Receding uncertainties IDFC :: HDFC Securities

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Receding uncertainties IDFC’s net earnings were ahead of estimates with lower than expected opex & provisions cost. However, its conservative provisioning policy continued with contingent provisions now at 3.9% of loans vs. 3.1% (1Q) and restructured provisions at ~5%. Restructured loans stood at 6.1%; w/w 87% of the loans belonged to the energy segment. While RBI’s clarification of availing regulatory exemption only on 30% of O/S eligible book was marginally negative; it further lowers the uncertainties. As the co. continues its transition towards becoming a bank, earnings are expected to remain subdued with slower loan growth, moderating spreads and higher provisions (conservative approach). However, the key would be the management’s strategy towards the banking business. Maintain NEUTRAL. Revise SOTP to Rs 177.  RBI clarified that 30% of O/S eligible loans (60% of loan) can be availed for exemption of the regulatory requirements, which is at par with the banks.  Asset quality marginally deteriorated with GNPAs increasing ~8/7.7% YoY/QoQ to Rs 3.7bn (0.7%). With a 165bps decline in PCR to 31.6%, NNPA inched up 10% QoQ to Rs 2.5bn (0.47%). Management continues to indicate a deterioration in asset quality with stress largely in the infra segment. We too remain cautious and expect GNPA of 0.8/1% in FY15/16E.  IDFC’s restructured book stands at 6.1% of loans, tilted towards the energy segment (~87% of total restructured book). Management has hinted at a further spike in the restructured book.  The specific and contingent provisions further increased to ~3.9% vs. 3.1% (1Q) of loans. Despite higher contingent provisioning, we believe LLP would remain elevated given the management’s conservative approach towards further strengthening the B/S and stress in the energy segment. We have factored provisions of 1.2% over FY15-16E vs. 1% in FY14.  IDFC’s NII (Rs 6.6bn) was inline with estimates led by a flat loan book & 30bps fall in NIMs to 3.7%. Driven by a a sharp rise in fixed income gains, non interest income jumped to Rs 3.2bn (+70% YoY). With higher investments in people, opex jumped 48% YoY, albeit remained flat QoQ. With higher provisions (Rs 1.5bn, ~4.2x YoY; 1.2% ann.), PAT declined ~16% YoY.

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