IDFC Bank: CMP: Inr50 TP: INR65 (+30%)
IDFC Bank: CMP: Inr50 TP: INR65 (+30%)
IDFC Bank: CMP: Inr50 TP: INR65 (+30%)
IDFC Bank
BSE SENSEX
28,209
S&P CNX
8,666
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
IDFCBK IN
3,392.6
186.6/2.7
73 /43
2018E
27.0
21.9
13.6
2.4
4.0
22.9
45.8
43.0
9.1
1.1
20.0
13.7
1.2
1.3
1.5
CMP: INR50
Buy
IDFC Bank (IDFCBK) reported PAT of INR2.6b (up 60% QoQ), led by strong income
growth. NII grew 20% QoQ, while non-interest income was up 55% QoQ. PPoP
grew 67% QoQ, helped by a 6% QoQ decline in operating expenses. The overall
stressed loans position remained unchanged at INR88b.
Reported NIM improves 30bp QoQ to 2.4%: Apart from benefiting from lower
cost of funds, IDFCBK received cash repayments on stressed loans, aiding
lending yields. Hence, while reported NIMs improved 30bp QoQ to 2.4%, loan
spreads improved 40bp QoQ to 3.2%.
Loans remain flat QoQ; expect 20-25% growth in FY17: Loan growth remained
flat QoQ at INR459b, while deposits increased 59% QoQ. The share of
investments increased significantly (46% of total assets v/s 27% in 4QFY16) as
management is looking at short-term arbitrage opportunity led by strong
liquidity. Overall, management expects 20-25% loan growth in FY17.
C/I ratio improves to 39% v/s 53% in 4QFY16: Overall operating expenses degrew 6% QoQ, led by other operating expenses (-8% QoQ). During the quarter,
the bank opened five new branches (now 65) v/s 36 branches added in 4Q.
Further, in line with its vision to create large low-cost distribution
infrastructure, IDFCBK added ~300 micro ATMs in 1QFY17 (now 330).
Other highlights: 1) Tier 1 ratio remains healthy at ~20%. 2) Core fee income
grew 61% QoQ (44bp of average assets). 3) Return ratios improved, with
ROA/ROE at 1.2%/7.7% v/s 0.8%/4.9% a quarter ago.
The bank has released its strategy presentation (link) for its products, plans and
processes for its banking business (refer page 3).
Valuation and view: Near-term quarterly trends are not much relevant, in our
view, considering that IDFCBK is investing aggressively in the business. Over time
with higher leverage, low cost to assets and higher share of infra bonds will lead to
higher sustainable ROE. We maintain Buy with a target price of INR65 (1.4x FY18
based on the RI model).
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.
IDFC Bank
Exhibit 1: Investments are ~47% of assets v/s peers at 2223%. Excess liquidity built in the balance sheet
Others
6.9
CASA
1.0
TD
8.2
Infra Bonds
12.5
Short term
8.5
Loans
45.1
Bonds /
Debentures
35.1
Investment
35.8
0.60
0.35
0.66
0.11
0.67
2.27
1.21
NII
Fees
Non-core
income
Tax
RoA
60
44
44
13
15
GNPA
RL
Provisions held
Bank's expected
recovery
28 July 2016
IDFC Bank
Physical infrastructure
Expanding distribution reach to
1400 points of presence as
against 409 in 1Q
IDFC Bank plans to add 74
branches (as against 65 in 1Q),
306 branches in GVFL network,
1000 Micro ATMS (330 in 1Q),
and 30 BCs
Retail banking
Achieving a 1.5m customer
base including customers from
GVMFI (as against 60k in 1Q)
Granularity in the Balance
Sheet: share of retail in total
advances - 20%; Share of retail
in total deposits - 12%
Corporate banking
Diversifying revenue outside
large corporates: 25% of
advances outside of large
corporates with midcorporate
and SME to contribute ~5% to
funded credit
Diversifying revenue stream:
Target NonFund/ Fund
volumes ~20% (as against 13%
in 1Q); Franchise based fee
income to contribute 1/3rd to
noninterest income and 10%
contribution from fees in total
corporate revenues
Source: Company
28 July 2016
IDFC Bank
Exhibit 8: Customer acquisition strategy: Filling product/service gaps
Source: Company
Source: Company
28 July 2016
IDFC Bank
Buy with a TP of INR65: 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
operationsan 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 1.4x FY18 BV. 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 - 16% and c) Terminal growth rate of 5%.
Execution challenges remain a key risk
Exhibit 10: We expect RoA/RoE to progressively move higher led by higher operating
profitability and leverage
RoE
RoA
1.1
1.2
1.2
1.1
1.1
7.2
2017E
9.4
2018E
10.9
12.1
13.4
2019E
2020E
2021E
Source: MOSL, Company
28 July 2016
IDFC Bank
28 July 2016
IDFC Bank
Exhibit 11: DuPont analysis : Higher revenues and operating leverage to drive RoE expansion
Y/E MARCH
Net Interest Income
Fee income
Fee to core Income
Core Income
Operating Expenses
Cost to Core Income
Employee cost
Emp to total exp (%)
Technology
Others
Core Operating Profit
Non-Interest income
Trading and others
Operating Profit
Provisions
NPA
Others
PBT
Tax
Tax Rate
RoA
Leverage (x)
RoE
2H2016
2.29
0.18
5.4
2.47
1.38
55.8
0.69
50.3
0.28
0.41
1.09
1.09
0.91
2.00
0.07
0.04
0.02
1.94
0.67
34.8
1.26
5.4
6.8
2017E
2.17
0.43
12.8
2.60
1.41
54.3
0.65
46.1
0.16
0.60
1.19
1.18
0.75
1.94
0.11
0.08
0.03
1.83
0.64
35.0
1.19
6.6
7.9
2018E
2.15
0.40
12.8
2.55
1.36
53.5
0.59
43.4
0.13
0.64
1.18
0.95
0.56
1.74
0.13
0.10
0.03
1.61
0.53
33.0
1.08
8.4
9.1
2019E
2.18
0.49
15.6
2.67
1.29
48.4
0.57
44.1
0.11
0.61
1.38
0.94
0.45
1.83
0.16
0.13
0.03
1.68
0.55
33.0
1.12
9.5
10.7
2020E
2.26
0.53
16.7
2.79
1.25
44.7
0.58
46.2
0.11
0.57
1.54
0.91
0.38
1.92
0.19
0.16
0.03
1.73
0.57
33.0
1.16
10.4
12.1
2021E
2.34
0.53
16.7
2.88
1.19
41.3
0.56
47.5
0.10
0.53
1.69
0.85
0.32
2.01
0.22
0.19
0.03
1.79
0.59
33.0
1.20
11.2
13.5
28 July 2016
IDFC Bank
Exhibit 12: Financials metrics
Rating
66
ICICIBC*
HDFCB
AXSB
KMB*
YES
IIB
IDFC Bk
FB
DCBB
JKBK
SIB
Private Aggregate
SBIN (cons)*
PNB
BOI
BOB
CBK
UNBK
OBC
INBK
ANDB
Public Aggregate
Banks Aggregate
HDFC*
LICHF
IHFL
GRHF
REPCO
DEWH
Housing Finance
RECL
POWF
Infra Finance
SHTF
MMFS
BAF
MUTH
SKSM
Asset Finance
NBFC Aggregate
Financials
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Neutral
Buy
Neutral
Buy
Buy
Neutral
Neutral
Buy
Neutral
Buy
Neutral
UR
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Buy
CMP
(INR)
272
1,248
543
749
1,221
1,168
50
65
104
68
21
Mcap
EPS (INR)
P/E (x)
BV (INR)
P/BV (x)
RoA (%)
RoE (%)
FY17
1.19
1.90
1.32
1.61
1.80
1.92
1.09
0.67
0.98
0.99
0.61
0.49
0.44
0.12
0.48
0.24
0.43
0.28
0.49
0.15
0.54
0.50
0.27
0.54
0.30
0.53
0.32
0.56
0.39
8.3
8.2
2.8
9.6
5.2
8.7
4.8
7.7
2.3
9.7
9.5
6.8
11.2
6.8
11.0
5.8
9.4
6.2
1.85
1.49
3.74
2.33
2.14
1.19
1.83
1.51
3.78
2.34
2.17
1.21
19.5
20.1
25.6
32.4
18.2
16.2
19.0
20.9
28.2
33.5
19.8
17.5
2.63
2.69
2.55
2.35
18.9
85.1
18.9
55.0
1.96
1.92
3.48
3.29
6.30
2.01
2.19
3.38
3.47
4.48
14.4
12.3
22.8
16.7
36.7
15.6
14.5
23.9
19.2
28.6
*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries
28 July 2016
IDFC Bank
Y/E March
Interest Income
Interest Expense
Net Interest Income
Change (%)
Non Interest Income
Fee income
Change (%)
Other Income
Net Income
Change (%)
Operating Expenses
Change (%)
Pre Provision Profits
Change (%)
Provisions (excl tax)
Credit Cost (%)
PBT
Tax
Tax Rate (%)
PAT
Change (%)
Equity Dividend (Incl tax)
Core PPP*
Change (%)
*Core PPP is (NII+Fee income-Opex)
Balance Sheet
Y/E March
Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
CA
SA
Borrowings
Change (%)
Infra Bonds
Other borrowings
Other Liabilities & Prov.
Total Liabilities
Current Assets
Investments
Change (%)
G Sec
RIDF and PTC
Other investments
Loans
Change (%)
Other Assets
Total Assets
2H2016
36,488
28,015
8,473
2017E
81,216
61,014
20,201
2018E
103,190
76,144
27,046
33.9
12,000
5,000
25.0
7,000
39,046
25.1
17,135
30.4
21,911
21.3
1,591
0.3
20,320
6,706
33.0
13,614
22.9
3,186
14,911
34.8
2019E
122,512
88,891
33,620
24.3
14,500
7,500
50.0
7,000
48,120
23.2
19,896
16.1
28,224
28.8
2,394
0.3
25,830
8,524
33.0
17,306
27.1
4,050
21,224
42.3
2020E
147,933
106,348
41,585
23.7
16,750
9,750
30.0
7,000
58,335
21.2
22,935
15.3
35,400
25.4
3,459
0.4
31,940
10,540
33.0
21,400
23.7
5,008
28,400
33.8
4,032
677
11,000
4,000
3,355
12,505
7,399
7,000
31,201
149.5
13,140
157.4
18,061
242
0.0
7,158
2,489
34.8
4,669
1,021
0.2
17,040
5,964
35.0
11,076
1,092
4,044
2,592
11,061
FY16E
33,926
102,399
136,326
82,190
110,570
6,877
83,465
456,994
n.a.
52,754
739,699
FY17E
33,926
110,883
144,810
231,548
n.a.
27,786
2,917
694,644
45.0
196,200
498,444
50,453
1,121,455
47,089
446,655
122.3
176,912
161,239
108,504
564,407
23.5
63,304
1,121,455
FY18E
33,926
121,312
155,238
413,313
78.5
41,331
7,875
767,582
10.5
296,190
471,392
60,544
1,396,678
59,913
552,068
23.6
212,294
204,144
135,630
708,731
25.6
75,965
1,396,678
FY19E
33,926
134,568
168,495
576,277
39.4
57,628
15,925
864,415
12.6
404,564
459,852
72,653
1,681,840
68,312
634,939
15.0
254,753
210,648
169,537
887,431
25.2
91,158
1,681,840
FY20E
33,926
150,961
184,887
777,974
35.0
77,797
27,073
950,857
10.0
522,578
428,279
87,183
2,000,901
77,451
724,758
14.1
305,704
207,133
211,922
1,089,302
22.7
109,390
2,000,901
30,583
11,390
6.27
2.49
62.8
38,176
11,453
6.34
2.03
70.0
44,651
13,395
5.93
1.89
70.0
49,896
14,969
5.32
1.69
70.0
57,665
17,300
5.03
1.59
70.0
5,106
3,610
800
479,138
99,450
379,688
42,044
739,699
29,039
200,912
(INR Million)
2021E
177,655
126,262
51,392
23.6
18,700
11,700
20.0
7,000
70,092
20.2
26,074
13.7
44,018
24.3
4,850
0.4
39,168
12,925
33.0
26,243
22.6
6,141
37,018
30.3
(INR Million)
FY21E
33,926
171,063
204,989
1,037,299
33.3
103,730
41,803
1,037,299
9.1
651,680
385,619
104,620
2,384,206
88,238
828,903
14.4
366,845
197,156
264,902
1,335,798
22.6
131,268
2,384,206
Asset quality
GNPA (INR m)
NNPA (INR m)
GNPA Ratio
NNPA Ratio
PCR (Excl Tech. write off)
E: MOSL Estimates
28 July 2016
67,918
20,375
4.84
1.53
70.0
IDFC Bank
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
9.7
10.6
8.0
8.2
1.5
2.4
9.1
10.2
7.4
7.2
1.9
2.4
8.8
10.0
6.9
6.8
2.0
2.4
8.9
10.0
7.0
6.7
2.2
2.5
8.9
9.9
7.1
6.6
2.3
2.6
7.9
1.19
75.1
12.8
35.3
9.1
1.08
73.8
12.8
30.7
10.7
1.12
72.6
15.6
30.1
12.1
1.16
71.9
16.7
28.7
13.5
1.20
71.1
16.7
26.7
42.1
46.1
1.9
2.0
3.5
43.9
43.4
1.7
1.3
3.2
41.3
44.1
1.6
1.2
3.2
39.3
46.2
1.5
1.2
3.1
37.2
47.5
1.4
1.1
3.1
40.2
42.7
1.4
37.8
1.3
40.3
1.5
1.4
1.4
3.3
40.0
16.8
0.7
1.2
45.8
7.2
1.2
43.0
6.6
1.3
4.0
22.9
13.7
0.8
1.5
49.7
8.5
1.1
46.6
8.3
1.2
5.1
27.1
10.8
1.0
1.9
54.5
9.7
1.0
50.9
9.3
1.1
6.3
23.7
8.7
1.3
2.3
60.4
10.9
0.9
56.2
10.4
1.0
7.7
22.6
7.1
1.5
2.8
Valuation
Book Value (INR)
Change (%)
Price-BV (x)
Adjusted BV (INR)
Change (%)
Price-ABV (x)
EPS (INR)
Change (%)
Price-Earnings (x)
Dividend Per Share (INR)
Dividend Yield (%)
E: MOSL Estimates
28 July 2016
10
IDFC Bank
NOTES
28 July 2016
11
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The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or
indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive
compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues
Disclosure of Interest Statement
IDFC Bank
Analyst ownership of the stock
No
Served as an officer, director or employee No
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Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which
would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For Hong Kong: This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures
Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) SFO. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has
an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to Professional Investors as defined in Part I of Schedule 1 to
SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors. Nothing here is an offer or solicitation of these securities,
products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in
Hong Kong.
For U.S.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a
registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the
absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This
document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be
engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by
the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal
Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore,
may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the
Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
Kadambari Balachandran
kadambari.balachandran@motilaloswal.com
(+65) 68189233 / 65249115
28 July 2016
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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