IDFC: Jump in treasury gains to prevent earnings downgrades

Management expects slower loan growth and rise in non-performing loans in coming quarters

The Reserve Bank of India's liquidity tightening measures might have taken the wind out of lenders such as IDFC that are heavily dependent on wholesale funds, but substantial treasury gains in the June quarter will prevent any earnings downgrades for the full year. Thanks to falling interest rates, the company's income from fixed income securities shot up to Rs 139 crore from Rs 12 crore in the corresponding quarter last year. Analysts say the company's treasury income has beaten the Street's estimates by over 50 per cent. Despite the challenges facing the firm in terms of growth, its loan book has grown to Rs 57,600 at the end of June, up 13 per cent, year-on-year, and two per cent on a quarter-on-quarter basis.

While growth and profitability is not showing signs of stress, the road ahead does not look rosy. A steadily deteriorating investment climate and the sudden squeeze in liquidity will choke IDFC's loan growth in the current financial year. Vikram Limaye, managing director and CEO of IDFC, believes the company's loan growth will be in the region of 5-10 per cent in FY14. The firm has already been dealing with slowing growth in the infrastructure space as projects have dried up, but now with the squeeze on liquidity, things may worsen. Given the dearth of new projects in the infrastructure space, IDFC will have to grow its loan book by lending to top-rated companies. Given that it is a pre-election year, even that might be difficult as most companies are not willing to borrow in a volatile interest rate and policy environment.

Growth over the next few quarters will come at the expense of margins, believes Limaye. In the next few quarters, capital will follow quality, and this will obviously have an impact on margins. IDFC's incremental lending will happen at spreads lower than the current weighted average of 2.4 per cent. However, this will not have an immediate impact on the spreads. Analysts believe the company will choose to restrict growth, as it has done in the past, rather than risk profitability by chasing sub-standard assets.

A protracted slowdown will also have an impact on IDFC's asset quality, too. The company's net non-performing assets currently stand at 0.2 per cent of loan dues.

Limaye believes this is not sustainable as some loans will have to be restructured and moratorium on principal payment be given in the power sector. Power sector loans account for 39 per cent of IDFC's loan book and, given the stress in the sector, the firm is bound to face some heat in the coming quarters.