IDFC bank’s Q4FY16 PAT of Rs 1.6 billion was significantly below our expectation driven by misses on all counts. NII was weaker than our expectation due to the impact of interest reversals. Opex was higher than our expectation with the cost/income ratio inching up to +50%. The non-interest income miss was due to lower treasury gains. This led to a 33% q-o-q decline in PPOP. The increase in GNPAs to 6.2% from 3.1% was largely due to movement from its stressed book, which is well provisioned, and hence credit costs should remain negligible for the bank.
NII missed vs. our expectation, leading to disappointing NIM, which improved just 10bps q-o-q vs our expectation of +20bps. While IDFC Bank had moved to cash accounting basis in Q3FY16, the inch up in GNPAs would have led to some interest reversals from earlier paying accounts.
We have highlighted that while the bank has moved to a cash accounting basis and hence will have limited NIM impact on recognition of stressed assets, PSL (priority sector loan) related negative carry will keep NIM under pressure. Our TP of Rs 55 (2% upside) is based on 1.35x FY21F book discounted back to FY18F. Low ROEs, low book growth and high execution challenges remain our concerns and hence we maintain our ‘neutral’ stance.