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IDFC Bank: Bad Loan Provisions Chip Away Profits - Views on News from Equitymaster
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IDFC Bank: Bad Loan Provisions Chip Away Profits
Jan 31, 2017

IDFC Bank declared its results for the third quarter of the financial year 2016-17 (3QFY17). The bank posted a 25.8% YoY growth in interest income and 21% fall in profit during the quarter. Since the bank commenced its banking operations on 1st October 2015, the year-on-year performance for 9mFY17 is not strictly comparable. Here's our analysis of the results.

Performance summary
  • Interest Income grew by 25.8% YoY in 3QFY17 on a 9% YoY growth in net advances and a 700% jump in net credit investments.
  • Due to a slower rise in interest expense, net interest income grew by 34.8% on a YoY basis to Rs 5.2 bn in 3QFY17.
  • NIMs (net interest margin) expanded slightly by 0.1% YoY to 2.1% in 3QFY16. For 9mFY17, the NIMs stood at 2.2%.
  • Backed by a 401% jump in fee and commission, non-interest income grew by 54% YoY in 3QFY17.
  • The cost-to-income ratio rose to 44.4% in 3QFY17 as compared to 35.6% in the 3QFY16 due to one-off effect of employee bonus. For 9mFY17, the cost-to-income ratio stood at 39.6% mainly on account of bonus provision in all the three quarters. As per the company, this ratio should normalise, going ahead.
  • The asset quality has declined during the quarter on account of a one-off deterioration in non-legacy corporate loan book due to fraud that is being contested in courts. Also there was a slippage in the legacy stressed book during the quarter mainly due to timing issue. As per IDFC Bank, this is an aberration and the volatility should ease out in future. Resultantly, the gross bad loan ratio increased to 7% in 3QFY17 from 6% in the preceding quarter and 3.1% in 3QFY16. The net bad loans ratio stood at 2.6% at the end of December 2016 quarter. The bank is confident that the 50% provisioning on the legacy stressed asset book remains sufficient.
  • On account of slippages and marked-to-market loss on bond investments, provisioning surged 1,785% YOY during the quarter. Therefore, net profit fell by 21% YoY during the quarter.
  • Capital adequacy ratio stood at 18.4% of which Tier I capital adequacy ratio stood at 17.9% at the end of 3QFY17.

    Financial snapshot
    Rs (m) 3QFY16 3QFY17 Change 9mFY16 9mFY17 Change
    Interest income 17,891 22,509 25.8% 18,333 63,093 244.2%
    Interest expense 14,028 17,301 23.3% 14,028 47,941 241.8%
    Net Interest Income 3,863 5,208 34.8% 4,305 15,152 252.0%
    Net interest margin (%) 2.00% 2.10% 2.3% 2.2%
    Other Income 2,179 3,350 53.7% 2,655 9,580 260.8%
    Other Expense 2,153 3,798 76.4% 2,159 9,800 353.9%
    Provisions and contingencies 123 2318 1785.4% 123 2,777 2159.2%
    Profit before tax 3,766 2,443 -35.1% 4,678 12,155 159.8%
    Tax 1,345 530 -60.6% 1,660 3,717 123.9%
    Profit after tax/ (loss) 2,422 1,913 -21.0% 3,018 8,438 179.6%
    Net profit margin (%) 13.5% 8.5% 16.5% 13.4%
    No. of shares (m) 3,396
    Book value per share (Rs)* 42.7
    P/BV (x) 1.41

    * (Book value as on 31st Dec 2016)

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