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28 July 2016

1QFY17 Results Update | Sector: Financials

IDFC Bank

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Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)

IDFCBK IN
3,392.6
186.6/2.7
73 /43

Financials & Valuations (INR b)


Y/E March 2H2016E 2017E
NII
8.5
20.2
OP
7.4
18.1
NP
4.7
11.1
NIM (%)
2.4
EPS (INR)
3.3
EPS Gr. (%)
BV/Sh. INR
40.2
42.7
ABV/Sh. INR
37.8
40.3
RoE (%)
7.9
RoA (%)
1.2
Payout (%)
20.0
20.0
Valuations
P/E(X)
16.8
P/BV (X)
1.3
P/ABV (X)
1.4
Div. Yield (%)
1.2

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

TP: INR65 (+30%)

Buy

Strong NII growth boosts earnings; Asset quality remains unchanged

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).

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); +91 22 6129 1526


Krishnan ASV (A.Krishnan@MotilalOswal.com);+91 22 6129 1571 / Dhaval Gada (Dhaval.Gada@MotilalOswal.com); +91 22 6129 1544

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

Exhibit 2: Share of bonds decreased to 35% of liabilities v/s


54% in 4QFY16 (%)

Other CRR Cash and


assets 1.9 Bank
SLR
1.9
4.6
10.6

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

Source: MOSL, Company

Source: MOSL, Company

Exhibit 3: Early days: Significant contribution from non-core income (%)


0.62

0.60

0.35

0.66

0.11
0.67

2.27
1.21
NII

Fees

Non-core
income

Staff costs Other Opex Provisions

Tax

RoA

Source: MOSL, Company

Exhibit 4: Banks asset quality position remains unchanged sequentially

60

44

44

13
15
GNPA

RL

Additional nonregulatory stress

Provisions held

Bank's expected
recovery

Source: MOSL, Company

28 July 2016

IDFC Bank

Key highlights from the strategy PPT released by bank


Exhibit 5: Retail Customer Strategy

Exhibit 6: Corporate Customer Strategy

Exhibit 7: Transformational Roadmap for FY17: IDFC Bank A work in Progress

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

Exhibit 9: Pricing as a customer acquisition tool

Source: Company

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

28 July 2016

IDFC Bank

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 ~1.3% by
FY20 from ~1% levels in FY17. ROEs are likely to be function of growth.
Buy with a TP of INR65 (1.4x
FY18 BV)

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

Conference call highlights


Macro-economic backdrop
Hyper-competition in large corporate lending - hence, very little pricing power in
this segment. Spreads are very fine and are being secularly driven down
(extreme concentration on the asset side of the balance sheet - 45% of
aggregate credit accrues to the top 300 corporates)
Hyper-competition on the deposit side as well
Distribution architecture
Less branch-intensive customer touch points
Cost of funds will be stickier - hence, incremental NIM expansion will largely be
driven by improvement in blended yields (and hence, emanate from changes in
the asset mix) over the next few years
Asset Quality
30%+ provisioning on standard restructured assets as against the regulatory
requirement of 5% rendering the bank adequately cushioned against
delinquencies. Any slippage from this pool is therefore unlikely to spill over to
the P/L
Balance sheet strategy
Raise the proportion of retail advances within the loan book
Pursue cost-effective acquisition for CASA
Diversify corporate customer base beyond the largest corporates
Generate sticky and predictable non-fund-based corporate fee income
Targeting an INR750b loan book in FY17, of which INR180b will be retail loans
Customer acquisition strategies
Identifying product / service gaps for under-served customers
Under-served constituency within the affluent retail segment (Business Banking
- traders, entrepreneurs with aggregate annual turnover below INR350m)
Focused on salaried Mass Affluent, Self-employed women and MSME
Pricing as an acquisition tool deployed by the bank
MFI acquisition
Acquired GVMFI with an aggregate MFI loan portfolio of INR15b as of FY16
(FY16 ROA of 3%)
GVMFI acquisition was made at ~2x FY16 BV
Performance highlights
Non-funded as % of funded at 13% (up from 11% during Mar16). This is
expected to increase further in favor of non-funded in the coming quarters
NII growth at 25% QoQ driven by stronger cash realizations on stressed
portfolios
Trading gains contributed significantly to growth in total income
Opex is expected to increase in the coming quarters; However, productivity will
improve in terms of cost/customer and cost/employee

28 July 2016

IDFC Bank

Fee based income to be 35-40% of total non-interest income (10% of total


income)
150 active customers for trade and corporate-linked finance
85 unique clients for cash management
409 points of presence (65 branches; 330 micro-ATMs)
60k customers (59k retail; 663 corporate customers; 119 NTB customers)
Monthly customer acquisition run rate at 14k (intention to double this over the
rest of this fiscal)

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

Source: MOSL, Company

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)

(USDb) FY17 FY18 FY17


24.0
18.1 20.8 11.2
47.8
58.4 70.2 21.4
19.6
31.8 37.4 17.1
20.8
26.8 34.0 28.0
7.8
78.8 99.2 15.5
10.5
50.5 63.8 23.1
2.6
3.0
4.1
16.9
1.7
3.9
4.7
16.6
0.4
7.4
8.6
14.1
0.5
17.6 21.2
3.8
0.4
3.1
3.7
7.0
136.2
19.8
231
27.2
19.3 24.3 11.9
129
3.8
15.7 19.9
8.2
111
1.4
9.3
23.5 12.0
154
5.4
14.7 18.7 10.5
258
2.1
25.4 34.8 10.2
129
1.3
26.8 36.7
4.8
118
0.6
22.1 27.9
5.3
156
1.1
22.2 29.1
7.0
60
1.9
2.9
8.2
20.3
44.8
12.0
181.0
17.0
1,401
33.5
34.6 37.9 28.7
514
3.9
39.5 47.3 13.0
770
4.9
68.2 84.0 11.3
295
1.6
8.3
10.7 35.4
826
0.8
30.3 39.0 27.3
224
1.0
29.7 36.4
7.5
45.8
21.8
213
3.2
59.2 68.6
3.6
220
4.4
46.8 49.1
4.7
7.6
4.2
1,233
4.2
68.4 84.6 18.0
321
2.7
13.9 18.1 23.1
10,323
8.4
345.9 442.0 29.8
319
1.9
24.9 32.0 12.8
896
1.7
48.8 52.5 18.3
19.0
21.6
72.4
15.1
253.4
16.4

BV (INR)

P/BV (x)

FY18 FY17 FY18 FY17 FY18


8.5
145
159
1.32 1.11
17.8 332
386
3.76 3.23
14.5 243
274
2.24 1.98
22.1 207
240
3.61 3.12
12.3 390
469
3.13 2.60
18.3 334
389
3.49 3.00
12.2
42
46
1.19 1.11
13.9
50
54
1.29 1.21
12.1
69
78
1.51 1.34
3.2
146
162
0.46 0.42
5.8
30
33
0.71 0.65
16.5
2.65 2.35
9.5
240
259
1.03 0.94
6.5
200
220
0.65 0.59
4.7
337
356
0.33 0.31
8.3
159
173
0.97 0.89
7.4
497
524
0.52 0.49
3.5
318
351
0.41 0.37
4.2
473
494
0.25 0.24
5.3
298
320
0.52 0.49
7.3
129
136
0.46 0.44
8.9
0.76 0.72
13.6
1.64 1.50
24.3 194
217
4.76 3.91
10.9 213
251
2.41 2.05
9.2
280
315
2.75 2.45
27.6
28
35
10.37 8.34
21.2 179
214
4.60 3.86
6.1
194
221
1.15 1.01
18.5
4.37 3.86
3.1
336
389
0.63 0.55
4.5
72
107
3.06 2.06
3.8
1.18 0.96
14.6 503
570
2.45 2.16
17.7 118
131
2.72 2.45
23.4 1,663 2,040 6.21 5.06
10.0 157
177
2.03 1.80
17.1 157
210
5.69 4.27
17.4
3.43 3.12
13.0
3.22 2.80
13.4
1.91 1.73

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

FY18 FY17 FY18


1.22 11.1 11.8
1.89 18.9 19.6
1.31 13.8 14.4
1.82 14.2 15.4
1.84 22.0 23.1
1.96 16.2 17.6
1.12 7.2
9.4
0.67 8.0
9.0
0.93 11.3 11.7
1.05 12.7 13.7
0.64 10.7 11.7

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

Financials and valuations


Income Statement

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

Financials and valuations


Ratios
Y/E March
Spreads Analysis (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Yield on Investments
Avg. Cost-Int. Bear. Liab.
Interest Spread
Net Interest Margin

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

Profitability Ratios (%)


RoE
RoA
Int. Expense/Int.Income
Fee Income/Net Income
Non Int. Inc./Net Income

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

Efficiency Ratios (%)


Cost/Income
Empl. Cost/Op. Exps.
Cost per Empl. (INR m)
of which for ex-Infra bus. INR M
NP per Empl. (INR Mn)

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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12