15 January 2018
Update | Sector: Financials
IDFC Bank
Neutral
BSE SENSEX
34,844
S&P CNX
10,742
CMP: INR64
Going retail
TP: INR65 (+1%)
Merger with Capital First provides abundant opportunities
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
IDFCBK IN
3,402
70/51
18/-6/-26
218.6
3.4
626
47.2
Management of IDFC Bank (IDFCB) hosted a concall to discuss the details of the
announced merger with Capital First (CAFL).
CAFL complements the IDFC franchise
The proposed merger is expected to help IDFCB get closer to its target of 60%
share of retail loans by 2021. Post the merger, the share of retail loans for the
consolidated entity would stand at 45%.
In addition, the target customer segment
of CAFL is complementary to that of IDFCB – CAFL targets predominantly the
SME/MSME space, while IDFCB targets the rural population through its ‘Bharat
Banking’ model and the affluent urban population.
CAFL fills in the missing link,
making the consolidated entity relevant to the entire spectrum of customers.
In
addition, with the planned ramp-up of IDFCB branches, the consolidated entity
would have 250 branches across 35 cities by March 2018.
Financials Snapshot (INR b)
Y/E Mar
2018E 2019E
NII
18.9
21.9
OP
15.3
18.3
NP
10.2
11.0
NIM (%)
1.7
1.8
EPS (INR)
3.0
3.2
EPS Gr. %
0.4
7.0
BV/Sh. INR
45.5
48
ABV/Sh
INR
43.7
46
RoE (%)
6.8
6.9
RoA (%)
0.8
0.8
P/E(X)
21.2
19.9
P/BV (X)
1.4
1.3
2020E
25.7
22.7
13.4
1.8
3.9
21.9
51
48
7.9
0.9
16.3
1.3
Regulatory drag lower than expected
One of the key investor concerns regarding the merger was the drag on
profitability due to regulatory requirements on CRR, SLR and PSL.
However,
management clarified that CAFL is by-and-large self-compliant with respect to
PSL – i.e. over 40% of its loans are PSL-compliant.
However, there would be some
sub-categories wherein CAFL would be deficient. In those cases, the bank will have
to take efforts to make up for the deficiencies.
Shareholding pattern (%)
As On
Dec-17 Sep-17 Dec-16
Promoter
52.8
52.8
52.9
DII
15.7
15.0
13.2
FII
14.9
15.7
21.5
Others
16.6
16.5
12.4
FII Includes depository receipts
Stock Performance (1-year)
IDFC Bank
Sensex - Rebased
82
74
66
58
50
Merger to conclude by end of calendar year
Management expects the merger to conclude in the next 9-10 months. Post the
merger, IDFC Ltd.’s (IDFC) shareholding in IDFCB will drop from 53% currently to
38%. According to regulatory requirement, IDFC would have to maintain at least
40% shareholding in the bank.
As a result, IDFC will look to buy shares from the
market to get its shareholding back to 40%.
Also, management’s assessment is
that, post the merger, the company will be well capitalized to support growth
(~20% CAGR target) for the next 2-2.5 years without need for dilution.
Valuation and view
While IDFCB started its banking journey two years ago, it has faced some
challenges along the way. While it has charted a clear course of action over the
medium term and has even acquired an MFI, overall retail traction has been slow.
Scale-up of retail assets and liabilities remains a key monitorable. The proposed
merger helps the bank move forward at least five years in terms of retail traction.
At the same time, with new management at the helm, the company would get
another fresh start. We expect RoA/RoE to improve 20/200bp post the merger
(without accounting for synergies).
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 3982 5540
| Anirvan Sarkar
(Anirvan.Sarkar@MotilalOswal.com); +91 22 3982 5505
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
| Parth Gutka
(Parth.Gutka@motilaloswal.com)
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
While we are excited about the transaction, we note of several possible challenges along
the way – culture integration issues, retail liability ramp-up, and turnaround in the
infrastructure finance book.
Additionally, our back-of-the-envelope calculation suggests that
RoE is likely to cross 10% only by FY20.
We maintain our Neutral rating on the stock. Our
target price is INR65 (1.3x FY20E BVPS).
Exhibit 1: IDFCB’s share count increases by 40% post-merger
Swap Ratio
Existing no. of shares of CAFL, m
New IDFCB shares to be issued, m
Existing number of shares of IDFCB, m
Revised number of shares - IDFCB, m
% increase in outstanding shares of IDFCB
13.9 : 1
98.9
1,375
3,402
4,777
40%
Source: MOSL, Company
Exhibit 2: Pro forma customer assets mix – combined entity
Retail, 33%
Infra, 49%
LC Non Infra+ELC,
16%
Corporate, 2%
Source: MOSL, Company
Exhibit 3: Shareholding pattern - IDFCB (%)
Individuals,
16.7
Exhibit 4: Shareholding pattern – combined entity (%)
FPIs/FIs/
Insurance,
21.2
GoI, 5.5
FPIs/FIs/Ins
urance,
27.3
MF/AIF,
3.2
Source: Company, MOSL
IDFC Ltd.,
52.8
MF/AIF,
5.5
Warburg
Pincus,
10.2
IDFC Ltd,
37.6
Source: Company, MOSL
15 January 2018
2

IDFC Bank
Exhibit 6: ~200bp RoE (%) improvement post-merger, ex-
synergy
IDFCB
1.2
1.0
6.9
8.2
9.4
7.9
9.2
Merged Entity
11.0
Exhibit 5: RoA (%) would improve post-merger, ex-synergy
IDFCB
Merged Entity
1.0
0.9
0.9
0.8
FY19E
FY20E
FY21E
Source: Company, MOSL
FY19E
FY20E
FY21E
Source: Company, MOSL
15 January 2018
3

IDFC Bank
Financials – IDFC Bank
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
36,488
28,015
8,473
4,032
677
3,355
12,505
5,106
7,399
242
0.0
7,158
2,489
34.8
4,669
1,092
4,044
2017
85,327
65,154
20,173
10,131
2,993
7,138
30,304
142.3
12,770
150.1
17,535
2,825
0.4
14,710
4,512
30.7
10,197
2,386
10,396
2018E
89,888
71,001
18,886
-6.4
12,138
5,000
67.1
7,138
31,025
2.4
15,742
23.3
15,283
-12.8
0
0.0
15,283
5,043
33.0
10,240
0.4
2,396
8,145
-21.7
2019E
102,259
80,333
21,925
16.1
15,138
7,500
50.0
7,638
37,064
19.5
18,750
19.1
18,314
19.8
1,960
0.2
16,353
5,397
33.0
10,957
7.0
2,564
10,675
31.1
2020E
115,977
90,235
25,743
17.4
18,638
10,500
40.0
8,138
44,381
19.7
21,729
15.9
22,652
23.7
2,716
0.3
19,936
6,579
33.0
13,357
21.9
3,126
14,513
36.0
(INR Million)
2021E
129,050
99,258
29,792
15.7
23,338
14,700
40.0
8,638
53,130
19.7
24,859
14.4
28,272
24.8
3,566
0.3
24,706
8,153
33.0
16,553
23.9
3,873
19,633
35.3
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
33,926
102,399
136,326
82,190
3,695
756
571,598
99,450
472,148
42,044
832,159
29,039
297,286
110,570
0
186,716
456,994
n.a.
48,839
832,159
2017
33,990
112,790
146,780
402,082
n.a.
13,685
7,259
502,622
-12.1
104,340
398,282
70,112
1,121,597
51,020
504,717
69.8
192,640
136,000
176,077
494,017
8.1
71,843
1,121,597
2018E
33,990
120,634
154,624
448,371
11.5
21,486
16,774
619,179
23.2
126,900
492,279
70,112
1,292,287
45,970
640,608
26.9
250,432
196,491
193,685
533,867
8.1
71,843
1,292,287
2019E
33,990
129,027
163,017
577,011
28.7
30,847
45,318
650,672
5.1
196,920
453,752
77,123
1,467,823
57,256
660,478
3.1
287,997
159,428
213,053
663,878
24.4
86,211
1,467,823
2020E
33,990
139,258
173,248
702,235
21.7
40,684
85,634
648,217
-0.4
269,532
378,685
92,548
1,616,248
45,129
666,287
0.9
331,196
100,733
234,358
801,378
20.7
103,454
1,616,248
(INR Million)
2021E
33,990
151,938
185,928
846,733
20.6
52,180
134,278
638,764
-1.5
344,995
293,769
111,057
1,782,482
53,162
691,465
3.8
364,316
69,355
257,794
913,710
14.0
124,144
1,782,482
15 January 2018
4

IDFC Bank
Financials – IDFC Bank
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)
2H2016
2017
9.7
10.7
8.2
8.4
1.4
2.3
2018E
8.3
9.6
6.9
7.2
1.1
1.7
2019E
8.2
9.5
6.8
7.0
1.2
1.8
2020E
8.3
9.5
6.8
7.0
1.3
1.8
2021E
8.4
9.5
6.8
7.0
1.4
1.9
7.2
1.0
76.4
9.9
33.4
6.8
0.8
79.0
16.1
39.1
6.9
0.8
78.6
20.2
40.8
7.9
0.9
77.8
23.7
42.0
9.2
1.0
76.9
27.7
43.9
42.1
44.9
1.8
93.9
3.2
50.7
41.7
1.6
94.6
2.4
50.6
40.7
1.5
80.4
2.2
49.0
41.0
1.6
80.4
2.4
46.8
42.3
1.6
84.5
2.6
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
40.2
1.6
37.8
1.7
1.4
46.5
43.2
1.5
42.0
1.5
3.0
21.3
0.6
0.9
45.5
5.3
1.4
43.7
4.1
1.5
3.0
0.4
21.2
0.6
0.9
48.0
5.4
1.3
45.8
4.7
1.4
3.2
7.0
19.9
0.6
1.0
51.0
6.3
1.3
48.3
5.4
1.3
3.9
21.9
16.3
0.8
1.2
54.7
7.3
1.2
51.4
6.5
1.2
4.9
23.9
13.1
1.0
1.5
15 January 2018
5

IDFC Bank
Financials – Capital First
Income Statement
Y/E MARCH
Interest Income
Interest Expended
Net Interest Income
Change (%)
Other Operating Income
Other Income
Net Income
Change (%)
Operating Expenses
Operating Income
Change (%)
Provisions and W/Offs
PBT
Tax
Tax Rate (%)
PAT from discontinued operations
PAT
Change (%)
Proposed Dividend
Balance Sheet
Y/E MARCH
Capital
Reserves & Surplus
Net Worth
Borrowings
Change (%)
Total Liabilities
Investments
Change (%)
Advances
Change (%)
Net Fixed Assets
Other assets
Total Assets
E: MOSL Estimates
2013
7,284
4,833
2,451
56.6
719
83
3,254
-6.0
2,452
802
-54.0
218
584
99
17.0
-67
631
-40.4
128
2014
9,748
6,467
3,282
33.9
782
95
4,158
27.8
3,022
1,136
41.7
489
648
58
9.0
-63
526
-16.6
165
2015
12,892
7,878
5,014
52.8
1,352
175
6,541
57.3
3,862
2,679
135.8
1,052
1,627
511
31.4
26
1,143
117.1
200
2016
16,678
8,972
7,705
53.7
2,145
66
9,916
51.6
5,028
4,888
82.5
2,364
2,524
848
33.6
-14
1,662
45.4
219
2017
23,888
11,606
12,282
59.4
3,841
280
16,403
65.4
8,298
8,104
65.8
4,530
3,575
1,174
32.8
-11
2,389
43.8
253
2018E
31,266
13,188
18,078
47.2
4,801
655
23,534
43.5
12,060
11,474
41.6
6,715
4,759
1,563
32.8
0
3,196
33.8
288
2019E
39,926
16,553
23,373
29.3
6,241
786
30,400
29.2
15,137
15,263
33.0
8,916
6,347
2,085
32.8
0
4,262
33.4
341
(INR Million)
2020E
2021E
49,998
62,155
20,603
25,342
29,395
36,813
25.8
25.2
7,801
9,752
943
1,132
38,139
47,697
25.5
25.1
18,677
23,065
19,462
24,631
27.5
26.6
11,264
13,710
8,198
10,922
2,693
3,588
32.8
32.8
0
0
5,505
7,334
29.2
33.2
385
513
(INR Million)
2020E
2021E
974
974
33,607
40,325
34,582
41,300
280,597 345,134
23.0
23.0
315,179 386,434
4,470
5,363
20.0
20.0
294,946 362,783
23.0
23.0
676
686
15,087
17,601
315,179 386,434
2013
704
8,903
9,607
62,301
42.0
71,909
11
-99.7
55,303
24.7
391
16,204
71,909
2014
820
10,898
11,719
84,220
35.2
95,938
3,474
31,281.3
69,657
26.0
340
22,466
95,938
2015
910
14,828
15,738
84,374
0.2
100,112
1,942
-44.1
87,089
25.0
191
10,890
100,112
2016
912
16,123
17,035
119,549
41.7
136,584
1,836
-5.4
124,455
42.9
292
10,000
136,584
2017
974
21,862
22,836
141,081
18.0
164,119
2,587
40.9
149,871
20.4
646
11,016
164,119
2018E
974
24,712
25,686
180,584
28.0
206,270
3,104
20.0
191,835
28.0
656
10,675
206,270
2019E
974
28,565
29,539
228,128
26.3
257,667
3,725
20.0
239,793
25.0
666
13,483
257,667
15 January 2018
6

IDFC Bank
NOTES
15 January 2018
7

Disclosures:
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IDFC Bank
Disclosure of Interest Statement
Analyst ownership of the stock
IDFC Bank
No
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regulation or which would subject MOSL & 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 Hong 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:
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person
or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of
offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or
appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations
as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to
determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative
products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time
without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities
mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities
functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already
available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is
being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not
directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would
be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to
certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or
representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The
person accessing this information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or
employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this
information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring
Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-30801085.
Registration details of group entities.: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MSE); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:
INA000007100. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS
(Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal
Commodities Broker Pvt. Ltd. offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private
Equity products
15 January 2018
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