Low non-interest income pulls IDFC net down by 14%

The decline in non-interest income was 60% to Rs 134 crore, due to a fall in growth of fixed income, loan related fees and principal gains

Infrastructure Development & Finance Company (IDFC) has reported a 14 per cent drop in net profit to Rs 482 crore in the financial year’s first quarter, ended June, compared with  Rs 557 crore during the same period last year. The reason was a sharp drop in non-interest income and an increase in provisioning. However, the bottom line was better than the consensus Bloomberg expectation of Rs 445 crore.

IDFC reported a contraction in the loan book as it prepares to convert itself into a bank. Loans fell seven per cent over a year to Rs 53,848 crore, much more than analyst expectations of a two per cent fall. In sync with loan growth, consolidated net interest income (NII) remained flat at Rs 682 crore over the June 2013 quarter. NII from both loans and treasury contracted in the quarter.

The decline in non-interest income was 60 per cent to Rs 134 crore, due to a fall in growth of fixed income, loan related fees and principal gains. Asset management fees and investment bank/broking income grew six per cent and 28 per cent to Rs 98 crore and Rs 17 crore, respectively, providing some support to non-interest income.

However, a 3.5 times surge in total provisioning to Rs 204 crore, coupled with muted revenue growth, led to a 14 per cent fall in net profit to Rs 482 crore.

Interestingly, provisioning fell on a sequential basis, indicating some stabilising of asset quality trends. A large part of IDFC's restructured assets are in the energy sector. Restructured loans formed 5.3 per cent of gross loans, up from 4.5 per cent in the March quarter. Gross non-performing assets (NPAs) and net NPAs remained flattish sequentially, at 0.6 per cent and 0.4 per cent of loans, respectively.

Analysts expect restructured assets to increase and be higher than FY14 levels. Asset quality is also expected to worsen, with gross NPA and net NPA ratios seen inching up to 1.2 per cent and 0.6 per cent in FY15, given the continued weakness in the infrastructure sector.

Net interest margin remained stable at four per cent (4.1 per cent a year before) as the cost/income ratio declined to 13.2 per cent (14.7 per cent a year before). The capital adequacy was 23.9 per cent, with tier-I capital at 21.6 per cent.

The Reserve Bank's recent move to exempt banks from  cash reserve ratio and statutory liquidity ratio rules for funds raised by long-term infrastructure bonds is seen as a positive for IDFC. “This move has a disproportionate positive impact on IDFC’s expected teething pains of converting into a bank. Steady-state bank returns on assets and return on equity (RoE) is likely to be 1.7 per cent and 21.8 per cent in our indicative calculation and the lowest RoE the bank will ever see is indicated at 14.7 per cent. Even more significantly, there is zero regulatory cost to pursuing loan growth post-bank conversion,” says Santanu Chakrabarti, financials analyst at ICICI Securities.