30 January 2016
3QFY16 Results Update | Sector: Financials
IDFC Bank
Buy
BSE SENSEX
24,871
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
12-Week Range (INR)
S&P CNX
7,564
IDFCBK IN
3,392.6
178.1/2.6
74 /43
CMP: INR53
TP: INR70 (+33%)
Maiden quarter: Good start (ROA of 1.2%) to a long journey
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
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)
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.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Dhaval Gada
(dhaval.gada@motilaloswal.com); +91 22 3982 5505

IDFC Bank
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 Cash and
Bank
2.3
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 TD
0.5 1.9
Infra Bonds
14.7
Loans
50.3
Investment
27.1
Short term
19.3
Bonds /
Debentures
48.1
Source: MOSL, Company
Source: MOSL, Company
Exhibit 3: Early days: Significant contribution from non-core income (%)
1.01
1.94
0.09
0.61
0.48
0.06
0.68
1.22
NII
Fees
Non-core
income
Staff costs Other Opex Provisions
Tax
RoA
Source: MOSL, Company
Exhibit 4: Banks asset quality position remains stable (INR b)
55
44
18
15
GNPA
RL
Additional non-
regulatory stress
Provisions held
44
Bank's expected
recovery
Source: MOSL, Company
30 January 2016
2

IDFC Bank
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
RoE
1.4
1.5
RoA
1.6
1.7
1.2
8.2
2017E
10.1
11.3
13.1
14.4
2018E
2019E
2020E
2021E
Source: MOSL, Company
30 January 2016
3

IDFC Bank
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
st
Requirement of PSL INR150b assuming base will be 31 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

IDFC Bank
Exhibit 6: 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
1.92
0.24
8.0
2.15
1.09
50.4
0.60
55.2
0.24
0.25
1.07
1.07
0.83
1.90
0.08
1.44
-1.37
1.82
0.63
34.5
1.19
6.1
7.3
2017E
2.32
0.54
15.6
2.86
1.48
51.8
0.73
49.1
0.19
0.57
1.38
1.13
0.59
1.97
0.11
0.47
-0.37
1.87
0.62
33.0
1.25
6.5
8.2
2018E
2.58
0.68
17.9
3.26
1.59
48.8
0.81
51.1
0.14
0.64
1.67
1.23
0.55
2.22
0.14
0.47
-0.33
2.08
0.69
33.0
1.39
7.2
10.1
2019E
2.72
0.76
19.1
3.48
1.63
46.7
0.86
53.2
0.11
0.65
1.86
1.27
0.51
2.36
0.18
0.49
-0.31
2.18
0.72
33.0
1.46
7.8
11.3
2020E
2.85
0.85
20.5
3.70
1.57
42.3
0.83
53.1
0.09
0.65
2.14
1.33
0.47
2.61
0.22
0.51
-0.29
2.38
0.79
33.0
1.60
8.2
13.1
2021E
2.93
0.88
20.7
3.81
1.47
38.7
0.79
53.9
0.07
0.61
2.33
1.31
0.43
2.77
0.27
0.51
-0.25
2.50
0.82
33.0
1.67
8.6
14.4
Source: MOSL, Company
30 January 2016
5

IDFC Bank
Exhibit 7: Financials: Valuation metrics
66
ICICIBC*
HDFCB
AXSB
KMB*
YES
IIB
IDFCBK
DCBB
FB
JKBK
SIB
Private Aggregate
SBIN (cons)*
PNB
BOI
BOB
CBK
UNBK
OBC
INBK
CRPBK
ANDB
IDBI
DBNK
Public Aggregate
HDFC*
LICHF
DEWH
IHFL
GRHF
REPCO
RECL
POWF
SHTF
MMFS
BAF
MUTH
SKSM
NBFC Aggregate
Rating
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Under Review
Neutral
Neutral
Buy
Buy
Under Review
Neutral
Buy
Under Review
Buy
Under Review
Buy
Neutral
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Buy
Buy
Under Review
Under Review
Buy
Buy
Buy
Buy
Buy
CMP
Mcap
EPS (INR)
P/E (x)
BV (INR)
P/BV (x)
FY18
0.90
2.73
1.41
2.88
1.63
2.38
1.11
1.04
0.82
0.43
0.55
1.94
0.59
0.35
0.27
0.60
0.29
0.34
0.20
0.28
0.23
0.24
0.41
0.26
0.49
3.06
1.88
0.78
2.10
7.46
2.93
0.49
0.49
1.43
1.59
3.17
1.09
2.99
1.84
RoA (%)
FY17
1.39
1.88
1.68
1.38
1.70
1.98
1.25
0.93
0.83
1.02
0.58
0.78
0.64
0.10
0.55
0.46
0.66
0.56
0.62
0.57
0.62
0.28
0.38
2.41
1.54
1.25
3.85
1.98
2.28
2.45
2.63
2.29
1.94
2.92
2.85
5.25
FY18
1.44
1.86
1.68
1.54
1.71
2.01
1.39
0.85
0.87
1.07
0.61
0.84
0.69
0.19
0.60
0.52
0.69
0.66
0.69
0.59
0.65
0.31
0.53
2.40
1.45
1.30
3.69
2.26
2.14
2.17
2.17
2.57
2.24
2.79
3.12
5.46
RoE (%)
FY17
13.4
19.2
17.0
13.9
21.0
15.8
8.2
10.8
9.5
12.4
10.3
12.7
10.1
2.7
10.5
9.8
13.2
10.3
10.2
12.9
12.2
4.2
8.0
21.9
21.2
16.9
23.6
27.8
20.7
17.6
17.2
15.0
11.8
18.8
16.1
27.5
FY18
14.4
19.8
17.6
14.8
21.9
17.3
10.1
10.8
10.7
13.5
11.4
14.3
11.2
5.4
11.8
11.7
14.2
12.6
11.8
13.4
13.6
4.9
11.6
22.0
20.2
18.6
25.7
33.2
21.3
16.0
14.6
16.5
13.5
19.7
18.6
28.8
(INR) (USDb) FY17
230
20.2 22.2
1,049
39.8 58.9
408
14.7 40.0
682
18.9 24.7
747
4.7
74.5
927
8.3
49.8
53
2.7
3.4
78
0.3
6.9
46
1.2
4.7
72
0.5
18.0
19
0.4
3.1
109.0
180
21.2 31.0
91
2.7
22.8
100
1.2
9.3
126
4.4
19.3
194
1.5
57.3
130
1.4
43.1
112
0.5
50.0
91
0.7
29.5
39
0.1
18.7
52
0.5
22.8
59
1.7
5.6
36
0.3
10.0
36.1
1,178
28.1
39
476
3.6
42
184
0.8
32
706
4.6
68
261
1.4
8
643
0.6
35
193
2.9
57
175
3.5
52
842
2.9
73
207
1.8
13
5,908
4.8
276
191
1.2
24
529
1.0
34
58.1
FY18 FY17
26.7 7.3
70.9 17.8
47.7 10.2
31.3 27.6
92.3 10.0
62.8 18.6
4.5 15.4
7.7 11.3
5.7
9.7
21.6 4.0
3.7
6.0
14.8
38.7 5.4
27.7 4.0
19.5 10.8
23.7 6.5
74.6 3.4
51.8 3.0
66.9 2.2
37.1 3.1
21.6 2.1
27.9 2.3
6.9 10.5
15.6 3.6
5.7
44
18.9
47
11.3
40
5.7
82
10.4
11
31.5
43
18.6
59
3.4
50
3.4
92
11.5
17
15.5
340 21.4
31
8.0
46
15.4
12.7
FY18 FY17 FY18 FY17
5.6
147 166 1.10
14.8 330 385 3.18
8.6
250 290 1.63
21.8 206 237 3.31
8.1
385 458 1.94
14.8 336 390 2.76
11.6
43
47
1.22
10.2
68
75
1.16
8.0
52
56
0.89
3.3
152 168 0.47
5.0
31
34
0.60
12.3
2.21
4.3
254 286 0.66
3.3
235 259 0.39
5.1
350 366 0.29
5.3
191 209 0.66
2.6
610 667 0.32
2.5
344 386 0.38
1.7
505 556 0.22
2.5
300 328 0.30
1.8
152 169 0.26
1.9
196 216 0.27
8.6
137 142 0.43
2.3
128 141 0.28
4.5
0.54
14.9 186 212 3.92
10.0 216 254 2.21
4.6
203 234 0.91
8.6
302 336 2.34
24.9
28
35
9.26
15.1 182 219 3.54
3.3
345 391 0.56
3.5
323 358 0.54
9.2
515 587 1.64
12.2 118 130 1.76
17.4 1,582 1,867 3.73
6.2
155 175 1.23
11.5 142 177 3.73
11.5
2.06
*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries
Source: MOSL, Company
30 January 2016
6

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)
2H2016
36,180
28,109
8,072
4,500
1,000
3,500
12,572
4,575
7,997
323
0.2
7,674
2,647
34.5
5,026
1,176
4,497
2017E
80,821
59,294
21,527
10,500
5,000
5,500
32,027
154.8
13,745
200.4
18,282
990
0.2
17,292
5,706
33.0
11,586
2,711
12,782
2018E
95,422
67,009
28,413
32.0
13,500
7,500
50.0
6,000
41,913
30.9
17,529
27.5
24,384
33.4
1,546
0.3
22,839
7,537
33.0
15,302
32.1
3,581
18,384
43.8
2019E
112,996
78,187
34,809
22.5
16,250
9,750
30.0
6,500
51,059
21.8
20,810
18.7
30,248
24.0
2,314
0.3
27,935
9,218
33.0
18,716
22.3
4,380
23,748
29.2
2020E
132,737
90,488
42,249
21.4
19,675
12,675
30.0
7,000
61,924
21.3
23,251
11.7
38,673
27.9
3,322
0.4
35,351
11,666
33.0
23,685
26.5
5,542
31,673
33.4
(INR Million)
2021E
156,297
105,557
50,740
20.1
22,710
15,210
20.0
7,500
73,450
18.6
25,492
9.6
47,958
24.0
4,632
0.4
43,326
14,298
33.0
29,029
22.6
6,793
40,458
27.7
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
FY16E
33,926
103,255
137,182
33,000
16,500
900
627,000
100,000
527,000
45,000
842,182
35,254
315,235
240,000
60,235
15,000
441,693
n.a.
50,000
842,182
FY17E
33,926
112,130
146,056
81,180
n.a.
24,354
3,938
730,620
16.5
196,200
534,420
54,000
1,011,856
43,335
359,917
14.2
204,000
133,417
22,500
548,604
24.2
60,000
1,011,856
FY18E
33,926
123,851
157,778
144,906
78.5
33,811
9,844
821,136
12.4
307,368
513,768
64,800
1,188,620
40,771
388,030
7.8
214,200
142,330
31,500
687,819
25.4
72,000
1,188,620
FY19E
33,926
138,188
172,114
224,122
54.7
44,824
19,294
896,487
9.2
430,608
465,879
77,760
1,370,483
41,287
388,177
0.0
214,200
133,027
40,950
854,618
24.3
86,400
1,370,483
FY20E
33,926
156,331
190,257
327,778
46.3
59,000
32,248
983,334
9.7
568,094
415,240
93,312
1,594,681
49,606
397,743
2.5
224,910
119,598
53,235
1,043,653
22.1
103,680
1,594,681
(INR Million)
FY21E
33,926
178,567
212,493
464,134
41.6
77,356
49,268
1,082,979
10.1
722,389
360,590
111,974
1,871,580
65,781
409,104
2.9
236,156
103,743
69,206
1,272,279
21.9
124,416
1,871,580
Asset quality
GNPA (INR m)
NNPA (INR m)
GNPA Ratio
NNPA Ratio
PCR (Excl Tech. write off)
14,887
4,466
3.26
1.01
70.0
20,744
6,223
3.64
1.13
70.0
27,567
8,270
3.85
1.20
70.0
35,810
10,743
4.02
1.26
70.0
45,740
13,722
4.20
1.31
70.0
57,465
17,240
4.32
1.36
70.0
30 January 2016
7

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
Profitability Ratios (%)
RoE
RoA
Int. Expense/Int.Income
Fee Income/Net Income
Non Int. Inc./Net Income
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)
FY16E
FY17E
9.7
11.0
7.5
8.1
1.6
2.6
FY18E
9.6
10.9
7.2
7.5
2.1
2.9
FY19E
9.7
10.9
7.2
7.5
2.3
3.0
FY20E
9.9
10.8
7.3
7.4
2.4
3.1
FY21E
10.0
10.8
7.4
7.4
2.6
3.2
8.2
1.25
73.4
15.6
32.8
10.1
1.39
70.2
17.9
32.2
11.3
1.46
69.2
19.1
31.8
13.1
1.60
68.2
20.5
31.8
14.4
1.67
67.5
20.7
30.9
42.9
49.1
2.6
2.0
4.5
41.8
51.1
2.4
1.9
4.1
40.8
53.2
2.2
1.8
3.7
37.5
53.1
2.1
1.7
4.0
34.7
53.9
2.0
1.6
4.1
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
40.4
1.3
39.5
1.3
1.5
35.4
43.1
1.2
41.8
1.3
3.4
15.4
0.7
1.3
46.5
8.0
1.1
44.8
7.3
1.2
4.5
32.1
11.6
0.9
1.7
50.7
9.1
1.0
48.5
8.3
1.1
5.5
22.3
9.5
1.1
2.1
56.1
10.5
0.9
53.2
9.8
1.0
7.0
26.5
7.5
1.4
2.7
62.6
11.7
0.8
59.1
10.9
0.9
8.6
22.6
6.1
1.7
3.3
30 January 2016
8

IDFC Bank
NOTES
30 January 2016
9

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