J.P. Morgan - IDFC

IDFC (IDFC IN) 4Q14: higher floating provisions; asset quality held up		Overweight Price: Rs114.10 25 Apr 2014 Price Target: Rs150.00 PT End Date: 31 Mar 2015

IDFC reported Rs 2.6bn of PAT for 4Q14, down 51% y/y. The sharp decline in PAT was due to higher floating provisions and provision for restructured loans during the quarter. Although the loan growth remained subdued, asset quality held up despite weak macro. Fee income growth remained strong. Spreads remained stable at 2.3%, despite the high rate environment. We maintain our OW on the stock as we believe the bank license will make a significant difference to its long term ROEs and growth rates. We will come back with more details after the conference call tomorrow regarding IDFC’s plans to convert into a bank. Link to our report- IDFC: Bank license long term positive

Table 1: 4Q14 result table

(Rs m)	4Q 13	3Q 14	4Q 14	YoY	QoQ
NII	6,430	6,640	6,680	4%	1%
Loans	6,030	6,100	6,050	0%	-1%
Treasury	400	540	630	58%	17%
Non-int inc	3,630	1,870	2,850	-21%	52%
Miscellaneous inc	30	10	190	-	-
Op. income	10,090	8,520	9,720	-4%	14%
Opex	1,510	1,290	1,380	-9%	7%
PPOP	8,580	7,230	8,340	-3%	15%
Provisions and losses	1,650	370	4,830	193%	1205%
PBT	6,930	6,860	3,510	-49%	-49%
Tax	1,680	1,860	930	-45%	-50%
PAT	5,250	5,000	2,580	-51%	-48%
Non Interest Income
Principal Investment	1,320	760	580	-56%	-24%
Asset management	870	1,010	1,170	34%	16%
IB & Broking	390	190	370	-5%	95%
Loan related & other fees	480	210	610	27%	190%
Spreads (12 mnt rolling)	2.50	2.30	2.30	-0.20	0.00
Margins	3.9%	4.1%	3.9%	0.0%	-0.1%
Prov/PPOP	19.2%	5.1%	57.9%	38.7%	52.8%
Cost/Income	15.0%	15.1%	14.2%	-0.8%	-0.9%
Tax rate	24.2%	27.1%	26.5%	2.3%	-0.6%
Loans (Rs mn)	557,370	535,650	585,450	5%	9%
Borrowings (Rs mn)	542,270	516,300	565,650	4%	10%
GNPA (%)	0.15%	0.60%	0.60%	0.5%	0.0%
NNPA (%)	0.05%	0.50%	0.40%	0.4%	-0.1%

Source: J.P. Morgan estimates, Company data.

· Provisions. Provisions for loans increased to Rs4.5bn v/s 0.5bn in Q314 mainly because: 1) provisions for restructured loans were ~Rs1.4bn (restructured loans stood at 4.5% of total loans), 2) higher floating provisions. Total loan loss reserves now comprise 2.4% of total loans v/s 2% in the previous quarter. We believe higher loan loss reserve will cushion against negative surprise on asset quality going ahead. Asset quality remained stable with gross NPLs of 0.6%, flat q/q.

· Loan growth. Loan growth remained muted at 5% y/y (down 1% y/y excl short term loans), in line with management’s guidance of lower growth due to weak activity in the infra space. We expect loan growth to remain weak and balance sheet to contract further to cushion the CRR/SLR hit in the future.

· Non interest income. The overall fee income growth was strong at 24% y/y. Asset management income remained robust; the loan related fees were also higher due to a one-off short term loan during the quarter. IB income though down 5% y/y, was strong q/q due to better operating environment. The principal book gains remained muted. Given the stable rates the fixed income book reported gains during the quarter v/s loss in the previous quarter.

Figure 1: Asset quality remained stable sequentially

Source: Company data.

Figure 2: Spreads remained stable, despite high rate environment

Source: Company data.

Figure 3: Adjusted loan growth was down 1% q/q

Source: Company data.

 

Investment Thesis

We are OW on the stock, as:

1. We believe IDFC’s higher loan loss reserves will cushion against any stress on asset quality in the near term. This should mitigate much of the P&L damage from NPLs.

2. We believe IDFC’s foray in to banking business will be a significant advantage in the longer term as it strengthens its funding profile and diversifies its loan book.

Valuation

Our Mar-15 PT for IDFC of Rs150 is based on a target multiple of 1.35x Mar-15E book which is at a discount to ~25% to ICICI bank. Our valuations factor in Cost of Equity at 15.7%, Normalised ROE of 14.6% and terminal growth of 5%.

Risks to Rating and Price Target

1) Asset quality risk for the power portfolio, given fuel shortage and low merchant rates. 2) Growth: Another risk is continued slowdown in loan growth surrounding the progress of infra projects. 3) Markets: The dependence on markets means that any further weakness will lead to risk in fees and investment profits.

��

-->