ABV PT calculation and upside Fair price EVA, Rs 67 Fair price P/ABV, Rs 59 Average of the two, Rs 63 Target P/ABV (x) 1.3 Target P/E (x) 15.2 Current price, Rs 59 Upside (%) 7% Dividend yield (%) 2% Total return (%) 8% Exhibit 7: RoAE tree Return ratios to move gradually but will remain sub optimal than peers RoAE decomposition (%) FY16 FY17E FY18E FY19E Net Interest Income/Assets 1.0% 2.2% 2.1% 2.2% Fees/Assets 0.1% 0.5% 0.7% 0.7% Investment profits/assets 0.4% 0.6% 0.4% 0.3% Net revenues/assets 1.5% 3.3% 3.2% 3.3% Operating Expense/Assets 0.6% 1.4% 1.4% 1.4% Provisions/Assets 0.0% 0.3% 0.3% 0.2% Taxes/Assets 0.3% 0.5% 0.5% 0.5% Total Costs/Assets 1.0% 2.2% 2.2% 2.2% ROA 0.58% 1.11% 0.99% 1.06% Equity/Assets 19.1% 15.4% 13.6% 12.6% ROE 3.0% 7.2% 7.3% 8.4% July 28, 2017 5
Income Statement (Rs m) Int. Earned from Adv. 23,514 50,884 52,390 57,833 Int. Earned from Invt. 12,343 32,888 52,260 63,614 Others 631 1,555 1,907 2,122 Total Interest Income 36,488 85,327 106,557 123,570 Interest expense 28,015 65,154 82,300 94,524 NII 8,473 20,173 24,257 29,046 Growth (%) (66.0) 138.1 20.2 19.7 Treasury Income 3,507 5,646 4,517 4,607 NTNII 525 4,539 7,640 9,982 Non Interest Income 4,032 10,185 12,157 14,589 Total Income 40,520 95,512 118,715 138,159 Growth (%) (58.3) 135.7 24.3 16.4 Operating Expense 5,106 12,770 16,045 19,261 Operating Profit 7,399 17,588 20,370 24,374 Growth (%) (78.0) 137.7 15.8 19.7 NPA Provisions (170) (10,623) 2,594 2,337 Investment Provisions 40 1,569 Total Provisions 242 2,825 3,401 3,284 PBT 7,158 14,763 16,969 21,089 Tax Provisions 2,489 4,512 5,686 6,961 Effective Tax Rate (%) 34.8 30.6 33.5 33.0 PAT 4,669 10,251 11,283 14,128 Growth (%) (73.3) 119.6 10.1 25.2 Balance Sheet (Rs m) Par Value 10 10 10 10 No. of equity shares 3,393 3,399 3,399 3,399 Equity 33,926 33,990 33,990 33,990 Networth 136,292 146,770 163,212 173,251 Adj. Networth 124,905 141,004 156,856 166,973 Deposits 82,190 402,082 514,665 658,772 Growth (%) 389.2 28.0 28.0 Low Cost deposits 4,451 20,944 33,453 48,090 % of total deposits 5.4 5.2 6.5 7.3 Total Liabilities 832,125 1,121,586 1,314,895 1,540,314 Net Advances 456,994 494,017 543,419 624,931 Growth (%) (14.4) 8.1 10.0 15.0 Investments 297,286 504,717 637,222 752,814 Total Assets 832,159 1,121,597 1,314,895 1,540,314. Quarterly Financials (Rs m) Y/e March Q2FY17 Q3FY17 Q4FY17 Q1FY18 Interest Income 20,830 22,509 22,234 21,451 Interest Expense 15,874 17,301 17,213 17,571 Net Interest Income 4,956 5,208 5,021 3,880 Non Interest Income 4,101 3,350 563 6,488 CEB 1,122 1,037 697 1,427 Treasury 2,799 2,189 (258) 4,563 Net Total Income 9,057 8,558 5,584 10,369 Operating Expenses 3,234 3,798 2,981 3,894 Employee Expenses 1,497 1,975 948 1,654 Other Expenses 1,737 1,823 2,033 2,240 Operating Profit 5,823 4,760 2,602 6,475 Core Operating Profit 3,024 2,571 2,860 1,912 Provisions 223 2,318 48 (146) Loan loss provisions 223 2,318 48 Investment Depreciation Profit before tax 5,600 2,443 2,555 6,621 Tax 1,722 530 795 2,245 PAT before EO 3,878 1,913 1,760 4,376 Extraordinary item PAT 3,878 1,913 1,760 4,376 Key Ratios CMP (Rs) 59 59 59 59 Equity Shrs. Os. (m) 3,393 3,399 3,399 3,399 Market Cap (Rs m) 200,843 201,221 201,221 201,221 M/Cap to AUM (%) 24.1 17.9 15.3 13.1 EPS (Rs) 1.9 3.0 3.3 4.2 Book Value (Rs) 40 43 48 51 Adj. BV (100%) (Rs) 37 41 45 48 P/E (x) 31.6 19.7 17.8 14.2 P/BV (x) 1.5 1.4 1.2 1.2 P/ABV (x) 1.6 1.5 1.3 1.2 DPS (Rs) 0.3 0.8 1.0 Dividend Yield (%) 0.4 1.3 1.7 Profitability (%) NIM 1.0 2.1 2.0 2.0 RoAA 0.5 1.0 0.9 1.0 RoAE 3.0 7.2 7.3 8.4 Efficiency Cost Income Ratio (%) 40.8 42.1 44.1 44.1 C D Ratio (%) 556.0 122.9 105.6 94.9 Business per Emp. (Rs m) 224 324 333 351 Profit per Emp. (Rs lacs) 19.4 37.1 35.5 38.6 Business per Branch (Rs m) 8,295 11,029 10,418 10,112 Profit per Branch (Rs m) 72 126 111 111 Asset Quality Gross NPAs (Rs m) 30,580 15,420 13,128 12,432 Net NPAs (Rs m) 11,387 5,765 6,356 6,278 Gr. NPAs to Gross Adv. (%) 6.7 3.1 2.4 2.0 Net NPAs to Net Adv. (%) 2.5 1.2 1.2 1.0 NPA Coverage (%) 62.8 62.6 51.6 49.5. July 28, 2017 6
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 43.1% 39.0% 17.9% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. R Sreesankar (B.Sc ), Mr. Pritesh Bumb (MBA, M.com), Ms. Vidhi Shah (CA), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. 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