IDFC Bank’s (IDFCB) Q1FY19 earnings exceeded estimates on lower credit cost, while revenue was in line. While erstwhile recognised stress pool remains broadly steady, IDFCB expects additional Rs 6 billion provisions on it (taking coverage to 90%). Up-fronting this in FY19 (versus our estimate amortised over two years), we prune FY19E earnings by >25% while FY20 EPS gets upgraded. Other metrics were broadly on expected lines: a) infra book run-down continued even as retail growth extended momentum; and b) investments towards building its franchise sustained, in turn keeping opex high. We believe continued investment in franchise and integration challenges, are likely to lead to sub-optimal RoE in near term transition phase. Hence, we moderate our TP to Rs 54 (Rs 65 earlier). However, over medium to long term, merger of Capital First (CapF) will be value accretive and synergistic. Hence, maintain ’buy’.
GNPLs fell to Rs 177 billion (down 11% year-on-year/flat quarter-on-quarter), while overall stress pool was steady at Rs 48.3 billion, IDFCB increased coverage to 77% (76% in FY18). While bank does not expect further addition to the stress pool, it expects further provisions of Rs 6 billion in Q2FY19. IDFCB continues to build its franchise — branches at 170, with customers crossing the three million mark. This also reflected in sustained CASA (11.3% of deposit). Impressively, retail asset continued to gain momentum even as bank continued to diversify mix within the retail segment in both rural and non-rural markets. The retail segment was up 1.7x year-on-year (rural up 103% year-on-year and urban up 245% year-on-year) at Rs 93 billion, bank expects the growth momentum to sustain and close FY19 at Rs 150 billion. As the bank has been investing in building processes, systems and infrastructure, merger with CapF will help build its retail franchise bolstered by latter’s execution capability.
We estimate merged entity’s RoE to be lower during the integration phase. However, a diversified product suite, aggressive management with proven execution track record and adequate capital will drive up RoE. Hence, we perceive the merger to be long-term value accretive. We maintain ‘BUY/SP’. At CMP, the stock trades at 0.8x FY20 P/ABV.