IDFC’s earnings continue to be tepid as balance sheet contraction persists while spreads remain under pressure (20bp QoQ decline). Asset quality deteriorated sharply with GNPLs increasing by 81% QoQ however hefty one‐time provisioning of Rs25bn resulted in a decline in net stressed assets. Other income stood stable on YoY basis led by pick‐up in fixed income fees and further 2% stake sale in NSE leaving behind a residual 2% stake now. IDFC has now increased its provisioning to Rs46bn (~10% of total loans) and has identified Rs88bn of assets which can potentially turn stressful. IDFC has spent heavily in its transition to a bank and orderly execution will be critical for stock performance as challenges still remain especially fallout from legacy book and building retail franchise. We maintain BUY with PT of Rs77 for IDFC and value IDFC Bank at Rs68per share. Total revenues decline 4% YoY: Core performance remained weak on muted NII growth as IDFC continued to focus on low‐yielding quality corporate (12M rolling spread declined 20bp QoQ). Other income though remained relatively flat helped by 2% stake sale in NSE and sequential pick‐up in fixed income fees. Profitability was also affected by high opex as IDFC continues to spend on capacity building for transformation to a bank and cost‐income ratio thus remains high at 28% (~18% in Q2FY15). Balance sheet continues to contract; treasury book now accounts for 33% of balance sheet: IDFC’s balance sheet contracted by 3% YoY (12% YoY decline in gross loan portfolio) impacted by high prepayments in telecom sector as the borrower migrated to cheaper money market borrowing. The share of treasury portfolio thus accounts for 33% of IDFC’s balance sheet and we believe that the focus on this should subside now going ahead. Asset quality deteriorated sharply; we value IDFC at Rs77 per share: Asset quality deteriorated sharply with GNPLs increasing by 81% QoQ however hefty one‐time provisioning of Rs25bn resulted in a decline in net stressed assets. IDFC now has provisions amounting to ~10% of total loans on its balance sheet. We maintain BUY with revise PT of Rs77 for IDFC and maintain BUY rating. We further value IDFC Bank at Rs68per share.
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