IDFC Bank: A long way to go

NPAs double, but proportion of stressed assets stable

The IDFC Bank stock fell six per cent on Wednesday, as the bank reported a 32 per cent sequential drop in net profit to Rs 165 crore for the March quarter. Significant slippages were ‘other income’ and asset quality. Also, compared to a healthy double-digit growth in net interest income (NII, or interest earned minus interest expended) posted by most private banks so far in the March quarter, IDFC Bank’s inched up a mere eight per cent sequentially.

‘Other income’ fell 37 per cent to Rs 138 crore quarter-on-quarter, as treasury gains more than halved. Cost-to-income ratio also came in at 53 per cent, against 36 per cent in the December quarter.

Analysts at Kotak Institutional Research say the trend in expenses may be volatile in the initial quarters, given the higher cost-to-income ratio already forecast by the management.

The larger pain came from higher gross non-performing assets (NPA). Amounts recognised as gross NPAs at Rs 3,058 crore in the March quarter, were almost twice as that much recognised in the December quarter. Consequently, the gross NPA ratio at 6.16 per cent in the March quarter rose 300 basis points (bps) sequentially.

The good part is added NPAs in the March quarter are from the earmarked pool of potential bad assets and have been provided for. Thus, with combined NPAs and restructured assets remaining stable at 5.3 per cent of loans, analysts are not worried.

The silver lining was the exponential growth in deposit base (Rs 8,219 crore in the March quarter versus Rs 1,640 crore in the December quarter) aided by expansion into new markets. Likewise, six per cent sequential loan growth in the March quarter and the marginal increase in net interest margin to 2.1 per cent versus two per cent in the December quarter, are positives.

While a Bloomberg poll indicates that 11 of 12 analysts recommend buying the stock, with a target price of Rs 66.57 (33 per cent upside), the journey will be bumpy. An analyst from a domestic brokerage says IDFC Bank is a long-term call and one should not expect returns in the short term.

“Costs will remain high for the next two years as the bank expands,” the analyst said.

Nomura, which has a neutral view on the stock, says low return on equity and loan book growth and high execution challenges remain concerns.