IDFC - Steady Quarter; The RBI Refrains From Any Special Dispensation ::Edelweiss

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IDFC reported Q3FY15 PAT of INR4.2bn (flat QoQ) in line with our estimates. In light of the onerous task of getting the bank operational by October 2015 coupled with trying times in the infra sector, core business remained muted. key highlights: 1) revenue momentum remained tepid (NII flat QoQ); 2) GNPLs inched up marginally to 0.68% (0.62% in Q2FY15), restructuring remained elevated at 6.1%; and 3) provisions stood higher (fixed income gains utilised to step up counter-cyclical provisions). The RBI has clarified that only 30% of loans will be eligible from PSL/SLR/CRR relaxations, not providing it with any additional benefits as was earlier anticipated thus putting it on par with banks. We expect company’s intrinsic profitability to improve from the earlier envisaged 10% RoE levels to 15% backed by 1.9% RoA by FY20E. We maintain ‘BUY’ with TP of INR197.

GNPLs steady; restructured stays elevated at 6.1% 

Headline asset quality was broadly steady with GNPA/NNPA of 0.68%/0.47% (versus 0.62%/0.42% in Q2FY15). While the stress numbers are relatively lower, IDFC has been guiding that NPLs are likely to inch up further (to be contained within 1.0-1.5%). Restructured book stood at elevated levels of 6.1% (IDFC reports restructured asset without taking benefits of keeping DCCO extensions outside of this even though 87% comes from the energy sector). Restructured assets are likely to further increase as the entire problem gas assets are yet not a part of this, which needs to be monitored

Prudent counter-cyclical buffer to limit impact on earnings

Despite stable NPLs, the company provided INR1.5bn for loan losses, which was largely on account of floating/dynamic provisions which are intended to take the coverage level higher. Such significant loan loss reserves’ build up (to 3.9% in Q3FY15) will ensure limited impact on earnings.

LINK
https://www.edelweiss.in/research/IDFC--Steady-Quarter;-The-RBI-Refrains-From-Any-Special-Dispensation;-Result-Update-Q3FY15/28190.html