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ACTION
Sell
IDFC Bank Ltd (IDFB.BO)
Return Potential: (7%)
Equity Research
Value creation to take time; better return potential elsewhere; initiate Sell
Source of opportunity
Investment Profile
We initiate IDFC Bank (IDFB) at Sell with a 12-month SOTP-based target price
of Rs57. IDFC Limited recently demerged its lending business into a banking
entity to benefit from possible diversification of its loan book/revenues and
develop its retail franchise, despite high regulatory costs. However, the
business strategy appears mixed and is unlikely to lead to a strong retail build
out (low cost deposits, high-yielding retail loan book) in the near-to-medium
term, which could have otherwise, partially offset the high regulatory cost,
in our view. As a result, we expect IDFB to deliver below median ROAs by
FY21E and lower headline loan growth vs. other private (PVT) banks.
Low
High
Growth
Growth
Returns *
Returns *
Catalyst
Multiple
Volatility
Volatility
20th
Percentile
40th
60th
80th
100th
Key data
We see IDFB as a laggard, over its first five years of operations, amongst the
PVT banks on multiple counts: (1) Subdued operating metrics as we
forecast its ROA to take at least five years to reach 1.5%, below median
levels of 1.9%; (2) lower headline loan growth than peers over
FY17E/FY18E even though we expect growth in non-infrastructure loans to
grow fairly strong; (3) tepid build out of granular liability franchise which
could have otherwise helped partially negate the impact of high regulatory
costs (cash reserve ratio, statutory lending ratio and priority sector lending);
(4) unfavorable risk reward with IDFB trading at 1.5X 12-month forward
book, +28%/-22%/-27% vs. the valuations of ICBK/AXBK/YES, which have
lower execution risks; and (5) lack of support from technical factors such
as the relaxation of foreign ownership (FII) limits thereby creating ample FII
room for other PVT banks (27%-41%) vs. IDFB (25%).
Valuation
We value IDFB at 1.4X 12-month forward banking book, while it is trading at
1.5X 12-month forward book. Our target price also includes the value of
existing private equity and project equity funds (Rs5) as the investment in
these funds remains part of the banking book.
Sharp uptick in macro, strong loan growth, faster recovery from stressed
loans, and better strategy on retail thereby improving revenue streams.
Current
Price (Rs)
12 month price target (Rs)
Market cap (Rs mn / US$ mn)
Foreign ownership (%)
EPS (Rs)
EPS growth (%)
P/B (X)
P/E (X)
Dividend yield (%)
P/PPOP (X)
PPOP growth (%)
Preprovision ROA (%)
Credit cost (%)
ROA (%)
ROE (%)
61.00
57.00
206,883.5 / 3,100.0
--------------
3/16E
(1.72)
-1.5
NM
0.0
8.9
-NM
NM
NM
NM
3/17E
2.76
260.1
1.4
22.1
0.9
13.7
(34.8)
1.7
NM
1.04
6.7
3/18E
3.38
22.4
1.4
18.1
1.1
11.0
24.9
1.9
NM
1.13
7.7
27,500
70
27,000
68
26,500
66
26,000
64
25,500
62
25,000
60
Aug-15
Key risks
Multiple
24,500
Sep-15
IDFC Bank Ltd (L)
Oct-15
India BSE30 Sensex (R)
3 month
---
6 month 12 month
-----
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 11/27/2015 close.
--
3/16E
3/17E
3/18E
------------
22,804.1
11,031.2
33,835.3
(10,654.4)
23,180.9
(4,919.4)
0.0
(8,125.5)
2,275.1
-(5,850.3)
16,075.2
14,366.0
30,441.2
(15,323.1)
15,118.1
(930.9)
0.0
14,187.2
(4,823.7)
-9,363.6
19,464.7
16,276.1
35,740.8
(16,860.6)
18,880.2
(1,516.1)
0.0
17,364.1
(5,903.8)
-11,460.3
Dividends
Dividends payout (%)
---
0.0
0.0
1,872.7
20.0
2,292.1
20.0
----
3/16E
-1.00
3/17E
1.93
0.17
3/18E
2.05
0.23
--------------
--------------
-15.0
(29.5)
133.7
30.2
(10.0)
(43.8)
(34.8)
(80.1)
274.6
260.1
260.1
--
727.0
18.3
21.1
42.7
13.3
17.4
(10.0)
24.9
62.9
22.4
22.4
22.4
22.4
Market dimensions
No of branches
No of staff (000)
Revenues/staff (US$)
Net profit/staff (US$)
------
3/16E
55.0
1.4
381,100.4
(65,894.7)
3/17E
140.0
2.9
155,150.2
47,723.6
3/18E
265.0
4.5
118,879.7
38,118.8
-----
3/16E
NM
NM
NM
3/17E
6.7
15.6
1.04
3/18E
7.7
14.6
1.13
% of assets
Net interest income
Fee income
Non-interest income
Operating revenue
Operating expenses
Preprovision operating profit
Loan loss provisions
Pretax profits
Taxes
-----------
3/16E
NM
NM
NM
NM
NM
NM
NM
NM
NM
3/17E
1.79
0.26
1.60
3.38
1.70
1.68
0.10
1.58
0.54
3/18E
1.92
0.33
1.60
3.52
1.66
1.86
0.15
1.71
0.58
--
3/16E
3/17E
3/18E
Gross loans
NPLs
Loan loss reserves
Total interest earning assets
Other non-interest earning assets
Total assets
Customer deposits
Total interest-bearing liabilities
Total equity
----------
-16,643.0
8,818.7
766,972.7
65,372.9
832,345.6
0.0
666,822.4
136,444.9
-24,821.5
2,805.3
902,272.5
65,372.9
967,645.4
22,750.0
789,595.8
143,617.5
-42,850.9
1,780.3
999,766.7
65,372.9
1,065,139.6
188,150.0
878,311.2
152,396.4
------------
3/16E
21.7
27.9
16.4
NM
53.0
-32.60
31.5
NM
NM
3/17E
19.5
25.5
14.8
NM
11.3
1.93
47.19
50.3
1.04
2,476.5
3/18E
17.7
22.9
14.3
NM
4.2
2.05
45.54
47.2
1.13
354.3
-----
3/16E
NM
NM
NM
3/17E
NM
NM
NM
3/18E
NM
NM
NM
------
3/16E
NM
1.52
8.9
0.0
3/17E
22.1
1.44
13.7
0.9
3/18E
18.1
1.36
11.0
1.1
---
(1.72)
(1.72)
2.76
2.76
3.38
3.38
---
---
260.1
260.1
22.4
22.4
BVPS (Rs)
DPS (Rs)
---
40.23
0.00
42.35
0.55
44.93
0.68
Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
Analyst Contributors
Rahul Jain
rahul.m.jain@gs.com
Tabassum Inamdar, CFA
tabassum.inamdar@gs.com
Mayank Bukrediwala
mayank.bukrediwala@gs.com
Table of contents
Executive summary: Better investment opportunities elsewhere
10
14
16
18
Key risks
20
Appendix
21
Disclosure Appendix
23
Prices in this report are as of the close of November 26, 2015, unless otherwise stated.
Market Cap
3m
ADVT
11/26/2015
12m TP/
Valuation
Rating
(US$ mn)
(US$ mn)
Price (Rs)
(Rs)
Axis
Buy
Federal
Buy
HDFCB
Neutral
ICICIB
Buy
ICICI Bank standalone valuation
IndusInd Bank
Neutral
17,217
1,446
41,712
25,498
71.5
4.7
24.0
56.9
Upside/
Downside
Potential
(%)
P/B (X)
FY16E
P/E (X)
FY17E
P/ABVPS (X)
ROA (%)
FY16E
FY17E
FY16E
FY17E
FY16E
FY17E
13.1
11.0
21.9
12.6
10.9
23.2
10.3
7.2
17.6
10.6
9.0
17.7
2.3
1.3
3.7
2.0
1.5
3.1
2.0
1.1
3.2
1.7
1.3
2.7
1.7
1.0
1.9
1.8
1.6
1.9
1.8
1.3
1.9
1.9
1.7
2.0
Private banks
IDFC Bank
KMB
KMB standalone valuation
Yes Bank
8,237
16.5
465
57
1,065
264
194
916
1%
2.1
1.2
3.7
1.7
1.3
3.1
Sell
3,173
3.6
62
57
-8%
NA
1.5
NA
22.4
NA
1.5
NA
1.0
Neutral
19,073
13.0
4,981
45.5
675
490
900
-1%
Buy*
684
500
750
5.2
3.9
2.3
4.5
3.3
1.9
54.0
40.3
12.4
30.6
22.7
9.7
5.2
3.9
2.5
4.5
3.3
2.1
1.5
1.2
1.7
1.9
1.8
1.8
562
78
1,090
340
270
930
21%
37%
2%
29%
20%
1.8
1.0
3.2
1.5
1.2
2.7
Note: *denotes stock is on our Conviction List. For IDFC Bank, FY16 numbers are not comparable as it does not include a full year of banking ops.
Source: Datastream, Goldman Sachs Global Investment Research.
Related Research
Pass on bank license hype; bank on existing Buys and stay Neutral on IDFC/LICH, dated
November 22, 2013
IDFC Ltd: Bank spin-off: The riddle of the net payoff, dated April 1, 2015
IDFC Ltd: Bank spin-off, Part 2: Solving the riddle; down to Sell, dated September 22, 2015
#1: We believe IDFBs return ratio would remain subdued over the next five years on
higher regulatory costs and banking-related opex. Even if its ROA were to recover
from our expectations of c.1% in its first year of banking operations, we believe it
would likely remain below median ROAs for peers, thus limiting any potential
significant re-rating of valuation.
Exhibit 2: While IDFBs return ratios could fall in the near
term on account of regulatory and banking-related
costs
FY18E
FY16E
2.1
FY18E
25
%
1.7
20
1.3
15
0.9
10
0.5
5
FED
YESB
AXBK
HDBK
KTKM
ICBK
INBK
IDFB
ICBK
INBK
KTKM
FED
AXBK
HDBK
Note: ROA for IDFB refers to the period of FY17E and FY21E.
Note: ROE for IDFB refers to the period of FY17E and FY21E.
YESB
IDFB
CAGR FY16-18E
Loan Mix
Rs1.2tn
7%
Rural
12%
SME
CAGR
FY17-21E
25
22.5
20
12%
Retail
15
Corp. 19%
16.8
Rs0.56tn
10
50%
81%
5.8
0
ICBK
AXBK
HDBK
INBK
FED
YESB
KTKM
IDFB
FY17E
Infra
CAGR :8.7%
30
Non-Infra
CAGR : 55%
IDFB loan CAGR breakdown and comparison with other PVT banks
FY21E
#3: We expect IDFBs liability franchise build out to remain tepid, over its first five
years of operations, which otherwise would have been helpful to partially offset high
regulatory costs besides building a granular liability franchise expeditiously.
Moreover, with regulators focusing on ensuring that banks have stable and granular
funding resources (net stable funding ratio and liquidity coverage ratio), we believe it
would be essential for IDFB to focus on its deposit franchise. IDFBs management plans to
initially rely on the digital platform for its consumer banking businesses (including its
liability franchise), which could be an interesting strategy (as none of its peers are focusing
solely on digital) but the jury is still out. For most of the other existing PVT banks, despite
their significant focus on the digital platform, they are also focusing on ramping up their
distribution network.
Exhibit 5: We believe managements strategy to rely
significantly on the digital channel to build out IDFBs
retail liability franchise
CA as % of liabilities
IDFB
ICBK
YESB
KTKM
IDFB
60%
ICBK
YESB
KTKM
18%
16%
50%
14%
40%
12%
10%
30%
8%
20%
6%
4%
10%
2%
0%
0%
Yr1
Yr4
Yr6
Yr8
Yr1
Yr4
Yr6
Yr8
#4: We view IDFBs risk reward profile as unfavorable, with the stock trading at 1.5X
12-month forward book, +28%/-22%/-27% vs. the valuations of ICBK/AXBK/YES.
Moreover, we believe the lack of support from technical factors such as the relaxation
of foreign ownership limits creates ample foreign holding room in other PVT banks
(27%-41%) vs. IDFB (25%), leading to potential share price underperformance.
Exhibit 7: IDFB currently trades at a 13% discount to
peers; we believe it warrants a higher discount
4.0
R = 0.303
(X)
IDFB
30
Sell
Buy
KTKM
3.5
1.8
RHS
LHS
HDBK
1.6
25
INBK
3.0
1.4
1.2
20
2.5
1.0
YESB*
2.0
15
AXBK
0.8
IDFC Bank
1.5
10
FED
1.0
0.6
ICBK
0.4
5
0.2
0
0.5
0.0
.
0.0
1.1%
1.2%
1.3%
1.4%
1.5%
1.6%
1.7%
1.8%
1.9%
LT Asset
growth (%)
2.0%
LT ROE (%)
LT ROA (%)
Note: 1) ROA avg for IDFC Bank is for the period FY17E-19E. 2) *denotes stock
is on our Conviction List.
Note: LT asset growth, ROA and ROE are for avg FY17E-24E. Tier 1 ratio and
net impaired loans are as of FY16E.
12m fwd P/B (bubble size) vs. RIM assumptions of LT ROA &
asset growth
Neutral
Sell
1.9
ICBK
60
27.7
27.7
32.1
41.6
AXBK
1.7
6.5
INBK
HDBK
KTKM
LT Avg ROA
4.2
70
1.8
80 %
50
YESB*
1.6
40
73.0
1.5
69.8
24.7
67.6
30
IDFB
1.4
46.3
1.2
19
41.9
32.4
18
46.3
20
FED
1.3
20
21
22
23
24
25
26
27
28
LT Asset CAGR
24.3
10
0
HDBK
INBK
ICBK
KTKM
AXBK
YESB
FED
IDFB
Note: 1) LT ROA & asset growth is for the period of FY17E-24E based on RIM
assumptions for all banks except IDFB which is for the period FY17E-28E. 2)
*denotes stock is on our Conviction List.
Source: Datastream, Goldman Sachs Global investment Research.
FY17E
Du -pont Analysis
Net interest income adjusted
Other income
Total income
Operating expenses
Employees
Others
Pre provision income
Provisions
Pre -tax pre extraordinary income
ROA
ROE
10 yrs Avg
AXBK
3.41
2.01
ICBK
3.20
1.91
YESB
3.15
1.85
IDFB
1.79
1.60
AXBK
1.93
2.02
ICBK
1.91
2.24
YESB
2.48
1.99
IDFB
2.36
1.76
5.42
2.08
0.68
1.40
3.34
0.58
2.76
1.82
19.0
5.11
1.89
0.78
1.11
3.22
0.55
2.67
1.90
15.3
4.99
2.01
0.84
1.18
2.98
0.36
2.62
1.77
21.7
3.38
1.70
0.77
0.93
1.68
0.10
0.54
1.04
6.7
3.95
1.66
0.40
1.25
2.30
0.49
1.80
1.01
20.3
4.15
1.98
0.55
1.43
2.16
0.68
1.46
1.22
13.7
4.47
2.14
1.14
0.99
2.33
0.24
2.05
1.36
18.0
4.12
1.65
0.74
0.92
2.46
0.31
2.15
1.42
13.2
Note: FY17E is the first full year of banking ops for IDFC Bank; 10 years avg. for each bank is calculated from the start of their banking ops, except for ICBK whose
starting year is FY03, the first full year after its reverse merger. For IDFC Bank, it is an 8-year average from FY17E-24E.
Source: Goldman Sachs Global Investment Research.
3,000
ICBK
Infrastructure loans
Non-Infra. loans
Retail
Business banking/SME
Rural banking
Growth rate
AXBK
IDFB
YESB
120%
30%
Rs. bn
100%
2,500
25%
8%
19%
2,000
80%
20%
60%
7%
1,500
14%
15%
17%
7%
7%
11%
18%
1,000
500
12%
10%
20%
20%
15%
81%
37%
57%
40%
22%
5%
44%
0%
0%
FY17E
FY20E
FY22E
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
Yr9
FY24E
(2) Net interest margins to initially compress due to priority sector requirements.
However, we expect it to improve over time due to change in loan book mix and
improvement in CASA ratio. We believe the trajectory would be similar to what was
seen at ICICI Bank given reverse merger by parent with itself that increased regulatory
reserve requirement such as SLR (statutory liquidity ratio), CRR (cash reserve ratio)
and PSL (priority sector lending).
Exhibit 14: ICBKs trajectory post 2002 could give a sense
about the likely trajectory at IDFB
NIM IDFC Bank vs. ICICI Bank, Yes Bank, Axis Bank
IDFB
3.5
ICICI Bank
Yes Bank
IDFB
Axis Bank
Yes Bank
KTKM
ICBK
60%
50%
3.0
40%
2.5
30%
2.0
20%
1.5
10%
1.0
0%
T-1
Yr1
Yr4
Yr6
Yr8
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
Note: Yr1 for IDFC Bank is FY17E, while that for YESB & KTKM is FY05; ICBK
is FY03 and Axis Bank is FY97.
Source: Company data, Goldman Sachs Global Investment Research.
Yes Bank
ICICIBK
IDFB
3.0%
Yes Bank
ICICIBK
40%
35%
2.5%
30%
2.0%
25%
1.5%
20%
15%
1.0%
10%
0.5%
5%
0.0%
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
0%
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
IDFB
ICBK
AXBK
YESB
IDFB
1.8%
400%
Yes Bank
ICICIBK
1.6%
350%
1.4%
300%
1.2%
250%
1.0%
200%
0.8%
150%
0.6%
100%
0.4%
50%
0.2%
0.0%
0%
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr1
Yr8
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
(3) Branch expansion and opex ratios: IDFB is focusing on ramping up distribution
network in rural/semi urban areas to build its micro/PSL eligible book. While this is a
right move in our view, we believe branch expansion is equally important in
metro/urban areas, besides focusing on digital banking platforms. A look at other
banks indicates most banks largely have a uniform distribution mix. Having said that,
we believe due to gradual recovery in macro, the recovery in IDFBs topline will be
gradual and hence its cost-to-income ratio would be stretched initially till FY19E.
However, given intense competition from existing large banks and smaller private
banks (including new specialized banks) and regulatory requirements like NSFR (net
stable funding ratio) and LCR (liquidity coverage ratio), we believe IDFB would need to
focus on building a granular deposit base.
Exhibit 20: While the bank will focus initially on
rural/semi urban, it will need to ramp up network even in
metro/urban eventually, in our view
1,000
Rural
Semi-urban
Urban
Semi-Urban
20%
800
3,500
24%
25%
25%
23%
32%
30%
19%
22%
HDBK
ICBK
3,000
700
2,500
600
25%
29%
18%
2,000
500
24%
14%
400
25%
1,500
11%
21%
14%
18%
1,000
12%
300
100
Metro
4,000
900
200
Urban
Metro
13%
500
7%
40%
14%
7%
71%
52%
FY17E
FY20E
45%
29%
26%
18%
25%
12%
45%
33%
55%
24%
17%
13%
IDFB
INBK
FED
22%
AXBK
Note: Data on IDFB is for FY22E, while for ICBK, AXBK & YESB is as of FY15.
0
FY22E
FY24E
25
Other Expenses
Employee Expenses
Other Expenses
(Rs bn)
20
50
57%
40
60%
15
30
10
57%
20
49%
53%
5
55%
10
45%
T-1
Yr1
49%
41%
43%
47%
41%
59%
43%
40%
Yr4
Yr6
Yr8
51%
47%
53%
59%
51%
FY05
FY08
FY10
FY12
FY15
Yes Bank
ICICIBK
IDFB
3.5%
120%
3.0%
100%
2.5%
80%
2.0%
60%
1.5%
40%
1.0%
20%
0.5%
Yes Bank
ICICIBK
0%
Yr1
Yr4
Yr6
Yr8
Yr1
Yr4
Yr6
Yr8
Please refer to Exhibit 45 for details on reference years as used in Exhibits 22, 24-25.
10
Exhibit 26: Bifurcating the business into 3 broad categories; consumer strategy is not very exciting, in our view, at least
for now
Broad contours on banking strategy
Micro/Rural banking
Consumer banking
Mgt. Strategy
Mgt. Strategy
Mgt. strategy
1. Will be a growth engine, chiefly the
non-infra part;
2. Leverage and deepen existing
relationships;
3. Focus is on diversification of loan
mix and improve revenue streams
GS View
GS View
1. Domain expertise in infra-related
project finance should be helpful;
2. Understanding / involvement in govt.
policies a plus;
3. Current deposits and off balance sheet
businesses should benefit from existing
relationships
4. While execution and macro pick up
will be the key, we expect IDFB to grow
non-infra piece at 46% CAGR over
FY17E-24E
GS View
1. A right strategy in our view as cost
for not meeting PSL is onerous
2. We estimate rural/micro could
grow at 44% CAGR to c.8% of loan
book by FY24E
3. Profitability wise, while NIMs
would be better, opex will be higher
initially
11
Exhibit 27: IDFC Bank to remain a corporate-centric bank amid a gradual retail build-out
Particulars
Branches
CASA ratio
Loan growth
Cost/asset ratio
PAT growth
Cost of equity
ROAs (%)
Period
5th Year
8th Year
5th Year
8th Year
5 yr CAGR
8 yr CAGR
5 yr average
8 yr average
5 yr CAGR
8 yr CAGR
Average
Banking Business
532
912
7.7%
12.3%
22.6%
23.4%
1.7%
1.7%
30.3%
29.3%
13.0%
5 yr average
8 yr average
5 yr average
8 yr average
ROEs (%)
1.3%
1.4%
10.0%
13.2%
1.4
Exhibit 28: We expect IDFC Banks ROA to recover from 1.04% in FY17E to c.1.6% levels in FY24E
DuPont analysis of IDFC Bank
IDFB
NII
Non interest income
Total income
Opex
- Emp. Expenses
- Others
PPoP
Prov. (total)
PBT
Tax
ROA
ROE
FY17E
1.79
1.60
3.38
1.70
0.77
0.93
1.68
0.10
1.58
0.54
1.04
6.69
FY18E
1.92
1.60
3.52
1.66
0.78
0.88
1.86
0.15
1.71
0.58
1.13
7.74
FY19E
2.33
1.71
4.04
1.79
0.80
0.99
2.25
0.21
2.04
0.69
1.35
9.82
FY20E
2.51
1.69
4.20
1.75
0.83
0.92
2.45
0.29
2.16
0.74
1.43
11.56
FY21E
2.56
1.81
4.37
1.62
0.72
0.90
2.75
0.42
2.33
0.79
1.54
14.20
FY22E
2.55
1.95
4.51
1.58
0.68
0.90
2.93
0.45
2.48
0.84
1.63
16.92
FY23E
2.60
1.87
4.46
1.55
0.67
0.89
2.91
0.44
2.47
0.84
1.63
18.59
FY24E
2.62
1.82
4.45
1.57
0.63
0.94
2.88
0.44
2.44
0.83
1.61
19.85
12
CA as % of liabilities
SA as % of liabilities
IDFB
ICBK
YESB
KTKM
IDFB
60%
ICBK
YESB
KTKM
18%
16%
50%
14%
12%
40%
10%
30%
8%
6%
20%
4%
10%
2%
0%
0%
Yr1
Yr4
Yr6
Yr1
Yr8
Yr4
Yr6
Yr8
4,500
Semi-Urban
Urban
Metro
14.5%
14.3%
4,000
4,000
3,500
3,500
24%
25%
25%
23%
32%
30%
19%
22%
HDBK
ICBK
3,000
3,000
15.3%
2,500
2,500
2,000
2,000
25%
24%
1,500
1,500
6.3%
25.1%
14%
18%
1,000
1,000
26.6%
21.0%
500
500
YESB
INBK
FED
KTKM
AXBK
ICBK
HDBK
18%
25%
12%
45%
IDFB
29%
26%
33%
55%
24%
17%
13%
INBK
FED
22%
AXBK
13
Yr1
Yr4
Yr6
Yr8
Yr1
Yr4
Yr6
Yr8
4.5%
120%
4.2%
110%
4.0%
100%
3.5%
3.1%
3.1%
65% 67%
60%
55%
49%
53%
2.1% 2.0%
2.0%
50%
48%
2.4%
2.5%
54%
52%
2.0%
37% 38%
38%
1.6%
1.6%
42%
40%
3.1%
3.0%
80%
35% 35%
1.5%
1.4%
1.6% 1.6%
1.4% 1.4%
1.3%
1.0%
20%
0.5%
0%
0.0%
YESB
ICBK
KTKM
IDFB
YESB
ICBK
KTKM
IDFB
Please refer to Exhibit 45 for details on reference years as used in Exhibits 29-30, 33-34.
14
Exhibit 35: We expect IDFBs ROA to shrink over FY1517E, due to lower NII, high opex and provision costs
2.5
0.14
2.0
-0.26
2.0
1.5
0.23
-0.35
-1.14
1.5
1.0
0.12
2.10
0.84
0.10
1.0
0.5
-1.27
1.04
0.94
1.61
0.5
(0.5)
1.04
FY15 ROA
NII
Oth. Inc
Op-ex
Provisions
Tax
FY17E ROA
FY17E ROA
NII
Oth. Inc
Op-ex
Provisions
Tax
FY24E ROA
Note: FY15 numbers are based on pro-forma lending business of IDFC Ltd.
Source: Company data, Goldman Sachs Global Investment Research.
Bear case: (1) Lower average NIMs by 17bps driven by lower CASA ratio, lower mix of
high-yielding book and lower Tier I ratio by 100bps; (2) lower fee income by 11bps, similar
to FED Bank (old private sector); and (3) higher opex ratio based on average of ICBK and
AXBK. This leads to lower ROAs of c.1%, much lower than private banks average of c.1.7%.
15
1.7
1.8
0.04
1.5
1.7
0.06
-0.17
1.3
1.6
-0.11
1.1
0.18
1.5
-0.19
1.76
1.47
0.9
1.4
1.47
1.00
0.7
1.3
0.5
1.2
ROA Base case
NIM
Fee Income
Opex
NIM
Fee Income
Opex
16
RIM Assumption
(FY17-28E)
R = 0.303
(X)
Buy
Sell
KTKM
3.5
18.5
3.0
ROA (%)
1.43
2.5
21.9
ROE (%)
14.7
COE (%)
13.0
20.0
Tier 1 Ratio
13.2
INBK
YESB*
2.0
1.5
HDBK
AXBK
IDFC Bank
ICBK
FED
1.0
0.5
0.0
1.1%
1.2%
1.3%
1.4%
1.5%
1.6%
1.7%
1.8%
1.9%
2.0%
1.4
57
-8%
Exhibit 41: We believe returns and growth to justify higher valuations of greater than
1.75X P/B would be difficult to achieve for IDFC given a large legacy book along with
regulatory costs and a higher opex burden initially
Scenario analysis Implied RIM assumptions for higher banking business multiples
RIM Assumption
(FY17-28E)
Scenario Analysis
1.75X
2.0X
22.1
24.4
ROA (%)
1.55
1.65
27.0
29.3
ROE (%)
16.5
16.4
COE (%)
13.0
13.0
20.0
15.8
Tier 1 Ratio
13.8
13.3
1.75
2.0
80
90
30%
46%
17
1.
2.
3.
Growth at IDFC Bank will be fairly strong as overall market share is insignificant
in systems loan book
IDFBs headline growth will be relatively lower in the initial phase, in our view,
because of the lack of pick up infrastructure activity. We believe most of the
growth would be driven by non-infra/rural banking/SME. On non-infrastructure
corporate loans, given that competition from existing PVT banks to gain market
share in corporate loans has picked up (average growth over the past four quarters
in corporate book: HDBK 23.7% yoy, AXBK 21% yoy), IDFBs profitability could
be pressured.
We believe investors focus would gradually shift to the profitability of IDFBs loan
growth and whether it is sustainable in the absence of a strong retail liability
franchise. Further, we believe IDFB would also need to maintain high levels of
liquid assets due to stringent liquidity coverage norms which in turn would be a
drag on profitability.
While we acknowledge that cleaning up of bad loans is a prudent move and it will
insulate the banking business from any legacy book issues, we believe the net
impaired loans would continue to be fairly high at c.6% of net loans in FY16E (ICBK
at 4.5%; AXBK at 3%).
We estimate the PCR excluding gas based projects would be c.35%. As such, we
assume minimum coverage of +50% on the entire stressed book (including 5/25
refinance) for other PVT banks.
In terms of recovery from these bad loans, we believe discom reforms and
availability of gas to power projects would be positive, but it would be difficult to
estimate the provisioning release due to that. Moreover, we estimate a low loan
loss provisions in the initial 3-5 year period to factor in some benefit due to an
improving macro.
18
4.
YES Bank as a fledgling bank traded at 4.6X P/B in the first three years post
listing, providing meaningful indications of where IDFB could trade at
a)
YES Bank did not have any legacy book to deal with as is the case with IDFB and
hence profitability was not marred in any way;
b)
YES Bank did not have to immediately onboard PSL assets as it did not have any
legacy book unlike IDFB due to regulatory pressures;
c)
YES Bank generated 1.5%-1.6% ROAs and 14%-20% ROEs in its first five years of
operations; and
d)
P/B multiple for the overall market was at a 36% premium to its 10-year average.
However, the market currently trades at c.3.2X, 6% lower vs. its 10-year average.
IDFC Bank
2.5
Yes Bank
IDFC Bank
25
2.0
20
1.5
15
1.0
10
0.5
(0.5)
Yes Bank
(5)
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
Exhibit 44: we do not expect IDFB to trade at similar valuations during the initial few
years, given that IDFB has an existing legacy book with asset quality issues and the
broader market is trading at much lower levels compared to when Yes Bank was listed
MSCI India vs. Yes Bank trailing P/B
MSCI India Trailing PB
7
6
5
4
3
2
1
0
19
Key risks
1)
Better macro impacting loan growth and asset quality: If the macro situation
recovers faster than expected, IDFB could benefit on multiple accounts: (1) Asset
quality: With IDFB declaring potential problem loans and making extra provisions
of c.Rs26bn, which is c.20% of its net worth, the probability of recovering this
amount will increase. (2) Loan growth: IDFB may see an early pick up in loan
growth amid a better macro backdrop and revival of the capex cycle.
2)
3)
Better strategy on retail business: IDFBs retail franchise could be a critical factor
in developing CASA deposits and retail fee income. We estimate that a 100bps
increase in CASA deposits could drive up NIMs by 17bps. Hence, a better strategy
on retail could lead to better NIMs and fee income on higher cross-selling ratio etc.
4)
Higher P/B valuations: We believe: (1) the markets expectation of robust growth
momentum led by diversified loan book; (2) likely better asset quality trends given
clean-up of legacy book; (3) opening of FII legroom; and (4) index inclusion are
potential reasons that could drive valuations higher than we foresee. However, we
do not expect such high valuations to be sustainable given our muted view on the
macro and micro strategy.
20
Appendix
Exhibit 45: IDFC Bank summary financials
Summary Financials
FY17E
FY18E
All data in Rsbn unless otherwise specified
P&L
NII
Non Interest Income
Fee
Other
Total Income
Opex
Employee
Other
PPOP
Provisions
PBT
PAT
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
16.1
14.4
4.0
10.4
30.4
15.3
6.9
8.4
15.1
0.9
14.2
9.4
19.5
16.3
4.8
11.5
35.7
16.9
7.9
9.0
18.9
1.5
17.4
11.5
26.9
19.8
6.9
12.9
46.6
20.7
9.3
11.4
26.0
2.4
23.6
15.6
35.0
23.5
10.3
13.2
58.4
24.3
11.5
12.8
34.1
4.0
30.1
19.9
44.9
31.7
18.2
13.5
76.6
28.3
12.6
15.7
48.2
7.4
40.9
27.0
56.6
43.3
29.5
13.8
99.9
35.0
15.2
19.9
64.9
10.0
54.9
36.2
72.7
52.3
38.2
14.1
125.1
43.6
18.7
24.9
81.5
12.4
69.1
45.6
92.0
63.9
49.4
14.5
155.9
54.9
22.1
32.8
101.0
15.4
85.6
56.5
EPS (Rs/Share)
2.8
3.4
4.6
5.9
8.0
10.7
13.4
16.7
Balance Sheet
Loans
Infra
Non-Infra
Investments
SLR
Other Assets
Total Assets
563
456
107
322
150
82
968
667
487
179
313
151
85
1,065
819
529
290
334
172
91
1,244
1,015
577
439
419
239
105
1,540
1,271
638
634
572
345
119
1,962
1,586
695
891
743
440
141
2,470
1,974
789
1,185
997
599
164
3,135
2,452
912
1,540
1,234
730
193
3,879
Deposit
CASA
Borrowings
Other Liabilities
Total Liabilities
Shareholders Equity
23
2
767
34
824
144
188
23
690
34
913
152
314
47
732
34
1,080
164
543
90
783
34
1,361
180
882
137
845
34
1,762
200
1,210
206
998
34
2,242
228
1,631
304
1,197
44
2,872
263
2,082
438
1,437
55
3,573
306
42.3
3,392
44.9
3,392
48.4
3,392
52.9
3,392
59.0
3,392
67.2
3,392
77.5
3,392
90.3
3,392
Asset Quality
GNPL
GNPL Ratio (%)
Net NPL
Net NPL Ratio (%)
Total Stress Loans
Stress Loan Ratio (%)
25
4.4
22
3.9
88
15.6
43
6.4
41
6.2
97
14.6
49
5.9
47
5.8
93
11.4
49
4.8
47
4.6
84
8.3
53
4.1
47
3.7
88
6.9
60
3.7
49
3.1
95
6.0
72
3.6
55
2.8
107
5.4
84
3.4
59
2.4
119
4.9
Key Ratios
NIM (%)
Cost-Income (%)
Credit Cost (%)
CASA (% of Liabilities)
Leverage (X)
ROA (%)
ROE (%)
1.79
50.3
0.17
0.2
6.7
1.04
6.7
1.92
47.2
0.23
2.5
7.0
1.13
7.7
2.33
44.3
0.29
4.3
7.6
1.35
9.8
2.51
41.6
0.40
6.6
8.6
1.43
11.6
2.56
37.0
0.58
7.7
9.8
1.54
14.2
2.55
35.1
0.63
9.2
10.8
1.63
16.9
2.60
34.8
0.63
10.6
11.9
1.63
18.6
2.62
35.2
0.63
12.3
12.7
1.61
19.9
BVPS (Rs/Share)
Share Count (mn)
21
Exhibit 46: Reference for year of operation of selected banks that we use in our case study
ICBK
AXBK
YESBK
IDFB
Yr1
FY03
FY96
FY05
FY17
Yr4
FY06
FY99
FY08
FY20
Yr6
FY08
FY01
FY10
FY22
Yr8
FY10
FY03
FY12
FY24
Special Disclosure
One of the analysts in the coverage team is a beneficial owner of an immaterial stake of
certain bonds issued by IDFC Bank.
22
Disclosure Appendix
Reg AC
We, Rahul Jain, Tabassum Inamdar, CFA and Mayank Bukrediwala, hereby certify that all of the views expressed in this report accurately reflect our
personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be,
directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and
market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
of several methodologies to determine the stocks percentile ranking within the region's coverage universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.
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GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list
includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Rahul Jain: Asia Pacific Financials. Tabassum Inamdar, CFA: Asia Pacific Financials.
Asia Pacific Financials: AIA Group, AMMB Holdings, Axis Bank, Bajaj Finance, Bajaj Finserv, Bangkok Bank, Bangkok Bank (Foreign), Bank Central
Asia, Bank Danamon, Bank Mandiri, Bank Negara Indonesia, Bank of Baroda, Bank of East Asia, Bank Rakyat Indonesia, Bank Tabungan Negara, Bank
Tabungan Pensiunan Nasional, BDO Unibank, BNK Financial Group, BOC Hong Kong (Holdings), Cathay Financial, Chailease Holdings, Chang Hwa
Commercial Bank, China Development Financial, CIMB Group Holdings, CTBC Financial Holdings, Dah Sing Banking Group, Dah Sing Financial
Holdings, DBS Group Holdings, DGB Financial Group, E.Sun Financial Holding, Federal Bank, First Financial Holdings, Fubon Financial Holdings,
Hana Financial Group, Hang Seng Bank, HDFC Bank, Hong Leong Bank, Housing Development Finance Corp., HSBC Holdings, ICICI Bank, IDFC Bank
Ltd, IDFC Ltd., IndusInd Bank, Industrial Bank of Korea, Kasikornbank, Kasikornbank (Foreign), KB Financial Group, Kotak Mahindra Bank, Krung Thai
Bank, Krung Thai Bank (Foreign), LIC Housing Finance, Mahindra & Mahindra Financial Svcs., Malayan Banking Bhd, Mega Financial Holdings,
Metropolitan Bank and Trust Co, Oversea-Chinese Banking Corp., Public Bank Bhd, Punjab National Bank, RHB Capital, Shin Kong Financial Holdings,
Shinhan Financial Group, Shriram Transport Finance, Siam Commercial Bank, Siam Commercial Bank (Foreign), SinoPac Holdings, Standard
Chartered Bank, State Bank of India, Taishin Financial Holdings, TMB Bank Public Co., TMB Bank Public Co. (Foreign), United Overseas Bank, Woori
Bank, Yes Bank, Yuanta FHC.
Buy
Hold
Sell
Buy
Hold
Sell
Global
32%
53%
15%
63%
57%
52%
As of October 1, 2015, Goldman Sachs Global Investment Research had investment ratings on 3,221 equity securities. Goldman Sachs assigns stocks
as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell
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market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
23
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