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IDFC
Revenue mix shifts to lending = lower structural ROEs: With fee income not
keeping pace with balance sheet growth, revenue mix is rapidly shifting toward
lending business. IDFC's attractiveness was its unique mix of balance sheet business
coupled with large fee based income which generated very high ROAs. With higher
share of revenues from lending business, IDFC is not only losing its uniqueness as it
becomes any other infrastructure finance company but the high ROAs currently
would also be under pressure.
Lending margins compress as bigger ticket sizes –> lower yields: Funding larger
projects are more price competitive and increasing ticket sizes for IDFC could impact
margins over the medium term. Infrastructure is the thrust area for most banks adding
to the competition in project financing.
Goodwill writedown on AMC investment: IDFC acquired StanC AMC for
~US$200mn in May-08 - the 2Q annualized revenues for this business were $67m.
The business continues to face margin and growth pressure after the abolition of
front loads, and needs to evolve new business models to get back on the growth path.
IDFC has not recognized any goodwill write downs on this business so far, but that
remains a risk for the future.
We are not too concerned about the long-term impact of a goodwill write down, as it
is not recognized as regulatory capital anyway and any BV compression will be
compensated by an ROE expansion. However, it does represent a small event risk.
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