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IDFC: Earnings Hit by Higher Provisioning - Views on News from Equitymaster
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IDFC: Earnings Hit by Higher Provisioning
Feb 17, 2017

IDFC declared the third quarter results of financial year 2016-2017 (3QFY17). The income from operations grew by 30% YoY, whereas profit was down 42.5% during the quarter. Here is our analysis of the results.

Performance summary
  • For 3QFY17, net interest income (NII) was up by 30% YoY. During 9mFY17, NII was up by 18.8% YoY.
  • Other income in 3QFY17 fell by 94.6%. For 9mFY17, other income declined by 30.4% YoY.
  • The operating expenses jumped up by 66.6% YoY during the quarter. The cost-to-income ratio shot up to 47% in 3QFY17 from 39% in 3QFY16. For 9mFY17, the cost-to-income ratio increased to 51% as compared to 33% in the year-ago period. As per the NBFC, the cost-to-income ratio is expected to remain above 40% due to growth in banking business before the scale benefits start trickling in.
  • The asset quality of the bank has slipped during the quarter on account of a one-off deterioration in non-legacy corporate loan book arising from fraud that is being contested in courts. Also there was a slippage in the legacy stressed loan 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 2.6% in 3QFY16.
  • Provisions surged 44 folds in 3QFY17 on a sharp slide in asset quality. This coupled with a 95% fall in the other income earned has pulled down earnings by 42.5% YoY during the quarter. But for 9mFY17, the provisions were down 90% YoY. The NBFC posted a profit of Rs 5.6 billion for 9mFY17 compared to a loss of Rs 10.6 billion booked in the corresponding year-ago period. As per IDFC, its bad loan provisions are adequate at the portfolio level but resolution of stressed assets in the energy sector is still taking time.
  • The capital adequacy ratio of IDFC Bank stands at a robust 18.4% at the end of December 2016 (Tier-1 ratio of 18%). The NBFC's Infrastructure Debt Fund (IDF) business remains well capitalized with a capital adequacy ratio of 31%.

    Consolidated financial performance snapshot
    Rs (m) 3QFY16 3QFY17 Change 9mFY16 9mFY17 Change
    Income from operations 21,695 28,245 30.2% 68,565 78,813 14.9%
    Interest expended 14,116 17,709 25.4% 43,311 48,820 12.7%
    Net Interest Income 7,579 10,537 39.0% 25,253 29,993 18.8%
    Net interest margin
    Other Income 110 6 -94.6% 123 86 -30.4%
    Operating expense 2,998 4,995 66.6% 8,489 15,217 79.3%
    Provisions and contingencies 59 2,590 4267.1% 3,246 319 -90.2%
    Exceptional items 0 0 26,387
    Profit before tax 4,632 2,958 -36.1% -12,746 14,543
    Tax 1,541 812 -47.3% -4,121 3,939
    Effective tax rate 33.3% 27.5% 32.3% 27.1%
    Share of profit from associates -145 -177 -432 -492
    Minority interest 1,184 955 -19.3% 1,596 4,469 180.0%
    Profit after tax/ (loss) 1,762 1,013 -42.5% -10,653 5,643
    Net profit margin (%) 8.1% 3.6% -15.5% 7.2%
    No. of shares (m) 1,596
    Book value per share (Rs)* 67.0
    P/BV (x) 0.8
    * (Book value as on 31st Dec 2016)
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