 "IDFC-IDFC Bank demerger: Fireworks missing")
The sentiments around the stock continues to be mixed, given the company’s earnings for the June quarter missed analyst estimates, primarily due to near-doubling of gross non-performing assets to 1.52 per cent from 0.64 per cent a year earlier. The return on assets fell from 2.37 per cent to 1.05 per cent.
The quarter also saw the company provisioning Rs 2,500 crore, primarily towards coal and gas-based assets, in addition to Rs 2,000 crore towards other stressed loans. IDFC also restructured 8.4 per cent of its loan portfolio (80 per cent accounted for by energy and power sector loans).
This augurs well for IDFC Bank, as from October 1, it will commence operations with a leaner and well-provided loan book. Another factor that could work to the bank’s advantage is IDFC’s core fee income has been among the lowest in the private banking space. The core fee market share of IDFC stands at 0.1 per cent, while for peers such as ICICI Bank, HDFC Bank and Axis Bank, it is 8-10 per cent of the total income. With the commencement of full-fledged banking operations, IDFC’s revenues from the core fee segment are likely to get a fillip, analysts say.
Post-listing, IDFC Bank will be among the few private banks with the lowest levels of foreign equity holding (23 per cent, against the sector limit of 49 per cent), which gives room to foreign institutional investors to expand their holding.
The flip side is it is likely to take a while for the banking operations to scale up to a reasonable level. As it will be in an investment and business development phase, return ratios are likely to be benign, which is partly being reflected in the management’s commentary. The management estimates its return on assets at one per cent in its early years of operations (for the June quarter, it was down 132 basis points at 1.05 per cent, compared to the previous quarter). Lower estimates might be on account of high operating costs attributable to setting up of technology, branches and staff. But as the bank grows, net interest margins and return ratios could rise.
The views of analysts on the demerger of IDFC Bank are mixed. In a report, Goldman Sachs downgraded the IDFC stock to ‘sell’, citing a slower-than-expected recovery in the infrastructure sector and weak operating metrics for the banking segment. Projecting a 14 per cent downside, the brokerage firm lowered its target price by 36 per cent (Rs 115). On the other hand, Morgan Stanley, despite reducing its target price (from Rs 200 to Rs 175), continues to remain optimistic on the stock. The firm expects operating efficiencies to improve after its early years and the return on assets to touch 1.7 per cent by FY22.
On Tuesday, the stock fell 2.5 per cent to close at Rs 136.55, which could largely be attributed to the fall of about two per cent in the broader markets.
While the jury is out, the counter seems to have seen its trough (52-week low of Rs 123 on September 4), given the stock is down significantly from its high of about Rs 180 in March this year.
