IDFC - Banking licence - a long term story... - ICICIDirect

IDFC is the only listed NBFC to receive an in-principal approval for the banking licence in the current set of issuances by the RBI followed by Bandhan Financial Services, a micro finance institution (MFI). IDFC with its independent professional management and strong corporate governance has been selected to receive a licence. This indicates the RBI has avoided offering licences to large corporate houses in its first phase. However, as 'on tap' licences will continue, other strong candidates still remain in the fray. Though in first and second year of incorporation, RoEs will be dragged down, it is a long term positive as it offers cheaper funding options for a large scale lender. Citing the banking story, we are raising our target multiple to 1.3x FY15E ABV leading to a revised TP of Rs. 150. We expect a sharp positive movement in IDFC in near term and recommend BUY.

Eighteen months validity to convert and form NOFHC

The "in-principle" approval granted is valid for 18 months during which it has to comply with the requirements under the guidelines and fulfil the other conditions as may be stipulated by the RBI. Post RBI being satisfied, as part of "in-principle" approval, they would be considered for grant of a licence for commencement of the banking business. Until then, banking operations cannot be undertaken.

It will have to transfer its subsidiaries related to AMC, private equity (alternatives) and securities to NOFHC. Hence, strong fee income on AUM and carry based gains will expectedly move out of bank (core lending business). Both these together (Rs. 470 crore) form 17% of net total income as on FY13. Hence, until a year at least NBFC operations will continue as currently.

Liability franchise build-up - a key monitorable

Currently, IDFC has borrowings of Rs. 51620 crore, which include long term bond debt of Rs. 34000 crore. It does not have a retail presence and has just four branches. This remains a challenge to build branches with added criteria of 25% in rural to accumulate CASA and retail term deposits. SLR of 23% and CRR of 4% in the first year of operation are expected to be a drag on profitability.

Loan book diversification to be positive, priority sector norm difficult

Currently, 85% of its loan book of Rs. 54552 crore is in infrastructure with 41% in energy, 24% in transport and 20% in telecom. IDFC has shown a recent interest in diversifying into non-infra sectors. We believe becoming a retail bank will be a tough call. It will continue to be wholesale with large corporate loans while extension to mid size corporate may be seen. Priority sector requirement of 40% of adjusted net bank credit (ANBC) is difficult for IDFC to achieve even in five years. Hence, investment into RIDF will be a drag on margins leading to NIM remaining subdued under 2% from current 4% with all 100% assets deployed in high yielding loans.

Return ratios to deteriorate initially, dilution to add pressure

Return ratios are likely to contract from the current 14% to single digit in the first two years. Post its capability to build CASA and contain operational expense, RoA and RoE can improve to >1% and >10%, respectively. Dilution requirement to bring down NOFHC ownership in the bank to 40% will keep RoE muted. A sentimental rally in the stock is seen, though implementation is far off.

Source : Equity Bulls

Keywords