IDFC First Bank ( IDFBAN)

CMP: | 45 Target: | 54 (20%) Target Period: 12 Months BUY

months August 19, 2019 Retailisation ‘FIRST’ –new mantra at IDFC First Bank IDFC First Bank has walked a long path of transformation starting from

infrastructure finance NBFC to universal bank. To strengthen retail franchise, IDFC Bank & Capital First Ltd engaged into a merger to form IDFC First Bank Particulars

in December 2018. The merged entity is the eighth largest private bank with Amount funded asset at ~| 112558 crore (retail: wholesale – 40:60) as of March 2019 Market Capitalisation | 21210 crore

and wide customer base of ~70 lakh. It is being headed by V Vaidyanathan, Networth | 17545 crore who has a proven track record at Capital First. IDFC First Bank has a pan 52 week H/L 57/33 India presence with 279 branches, 199 ATMs, 520 BCs & 102 CFL. Equity capital | 4782 crore Face value | 10

Initiating Coverage Initiating Focus on retail asset & liabilities remains NIM, RoA accretive DII Holding (%) 3.98 FII Holding (%) 13.75 IDFC First Bank, in its new avatar, envisages to become a retail centric bank and shift focus from corporate to granular retail loans, build strong & Key Highlights sustainable retail liability franchise. Accordingly, a rise in high yield retail  New journey under strong loans, low cost liabilities is seen staying margin accretive with margin leadership and multiple fundamental improving from ~3% in FY19 to ~4.5% in FY23E. Gross advances may grow levers at ~10% CAGR in FY19-23E to | 162880 crore, with faster retail traction at  Core strength in SME finance to 27.2% CAGR to | 106850 crore; raising its proportion from 35% in Q3FY19 retain. Benefit of low cost deposit to to 65.6% in FY23E. Such a rise in high yield retail asset is seen improving support return ratios yields by ~140 bps to 13.1% in FY23E. On liabilities side, differential rates  Retailisation of advances and liabilities i.e. CASA to remain margin

on deposits & aggressive customer acquisition would drive robust CASA accretive growth increasing ~4x in FY19-23E to | 39318 crore, doubling CASA ratio to ~24.5%. This is seen bringing CoF down ~80 bps in FY19-23E.  Building retail franchise to result in higher opex in the initial period

Margins to drive RoA; building retail franchise to shore up opex Price movement

High yielding retail advances growth, falling CoF is seen driving return ratios 14,000 100 12,000 improvement. However, aggressive branch expansion plan (279 currently to 80 ~800-900 in FY23E) would keep CI ratio elevated at ~69% in FY19-21E, 10,000 8,000 60 before moderating to ~57% in FY23E. Operating leverage would kick in,

6,000 40 leading to gradual improvement in RoA at ~1%, RoE at ~11% in FY23E. 4,000 20 Research Equity Retail 2,000

Building liability franchise; retain focus on retail asset aid valuation 0 0 –

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Mar-18 May-17 IDFC First Bank, under new leadership, aims to retain its ability to grow retail May-19 asset base at healthy pace with an eye on quality. Building of sustainable IDFC First Bk (R.H.S) Nifty (L.H.S)

liability franchise would act as catalyst to support valuation. Higher capital Source: ICICI Direct Research, Company adequacy rules out any near term dilution. Recent recognition of stress Research Analyst coupled with adequate provisions gives comfort. With anticipated NIM at 4%, we compare IDFC First Bank with banks delivering superior margin Kajal Gandhi Securities ICICI (HDFC, IndusInd & Kotak Bank). IDFC First Bank’s, sustainable RoE being [email protected]

relatively lower at 10% vs. 16-17% of aforesaid banks, a 50% discount to Vishal Narnolia their valuation of ~3x P/ABV is justified for IDFC First Bank. Consequently, [email protected] we assign a target multiple of ~1.5x on FY21E ABV and arrive at target price of | 54 per share. We initiate coverage on the stock with BUY rating. Harsh Shah [email protected]

Key Financial Summary

Key Financials FY19E FY20E FY21E FY22E FY23E Net profit (| crore) (1,641) -246.9 711.7 1388.2 2362.1 EPS (|) (3.4) -0.5 1.5 2.9 4.9 P/E (x) NM -85.9 29.8 15.3 9.0 BV (|) 38.1 37.6 38.9 41.5 46.0 P/BV (x) 1.2 1.2 1.1 1.1 1.0 ABV (|) 35.7 34.4 35.8 37.9 41.9 P/ABV (x) 1.2 1.3 1.2 1.2 1.1 RoA (%) (1.1) -0.1 0.4 0.7 1.0 RoE (%) (9.8) -1.4 3.9 7.2 11.3 s

Source: ICICI Direct Research, Company Initiating Coverage | IDFC First Bank ICICI Direct Research

Company Background IDFC First Bank has a long record of being in the financial business dating back to 1997. The venture began as IDFC Ltd, a non-banking financial company (NBFC) with focus towards financing infrastructure projects in Shareholding Pattern India. Later, IDFC Ltd received universal banking license in 2015 and started Shareholder Holding (%) its journey venturing into non-infrastructure lending as well as providing Promoter 40.0 retail products on liabilities side – saving and current accounts. Although the Institutional Investor 16.2 bank focused on growing its non-infra book and retail liability franchise at Others 43.9 faster pace, legacy problem in terms of asset quality and higher opex related Source: BSE to expansion kept impacting earnings and return ratios. With a strategy to strengthen retail business, erstwhile IDFC Bank got into a merger with Capital First Ltd, an NBFC with major proportion of retail advances. IDFC Ltd started lending operations in 1997 and increased its book size to ~| 53000 crore in FY15. Exposure of the book primarily was to infrastructure projects in sectors ranging from telecom, roads, power etc. Later, IDFC Ltd applied for universal license and was granted one in 2015, to set up a scheduled commercial bank in the private sector. IDFC Ltd transferred its lending business (including all assets, liabilities, accumulated profits) to erstwhile IDFC Bank. Thus, inheriting infrastructure lending business from parent (IDFC Ltd), erstwhile IDFC Bank started its journey as a corporate lender to become a pan India universal bank. Erstwhile IDFC Bank, since inception focused on building retail franchise utilising both aspects of business development – engaging with customers using digital mode and branch expansion. The bank adopted the strategy of garnering business from retail & semi urban region by opening up majority branches in rural areas. However, the bank has to face twin challenges - building of retail franchise led to higher opex, which kept profitability under pressure; elevated provision with respect to legacy infra book which led to Top Shareholder higher provisions; especially in H1FY19. Top Shareholders (%) IDFC FHCL 40.0 In order to strengthen banking capabilities within retail sector and to operate Cloverdell Investment 9.9 as a larger universal bank, IDFC Bank & Capital First Ltd engaged into a President of India 5.5 merger to form IDFC First Bank. While the merger was announced on Government Of Singapore 2.6 January 13, 2018, the merged entity came into existence in December 2018, Aditya Birla Sun Life 1.8 post receiving of all the approvals. The merged entity is the eighth largest Caladium Investment 1.4 private bank with funded book of ~ | 112558 crore as on June 30, 2019. As V Vaidyanathan 1.1 of June 30, 2019, the bank has a pan India presence with ~279 branches, Platinum Int Fund 1.0 199 ATMs, 166 business correspondent & 102 CFL branches. Customer base Source: Bloomberg seen to increase from currently ~30 lakhs pertaining to erstwhile IDFC Bank to ~70 lakhs for the merged entity. The new entity formed by way of merger is to be headed by V Vaidyanathan. All-round performance with consistency in terms of advances growth (58% CAGR in FY14-18) as well as asset quality demonstrated in Capital First induces confidence.

Exhibit 1: IDFC Bank’s performance over the years Exhibit 2: Capital First performance over the years H2FY16 FY17 FY18 H1FY19 FY14 FY15 FY16 FY17 FY18 H1FY19 NII (| crore) 808 2076 1859 912 NII (| crore) 406 637 985 1612 2388 1143 PAT (| crore) 407 1020 859 -167 PAT (| crore) 53 114 166 239 327 206 Loan Asset (| crore) 53903 70248 73055 75337 AUM (| crore) 9679 11975 16041 19824 26997 32622 AUM growth % 30.3% 4.0% 3.1% AUM growth % 23.7% 34.0% 23.6% 36.2% 20.8% NIMs % 2.0 2.1 1.7 1.9 NIMs % 5.4 6.6 7.6 9.0 9.6 8.0 GNPA % 6.2 3.0 3.3 1.6 GNPA % 0.5 0.7 1.7 1.7 1.6 1.9 RoA % 1.1 1.0 0.7 -0.3 RoA % 0.6 1.1 1.3 1.5 1.5 1.6 RoE % 6.0 7.2 5.7 -2.2 RoE % 4.9 8.3 10.1 11.9 13.3 14.9

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Erstwhile IDFC Bank advance book as of FY18 was at | 70935 crore. The bank primarily operated in two segments – infrastructure and corporate,

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contributing ~71% of the book. Capital First, with focus on high yield retail loans, was engaged in SME, two-wheeler & consumer financing with loan book at | 26997 crore as of FY18. Post the merger, the funded book was at | 104660 crore in December 2018 (| 112558 crore as of Q1FY20) with share of retail pegged at ~35% and wholesale at ~54%. Under the new management, while the merged entity is to retain its strength in retail lending (proven in erstwhile NBFC), focus will be on building a retail liability franchise to boost earnings and return ratios ahead. The management has indicated that, going ahead, the bank focus will be on retail book majorly on home loans, auto loans (including two- wheelers) and consumer durable financing. We expect funded book to grow at CAGR of ~10% to ~ | 161336 crore by FY23E.

Exhibit 3: Transition from NBFC to bank and than merger…. (| Crore) FY17 FY18 Q1FY19 Q2FY19 Q3FY19 FY19 Gross Loan book 66567 70932 75191 75331 104660 110400 Deposit 40208 48198 54057 48356 61915 70479 CASA 2094 5710 6083 6426 6421 9114 PPP 1754 1403 104 19 308 850 Provisions 283 376 23 601 213 1546 PAT 1020 859 192 (370) (1,538) (1,944) GNPA 1542 1779 1774 895 1671 2136 NNPA 576 891 881 321 796 1107 C-I ratio (%) 42.1 54.1 65.7 96.7 78.8 79.5 PCR (%) 61.0 76.0 77.0 80.0 72.9 55.9 Yield on advances (%) 9.7 8.9 9.1 9.4 11.5 11.7 Avg Cost of funds (%) 8.2 7.6 7.4 7.6 8.0 7.9 NIM (%) 2.1 1.7 1.9 1.9 3.6 3.7 Source: Company, ICICI Direct Research

Exhibit 4: Advances break-up - IDFC Bank (Q2FY19) Exhibit 5: Advance break-up - Capital First (Q2FY19)

8% 11% 6% 10% 13% 40%

17% 37% 34% 10% 14%

SME/LAP Consumer Two Wheeler Retail Corporate Infrastructure PSL Buyout SR Business Loans Others Wholesale

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Going ahead, the management has penned down a roadmap for the bank for the next five to six years.

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Exhibit 6: Strategy for merged entity and our view Management target Our view Asset Strategy To grow total funded asset to ~| 180000 crore Expect gross advances to grow at ~10% CAGR to | 162880 crore To grow retail asset book to over | 100000 crore Focus on retail and SME to lead to faster growth at 27.2% CAGR to | 106850 crore in Diversify advance book across sectors with focus on retail and to FY23E. Accordingly, proportion of retail segment is to increase from 37% to ~65.6% in take share of retail to ~70% from current proportion of ~35% FY23E Merged entity does not envisage funding infrastructure projects. Consequently, Run down infrastructure loans as they mature proportion of book is to run down from 19.4% to ~ 2.5% in FY23E To grow non-infra corporate book to | 50000 crore Proportion of corporate segment to remain broadly similar

Liability Strategy Set up 600-700 branches in next five years (current branch count Aggressive branch addition to lead to higher CI ratio – 206) To reach CASA ratio of ~30% in five to six years with target of 40- Differential rates to lead to CASA ratio moving from 10.4% in FY19 to 24.5% in FY23E, 50% ahead though competition to keep actual away from target Reduce dependence on borrowings through diversification of This is seen lowering CoF by ~80 bps to 7.1% liability mix Increase share of retail TD & CASA from ~10.5% currently to Higher retail deposit to provide stickiness but competition to remain intense ~50%

Profitability Expansion in NIM to ~5.5% on back of low cost of fund & higher Yield accretion, led by rise in retail advances and moderation in CoF favourable for NIM yield retail asset expansion to ~4.5%. However, remains short of target of 5.5% Bring down cost-to-income ratio to ~50-55% from 79% for Aggressive branch expansion to keep CI ratio eleveted initially, followed by effiency to combined entity lead to decline in CI ratio to ~56-57% in FY23E

Improvement in NIM & cost to income ratio to enhance return Margin expansion led by retailisation to benefit return ratios. However, delivery to remain ratio with RoA target of ~1.4-1.6% & RoE target of ~13-15% short of target as efficiency to take longer to kick in due to intense competition

Source: Company, ICICI Direct Research

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Investment Rationale

Retailisation to drive operational performance Erstwhile IDFC Bank has transitioned from an infrastructure financier NBFC to a bank with an asset mix focusing on retail and corporate segment. Post the merger, IDFC First Bank envisages becoming a retail centric bank. On the asset side, the bank manoeuvres to shift focus from corporate loans to granular retail loans. The bank also endeavors to build a strong and sustainable retail liability franchise, which could enable better earnings visibility. Following are the strategies to shore up operational performance;

 Change in loan book mix increasing proportion of towards retail

 Retailisation of liabilities and lower dependence on borrowings  Increase in yields and rationalisation in funding cost to drive margin

Transition to retail advances; shedding of erstwhile infra book – accretive for yields Erstwhile IDFC Bank advances were dominated by wholesale sector (Wholesale - 72%, Retail - 13%, others - 15%) as of September 2018. The bank has been engaged in wholesale lending via two sub-segments – infrastructure finance and corporate loans. Going ahead, the management plans to run down its infrastructure book (refer Exhibit 10). Within corporate segment, the bank is to focus towards higher yielding mid-size corporate. On the retail side, Capital First had a loan book with high yielding segment including SME/ LAP, two-wheeler and consumer durables. Erstwhile IDFC Bank had exposure towards rural finance (MFI), SME/MSME and home loans. Going ahead, the merged bank is seen to retain its product suite comprising of a wide range of high yield advances including rural financing, personal loans, auto finance and affordable home loans. For the merged entity, overall advances comprise ~54% wholesale lending followed by ~35% retail book. The new management envisions itself as a retail lender and intends to grow the retail book aggressively compared to wholesale book. Accordingly, the retail book is seen growing at a faster pace at 27.2% CAGR in FY19-23E, thereby increasing proportion of retail book to ~65.6% in FY23E. The wholesale book, on the other hand, is expected to remain stable in absolute terms and witness a decline in proportion from ~48.6% in FY19E to ~29% in FY23E. Corporate book growth is expected at 7.3% CAGR while infrastructure book is to rundown with maturity.

Exhibit 7: Transition from NBFC to bank…. IDFC Ltd^ IDFC Bank IDFC First | crore FY15 Q2FY16 H2FY16 FY17 FY18 Q2FY19 Q3FY19 Loan Book 75573 54293 45699 70248 70932 75331 104660 Wholesale 75573 54293 45605 49477 50249 51190 56808 Corporates - - - 18949 26059 29218 34098 Infrastructure 75573 54293 45605 30528 24190 21972 22710 Energy 28016 23059 18435 16395 13617 12877 10753 Transport 17737 13162 10403 8997 7268 7128 7806 Telecom 18279 8133 7917 5388 1864 1548 1084 Other 11541 9939 8850 - 1441 419 3067 Retail - - 93.6 2598 7966 11070 36236 Rural - - - - 3264 4295 4704 SME - - - - 2085 3114 13574 Consumer - - - - 2617 3661 17957 Others* - - - 18173 12717 13071 11616

Source: Company, ICICI Direct Research, ^ Amounts are approval, *others include PSL certificate & SR ** Loan book consist of advances + credit substitutes

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The management plans to grow total funded loan book to | 180,000 crore augmenting its retail asset book from ~| 40812 crore in FY19 to over | 100,000 crore in the next five to six years thereby reshuffling the asset mix in favour of retail to ~70% from ~37% currently.

Exhibit 8: Change in asset mix with retail rising from ~37% … Exhibit 9: ….to ~65% in FY23E

6% 14% 29%

49%

37% 65%

Wholesale Retail Others Wholesale Retail Others

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

In terms of yields, retail segment is expected to witness decline in yields ahead to the tune of ~100 bps from ~16.6% in Q3FY19 to ~15.6% in FY23E (~16.4% in Q4FY19). This decline is attributable to intense competition in the retail space, which is seen impacting pricing power coupled with higher budgeted growth in retail loans, which will necessitate disbursement in low yielding secured retail loans including home loans. Though yields in retail segment are seen moderating led by broadening of product profile, proposed rejig in loan book replacing corporate book into retail lending to remain yield accretive. Accordingly, overall yield for IDFC First Bank is expected to improve ~140 bps in FY19-23E to 13.1% (11.7% in Q4FY19). This is led by a shift towards high yielding retail book.

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Exhibit 10: Improvement seen in YoA led by increasing proportion of retail business Loan Book (| crore) Q3FY19 FY19 FY20E FY21E FY22E FY23E Retail 36236 40812 54280 68935 86169 106850 Wholesale 56809 53648 45708 45238 45527 46751 Infrastructure 22710 21459 16094 12071 8048 4025 Corporate 34098 32189 29614 33167 37479 42726 PSL buyout 8575 12924 12020 10818 9519 8092 Stressed asset 3040 3016 2564 2102 1650 1188 Total 104660 110400 114571 127093 142866 162880

% Growth YoY Retail 33.0 27.0 25.0 24.0 Wholesale (14.8) (1.0) 0.6 2.7 Infrastructure (25.0) (25.0) (33.3) (50.0) Corporate (8.0) 12.0 13.0 14.0 PSL buyout (7.0) (10.0) (12.0) (15.0) Stressed asset (15.0) (18.0) (21.5) (28.0) Total growth (%) 3.8 10.9 12.4 14.0

% Mix Retail 34.6 37.0 47.4 54.2 60.3 65.6 Wholesale 54.3 48.6 39.9 35.6 31.9 28.7 Infrastructure 21.7 19.4 14.0 9.5 5.6 2.5 Corporate 32.6 29.2 25.8 26.1 26.2 26.2 PSL buyout 8.2 11.7 10.5 8.5 6.7 5.0 Stressed asset 2.9 2.7 2.2 1.7 1.2 0.7 Total 100 100 100 100 100 100

Yields (%)** Retail 16.6 16.4 16.2 16.0 15.8 15.6 Wholesale 9.5 9.5 9.5 9.5 9.5 9.5 Infrastructure 9.6 9 9 9 9 9 Corporate 9.5 9.9 9.9 9.9 9.9 9.9 PSL buyout 6.4 6.5 6.5 6.5 6.5 6.5 Stressed asset 5.7 5.6 5.6 5.6 5.6 5.6 Total (%) 11.5 11.7 11.9 12.5 12.8 13.1

Source: Company, ICICI Direct Research ** Loan book consist of advances + credit substitutes. Reported yield as of Q4FY19

Focus on retail deposit accretion; reduction in dependence on borrowings IDFC First Bank, the merged entity, has one of the weakest liability profile, among peer, led by greater reliance on borrowings & wholesale deposits. Huge scope for CASA improvement This is attributable to dependence of Capital First Ltd on borrowings and large chunk of borrowing portfolio (including infrastructure bonds) held by 35 erstwhile IDFC bank. 30 25 For the merged bank, ~89% of the liability constitutes of wholesale funding. 20 Therefore, the bank aims to embark on aggressive strategy to shore its retail 15 liability franchise (CASA and retail term deposit) and thus lower its reliance 10 on borrowing. Accordingly, the management has adopted strategy of 5 offering higher rates on saving deposits as well as aggressive branch 0 expansion. In order to build sustainable deposit base, the bank is offering highest interest rates on saving and term deposits (refer exhibit below). For CASA (%) customer acquisition, the bank is targeting ~70 lakh customers (~40-45 lakh Source: Company, ICICI Direct Research live customers) of CFL in initial stage offering wide range of banking product and services on the liability side. In addition, CFL’s tie up with ~10,000 dealership (~60% converted to IDFC clients) offer clientele for CA deposits.

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Exhibit 11: Aggressive SA interest rate compared to peers SA Deposit IDFC RBL Yes Kotak Indusind Ujjivan Equitas AUSFB Rates (%) First bank Bank Bank Bank SFB SFB Upto | 1 lac 6.00 5.50 5.00 5.00 4.00 5.00 4.00 5.50 | 1 lac- | 10 lac 6.50-7.00 6.00 6.00 6.00 4.00 6.50 4.00-5.50 6.00 | 10 lac- | 1 Crs 7.00 6.50 6.00 6.00 5.00 6.75 5.50-6.75 6.50 Above | 1 Crs 7.00 7.00 6.30 5.50 6.00 6.75 6.8 7.00 Source: Company, ICICI Direct Research

Given importance of reach and age of customer touch points or branches, the bank has set out a roadmap of a massive branch expansion (compared to calibrated addition by previous management) with addition of ~600 branches in next five to six years taking the total branch count from 242 in FY19 to ~800-900 ahead. Majority of these newly branches are to be in urban & semi-urban areas to garner higher customer density per branch as well as higher deposits per customer. The management has aimed at CASA ratio to reach ~30% over the next five to six years and further aims to touch ~50% in the long run. Further, the bank is targeting contribution of CASA & retail term deposit to touch ~50% of total liabilities. Led by focus on customer acquisition and offering differential interest rates on deposits, we expect CASA per branch to improve from ~| 38 crore in FY19 to ~ | 52 crore in FY23E, an increase of ~37%. Further, aggressive branch expansion is seen leading to robust growth in low cost deposits increasing ~4x in FY19-23E. Accordingly, CASA ratio is seen improving from 12.9% in FY19 to ~24.5% in FY23E. Replacing legacy borrowings (~| 26000 crore maturating in the next two years) with retail deposits, though partially, is seen increasing the proportion of deposits from 50% in FY19 to ~74% in FY23E, while contribution of borrowing is seen falling from ~50% in FY19 to ~ 26% in FY23E. The proposed roadmap for retailisation of liabilities ought to reduce dependence on borrowing and, thus, enable the bank to lower its cost of fund. Accordingly, we factor in ~80 bps reduction in cost of funds over the next few years.

Exhibit 12: CASA as percentage of liabilities to rise from ~6% Exhibit 13: ….to ~18% in FY23E in FY19

26%

44% 50% 56%

18%

6% Borrowing CASA Term Deposit Borrowing CASA Term Deposit Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Post receiving banking license, erstwhile IDFC Bank being a corporate lender envisioned becoming a retail bank. Accordingly, the bank strategised to aggressively target rural area using digital wave to build a strong retail liability franchise. However, the strategy misfired as the bank was unable to build a robust base of low cost deposit, attributable to slower growth in CASA per branch and calibrated branch expansion. The bank CASA per branch, which was at | 28.3 crore as of FY17 improved to | 38 crore as of FY19. However, larger peers such as Kotak Bank, Yes Bank & RBL Bank performed better even on higher base. Kotak Bank’s CASA per branch

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improved from | 50.6 crore in FY17 to | 74.6 crore in FY19. Yes Bank’s CASA per branch improved from | 51.9 crore in FY17 to | 66.5 crore in FY19.

Exhibit 14: CASA ratio improves in FY17-9MFY19…. Exhibit 15: …remains laggard in CASA accretion per branch CASA (%) FY2017 FY2018 9MFY2019 CASA/Branch (|) FY2017 FY2018 9MFY2019 IDFC Bank 5.2 11.8 10.4 IDFC Bank 28.3 38.1 31.2 Bandhan 29.4 34.3 41.4 Bandhan 8.1 12.4 14.7 Yes 36.3 36.5 33.3 Yes 51.9 66.5 66.5 RBL bank 22.0 24.3 24.6 RBL bank 31.8 40.3 44.5 Kotak 44.0 50.8 50.7 Kotak 50.6 70.4 74.6 Ujjivan 3.0 3.7 10.4 Ujjivan 0.0 0.3 1.1 Equitas SFB 9.6 15.4 30.5 Equitas SFB 1.0 4.2 5.1 AU SFB - 32.0 24.0 AU SFB - 5.7 7.5

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 16: IDFC First Bank CASA progression expected to follow Yes Bank’s liabilities trajectory | in Crore FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 9MFY19 FY19 FY20E FY21E FY22E FY23E FY24E Yes Bank

Deposits 45939 49152 66956 74192 91176 111720 142874 200738 222758 227610 CASA 4751 7392 12688 16345 21079 31343 51870 73176 74117 75200 CASA % 10% 15% 19% 22% 23% 28% 36% 36% 33% 33% Branches 214 356 430 560 630 860 1000 1100 1115 1120 CASA/Branch 22.2 20.8 29.5 29.2 33.5 36.4 51.9 66.5 66.5 67.1 IDFC First Bank

Deposit 61915 70478 86503 106026 130008 160478 203807 CASA 6420 9113 14007 20107 28116 39318 44837 CASA% 10% 13% 16% 19% 22% 25% 22% Branches 206 242 417 567 667 742 862 CASA/ Branch 31.2 37.7 33.6 35.5 42.2 53.0 52.0

Source: Company, ICICI Direct Research In FY11, Yes Bank had a branch network of 214 with CASA per branch at | 22 crore. Led by continuous focus on CASA mobilisation and differential interest rates offered on saving deposits, CASA per branch increased by ~63% in FY11-16 to | 36 crore. Absolute CASA growth remained robust at 45.8% CAGR in FY11-16, attributable to aggressive branch expansion and improvement in CASA per branch. We believe IDFC First Bank’s current We believe IDFC First Bank’s current situation has situation has many similarities when compared with Yes Bank in FY11. With many similarities when compared with Yes Bank in IDFC First Bank’s strategy of aggressive branch expansion coupled with FY11 differential rates offering, we forecast IDFC First Bank’s branch network would grow by ~600 branches taking total count to ~806 in FY23E from 206 currently. CASA per branch is seen to grow from ~| 38 crore in FY19 to ~| 52 crore in the next five years. Accordingly, absolute low cost deposit is seen growing at a robust pace of ~44% CAGR in FY19-23E to | 38741 crore.

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Exhibit 17: Robust CASA mobilisation led by aggressive branch expansion | crore Q3FY19 FY19 FY20E FY21E FY22E FY23E Total Deposit 61915 70478 86503 106026 130008 160478 CA 2022 2364 3545 4937 6878 9585 SA 4398 6750 10462 15170 21237 29732 Term Deposit & CD 55495 61365 72495 85919 101893 121160 Bonds/ Borrowing 68615 69983 68946 65783 60925 55302 Total 130530 140461 155449 171809 190933 215780

Funding Mix (%) Total Deposit 47.4 50.2 55.6 61.7 68.1 74.4 CA 1.5 1.7 2.3 2.9 3.6 4.4 SA 3.4 4.8 6.7 8.8 11.1 13.8 Term Deposit & CD 42.5 43.7 46.6 50.0 53.4 56.1 Bonds/ Borrowing 52.6 49.8 44.4 38.3 31.9 25.6 Total (%) 100 100 100 100 100 100

Cost of Funds (%) Total Deposit 7.4 7.5 7.3 7.2 7.1 6.9 CA 0 0 0 0 0 0 SA 5.4 6.4 6.4 6.4 6.3 6.2 Term Deposit & CD 7.53 7.6 7.8 7.8 7.8 7.7 Bonds/ Borrowing 8.5 8.3 8.2 8.0 7.8 7.7 Total (%) 8.0 7.9 7.7 7.5 7.3 7.1

Source: Company, ICICI Direct Research Given proposed retailisation of asset & liabilities, margins are expected to head north with yield on retail focused sector such as SME, Consumer durable, two-wheeler, rural & housing are poised to inch up. On the liability front with maturity of legacy bonds and increasing focus on retail TD & CASA will help the bank to reduce its cost of fund leading to expansion in margins. We expect cost of funds to decline ~80 bps from 7.9% in FY19 to ~7.1% in FY23E.

Building retail franchise to shore up opex; leverage to kick in IDFC First Bank has been aiming to build a strong and sustainable retail franchise for business growth ahead. In order to build sustainable deposit base, the bank plans to adopt aggressive expansion and frontload branch addition. Accordingly, ~600 branches are to be added in the next five to six years taking total branch count from 242 in FY19 to ~800-900 ahead. Such resource addition is seen increasing operational expense in the initial two fiscals (refer exhibit below) with CI ratio being elevated at ~69% in FY19- 21E. With accretion of business and transition of newly opened branches towards break even mark, CI ratio is expected to moderate gradually to ~56- 57% in FY23E (management guidance – 50-55%).

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Exhibit 18: Management plans aggressive branch expansion 800 742 667 700 567 600 500 417 400 300 242 200 150 100 0 FY18 FY19 FY20E FY21E FY22E FY23E

Number of branches

Source: Company, ICICI Direct Research Exhibit 19: CI ratio to surge initially; moderate as operating leverage entails 80 75.0 75 72.5 68.8 70 63.6 (%) 65

60 56.8

55

50 FY19 FY20E FY21E FY22E FY23E

C-I Ratio (%)

Source: Company, ICICI Direct Research

Asset quality seen steady; credit cost at ~1-1.3% in FY19-23E Erstwhile IDFC Bank has faced asset quality issues pertaining to legacy infrastructure book. However, the bank has progressively undertaken Credit cost to remain ~ 1% in FY20-23E provisions after receiving banking license. With majority of infrastructure 2.5 2.36 stress either provided or sold to ARC and adequate provision, the worst in 1.91 corporate/ infrastructure book seems to behind. 2.0 The bank had inherited ~| 44000 crore book from IDFC Ltd with stress loan 1.5 1.30 of ~| 12000 crore accounting for ~27% of the inherited book. Over the 1.21 1.19 years, the bank has been able to reduce the stress on that book with effective sale to ARC & providing adequately. Out of | 12000 crore bank has sold loans 1.0 worth | 6800 crore to ARC, | 2600 crore became performing while on remaining | 2800 crore 80% has been provided. The total provisions since 0.5 inception has been | 6500 crore on total infrastructure stress of | 9400 crore. FY19 FY20E FY21E FY22E FY23E Led by higher provision, GNPA ratio witnessed a sharp moderation from Credit Cost(%) 6.2% in FY16 to 1.6% in H1FY19. Source: Company, ICICI Direct Research In case of erstwhile Capital First assets, asset quality remained broadly stable backed by exposure to granular retail loans and prudent risk management. GNPA ratio remained in a range of 1.5-2.5%. For the merged entity, GNPA ratio as of FY19 was at ~2.4%, which increased to 2.66% in Stressed asset recognized in Q4FY19 Q1FY20. Apart from NPA, the bank has recognised stressed assets to the | crore Exposure Provision tune of | 3480 crore (excluding ~|1461 crore of exposure), primarily Financial Company 1461 1096 comprising of legacy infra and corporate accounts. HFC Toll project 1006 154 Other Infra 810 570 Total 3277 1820 Source:Source: Company, Company, ICICI ICICI Direct Direct Research Research

ICICI Securities | Retail Research 11 Initiating Coverage | IDFC First Bank ICICI Direct Research

Exhibit 20: Asset quality trend for IDFC First Bank | crore IDFC Ltd IDFC Bank IDFC First FY15 Q2FY16 H2FY16 FY17 FY18 Q2FY19 Q3FY19 FY19 GNPA (| crore) 358 1467 3058 1542 1779 895 1671 2136 GNPA (%) 0.7 3.2 6.2 3.0 3.3 1.6 1.97 2.4 Stressed asset* 2105 2225 2155 3480 PCR (%) 70 81.5 72.9 55.9 Security Receipt 1984 1712 1672 1650 Provision on SR (%) 9.879032 11.4486 11.72249 11.87879

*Stressed asset do not include exposure of | 1461 crore, classified into investments, wherein loans have been recognized

Source: Company, ICICI Direct Research

Exhibit 21: Sectoral breakup of GNPA (Q1FY20) | crore GNPA Provision Transport 819 471 Real Estate 291 75 Energy & Power 115 18 Trade 64 48 Textile 39 39 Rubber, Plastics and Products 25 11 Others including Retail Segments 1065 540 Total 2,419 1,203 Source: Company, ICICI Direct Research

Going ahead, the management plans to run down the erstwhile infra book. Therefore, risk of bulky slippages is ruled out. Lower corporate slippages and granular retail loans is seen leading to paring down of GNPA ratio to ~2.2% in FY23E. However, given the intense competition in the retail segment and the bank’s plan to increase proportion of retail book, credit cost is seen at ~110 – 130 bps in FY21-23E. However, credit cost for FY20E is expected to remain elevated at 190 bps on the back of exposure towards stressed companies recognised in the watch list.

Exhibit 22: GNPA to witness gradual decline ahead….. Exhibit 23: ….steady PCR to lead to improving NNPA 3.0 1.5 1.37 2.7 1.3 1.24 2.6 1.20 1.23 2.5 2.4 1.1 1.01 2.2 (%) 2.0 2.0 (%) 0.9 0.7 1.5 0.5

1.0 0.3 FY19 FY20E FY21E FY22E FY23E FY19 FY20E FY21E FY22E FY23E

GNPA (%) NNPA (%)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Retailisation to drive RoA; below target due to higher opex We expect return ratios to improve steadily with RoA seen at ~1% and RoE to ~11% by FY23E led by (1) improvement in yield led by tilt towards high yielding retail loans, (2) higher CASA accretion thereby lowering CoF, (3) better growth in fee based income (4) broadly steady quality restricting concerns on credit cost, and (5) adequate capital to fund future growth ruling out any dilution in near term. Though we expect growth in high yielding retail advances to drive improvement in return ratios with support from declining CoF. However, higher opex related to building retail franchise is

ICICI Securities | Retail Research 12 Initiating Coverage | IDFC First Bank ICICI Direct Research

seen acting as a deterrent. Therefore, we expect a substantial improvement in return ratios with the bank poised to deliver RoA of ~1% and RoE of ~11% in FY23E. However, this was behind the management’s target of 1.4- 1.5% and 13-15% in the next five years.

Exhibit 24: RoA to improve steadily Exhibit 25: RoE to improve to ~11% in FY23E 1.50 15.0 11.3 1.01 1.00 0.66 10.0 7.2 0.37 3.9 0.50 5.0

(%) 0.00 (%) 0.0 ROA (%) ROE (%) -0.50 -0.14 -5.0 -1.4

-1.00 -10.0 -9.8 -1.12 -1.50 -15.0

FY19 FY20E FY21E FY22E FY23E FY19 FY20E FY21E FY22E FY23E

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 26: NII trend Exhibit 27: PAT trend 12000 3000 2362 9933 2500 10000 2000 7827 1388 8000 1500 6263 (| crore) 1000 712 6000 5342 4287 (| crore)500 4000 0 -500 PAT (| crore) 2000 -247 -1000 0 -1500 NII (| crore) -2000 -1641

FY19 FY20E FY21E FY22E FY23E FY19 FY20E FY21E FY22E FY23E

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 13 Initiating Coverage | IDFC First Bank ICICI Direct Research

Exhibit 28: RoA tree Exhibit 29: Comparative RoA for FY21E (%) FY19 FY20E FY21E FY22E FY23E FY21E (%) IDFCB RBL DCB FED YES EQUITAS UJJIVAN Interest Earned 8.8 9.6 9.7 10.1 10.4 Interest Earned 9.7 9.3 9.3 8.1 7.8 14.8 15.9 Interest Expended 6.1 6.5 6.4 6.3 6.2 Interest Expended 6.4 5.6 5.8 5.0 4.8 6.9 7.2 Net Interest Income 2.7 3.1 3.3 3.7 4.2 Net Interest Income 3.3 3.7 3.5 3.1 3.0 7.9 8.8 Non Interest Income 0.7 0.8 0.9 0.9 1.0 Non Interest Income 0.9 1.8 1.0 0.7 1.4 1.7 1.8 Net Income 3.4 3.8 4.1 4.7 5.3 Net Income 4.1 5.5 4.5 3.8 4.3 9.6 10.5 Staff cost 0.6 0.8 0.9 0.9 0.9 Staff cost 0.9 1.0 1.2 0.9 0.7 3.0 3.7 Other expense 1.9 2.0 2.0 2.1 2.1 Other expense 2.0 1.8 1.5 1.0 1.0 1.9 2.7 Opex 2.5 2.9 2.8 3.0 3.0 Opex 2.8 2.8 2.7 1.9 1.7 4.9 6.4 Operating profit 0.9 1.0 1.3 1.7 2.3 Operating profit 1.3 2.7 1.8 2.0 2.6 4.0 3.8 Provisions 1.2 1.2 0.8 0.8 0.8 Provisions 0.8 0.6 0.5 0.5 0.7 0.9 1.0 PBT -0.3 -0.3 0.5 0.9 1.4 PBT 0.5 2.1 1.3 1.5 1.9 3.1 2.7 Taxes -0.9 -0.1 0.2 0.3 0.4 Taxes 0.2 0.7 0.4 0.5 0.6 1.1 0.9 RoA -1.0 -0.1 0.4 0.7 1.0 RoA 0.4 1.4 1.0 1.0 1.3 2.0 1.8 Leverage 9.5 9.7 10.4 10.9 11.2 Leverage 10.4 11.3 14.9 12.6 14.5 7.7 8.4 RoE -9.8 -1.4 3.9 7.2 11.3 RoE 3.9 15.8 14.9 12.6 18.8 15.4 15.1

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 14 Initiating Coverage | IDFC First Bank ICICI Direct Research

Financials Erstwhile IDFC Bank delivered subdued returns on the back of higher opex and provision related to legacy infra book. Post merger, the bank plans to focus on retail & MSME segment to drive growth. Accordingly, the merged bank plans to pedal aggressive branch expansion, which will keep CI ratio elevated. As of FY19, CASA is at ~13% of overall deposits. We expect advances (net) to grow at ~10% CAGR in FY19E-23E to | 161336 crore while deposit is expected to grow robustly at 23% CAGR in FY19-23E to | 160478 crore. Improvement in margins to ~4.5% by FY23E and stable asset quality is seen to boost return ratios. Accordingly, RoA & RoE is seen at ~1% and ~11.1%, respectively, by FY23E.

Exhibit 30: Advances to grow at ~11% CAGR in FY19-23E led by retail segment Merger of IDFC Bank and Capital First has led to 180000 161,336 creation of goodwill of ~| 2400 crore. Pursuant to 160000 141,178 decision to amortise goodwill, the bank had an 140000 125,363 exceptional charge in Q3FY19 resulting in losses in 113,075 120000 109,369 the quarter. This transaction has led to creation of 100000 deferred tax liability (DTL); utilisation of the same (| crore) 80000 could reduce tax burden ahead. However, we have 60000 not factored it in our estimates 40000 20000 0 FY19 FY20E FY21E FY22E FY23E

Advances (| crore) Deposit (| crore)

Source: Company, ICICI Direct Research

Exhibit 31: Efficiency improvement to lead to PAT growth Exhibit 32: Increase in retail advances to shore up margins

9933 5.0 4.5 10500 4.1 7827 4.0 3.7 8500 3.3 3.4 6263 6500 5342 3.0 4287 4500 (%) (| crore) 2362 2.0 2500 1388 712 1.0 500 -1500 FY19E FY20E FY21E FY22E FY23E 0.0 -1641 -247 FY19E FY20E FY21E FY22E FY23E -3500 NII (| crore) PAT (| crore) NIMs (%)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 33: Stable asset quality…. Exhibit 34: ….to support gradual improvement in return ratio 4000 3.0 11.3 10.5 3500 2.7 2.6 2.4 2.5 7.2 3000 2.2 2.0 5.5 3.9 2500 2.0 2000 1.5 (%) 0.4 0.7 1.0 3441 3522 (%) (0.1) (| crore) (| 1500 3042 3230 0.5 1.0 1000 2137 FY19E FY20E FY21E FY22E FY23E 0.5 500 (4.5) (1.1) (1.4) 0 0.0 FY19E FY20E FY21E FY22E FY23E (9.5)

GNPA (| crore) GNPA Ratio (%) ROA (%) ROE (%)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 15 Initiating Coverage | IDFC First Bank ICICI Direct Research

Risk and concerns

Continuity of new management team and skilled personnel IDFC First Bank will led by the new MD & CEO, Mr Vaidyanathan. Therefore, strong management and its execution skills remain the key investment theme. In Capital First (NBFC), the new MD has successfully demonstrated his expertise in establishing & developing a retail business with a strong track record. The company’s performance is highly dependent on the continued services of its management team. In particular, this includes the efforts of its Managing Director & CEO –V Vaidyanathan along with other experienced members of its Board of Directors & senior management. The company’s turnaround is highly dependent on continued service of top managerial teams. Any loss of a key personnel or inability to replace key personnel may restrict its ability to grow and manage the overall running of operations.

Building strong liability franchise remains key challenge IDFC First Bank has one of the weakest liability profile with greater reliance on borrowings & wholesale deposits. Nearly 89% of the liability constitutes of wholesale borrowing. This leads to ALM mismatch as well keeps cost of funds higher. Given competition from larger banks & small finance banks is getting intense, company faces challenge of garnering deposits to shore up its liabilities franchise. In addition, the bank has to shore up deposit base to replace slew of infra bonds slated to mature in next two to four years. Cost associated with retailisation poses risk on earnings The new management is adopting a strategy to focus on retailisation of both sides of business i.e. assets as well as liabilities. Accordingly, the bank needs to build higher number of customer touch points (branches and ATM). This will lead to frontloading of operating expenses and thereby increase CI ratio. However, incurring of high expenditure to improve its presence does not guarantees robust accretion of deposits. Failure on garnering healthy traction in liability franchise could impact earnings trajectory and thereby our estimates.

Asset quality risk of erstwhile IDFC bank infra book The new management plans to run down its erstwhile infrastructure book over the next five to six years. However, one of the major risk lies in any incremental pain arising of infra book. Though IDFC First Bank has adequate provision related to infra book, any undue surprise out of outstanding book of ~| 22700 crore could impact profitability and return ratios going ahead.

Exposure to high yield book of Capital First entails default risk Being a retail focused lender, erstwhile Capital First had concentration towards SME/LAP at ~40%. Any slowdown in the economy would largely impact the SME/LAP as the sector is closely linked to the economy. This can derail the growth trajectory being factored in our assumptions.

ICICI Securities | Retail Research 16 Initiating Coverage | IDFC First Bank ICICI Direct Research

Valuation IDFC First Bank will be led by the new MD & CEO, Mr Vaidyanathan. Therefore, strong management and its execution skills remain the key investment theme for IDFC First Bank. In Capital First (NBFC), the new MD has successfully demonstrated his expertise in establishing & developing a retail business with a strong track record. With the new management’s thrust on improving CASA driven by aggressive branch expansion and focusing on retail loans, we expect return ratios to improve substantially from hereon. IDFC First Bank is poised to clock ~10% CAGR in advances, with traction in retail segment at ~26% and corporate remaining flattish shedding infra Comparative valuation book currently to ~| 21459 crore. With improving return ratios, RoA is seen Bank RoE (%) NIM (%)P/ABV (FY21E) increasing to 0.4% by FY21E and 1% by FY23E and RoE to 4% by FY21E HDFC Bank 16.8 4.5 3.2 and 11% by FY23E. IndusInd Bank 19.0 4.2 2.3 Recent recognition to stress pool largely from corporate book led to Kotak Bank 13.5 4.2 4.1 marginal deterioration in asset quality. However, more than required Average 16.4 4.3 3.2 provisions on it gives us higher comfort on asset quality & future trajectory Source: ICICI Direct Research of credit cost. In the banking domain, NIM and RoE remains important parameter defining fundamental strength and valuation of a bank. With NIM anticipated at 4% ahead, we compare IDFC First Bank with universal bank delivering superior margin including HDFC Bank, IndusInd Bank and Kotak Mahindra Bank (refer side table). IDFC First Bank’s, sustainable RoE being relatively lower at 10% vs 16-17% of aforesaid banks, a 50% discount to their valuation of ~3x P/ABV is justified for IDFC First Bank. Consequently, we assign a target multiple of ~1.5x on FY21E ABV and arrive at target price of | 54 per share. We initiate coverage with BUY rating from a 12-18 months perspective.

Exhibit 35: Valuation Comparison P/E (x) P/B (x) ROA (%) ROE (%) FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E IDFC First Bank (12.6) (83.9) 29.1 1.1 1.2 1.1 (1.1) -0.1 0.4 (9.8) -1.4 3.9 DCB 18.5 15.5 12.1 2.1 1.9 1.6 1.0 1.0 1.1 12.1 12.9 14.4 Yes Bank 11.4 12.6 9.3 0.6 0.6 0.6 0.4 0.4 0.5 5.6 5.5 6.6 RBL 18.0 16.1 11.4 2.1 1.7 1.5 1.2 1.1 1.3 12.2 12.0 14.4

Source: Company, ICICI Direct Research

Exhibit 36: Key Parameters (| crore) IDFC First Yes Bank DCB RBL AU SFB Equitas Ujjivan Advances (Q1FY20) 112558 236300 24044 56837 23102 12355 11783 Deposit (Q1FY20) 66226 225902 28789 60811 19849 8670 7956 CASA (%) (Q1FY20) 15.1 30.2 24.5 25.8 19.0 16.3 10.4 Net Profit (Q1FY20) (617) 114 81 267 190 62 94 P/E (x) (FY21E) 29.1 9.3 12.1 11.4 26.4 7.9 9.2 P/BV (x) (FY21E) 1.1 0.6 1.6 1.5 4.1 1.1 1.3 RoA (%) (Q1FY20) (1.5) 0.1 0.9 1.3 1.4 1.5 2.7 RoE (%) (Q1FY20) NA 1.6 11.2 13.8 14.7 9.8 20.2 CD ratio (%) (Q1FY20) 170.0 104.6 83.5 93.5 116.4 142.5 148.1 NIMs (%) (Q1FY20) 3.01 2.9 3.7 4.3 5.0 8.6 10.5

Source: Company, ICICI Direct Research

Exhibit 37: Valuation comparison- SFB P/E (x) P/B (x) ROA (%) ROE (%) FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E IDFC First Bank (12.6) (83.9) 29.1 1.1 1.2 1.1 (1.1) (0.1) 0.4 (9.8) (1.4) 3.9 AU SFB 52.0 35.2 26.4 6.3 5.1 4.1 1.5 1.5 1.5 14.0 15.6 16.8 Equitas SFB 17.1 11.5 7.9 1.5 1.3 1.1 1.5 1.6 1.7 9.0 12.4 15.3 Ujjivan SFB 17.5 12.9 9.2 1.8 1.6 1.3 1.7 1.9 1.9 10.7 13.4 16.0

Source: Company, ICICI Direct Research We expect NII to grow at ~21% CAGR in FY19E-21E to | 6263 crore, while PAT is expected to turn profitable at | 712 crore in FY21E from loss of | 247

ICICI Securities | Retail Research 17 Initiating Coverage | IDFC First Bank ICICI Direct Research

crore in FY20E. Change in asset mix towards retail will lead to improvement in yield on advances. At the same time focus on tapping CASA & retail term deposit to lower CoF leading to improvement in margins at ~3.7% by FY21E.

ICICI Securities | Retail Research 18 Initiating Coverage | IDFC First Bank ICICI Direct Research

Financial Summary

Exhibit 38: Profit & Loss Statement (| Crore) FY18 FY19E FY20E FY21E FY22E FY23E Interest Earned 9,098.5 13,998 16,706 18,550 21,138 24,429 Interest Expended 7,126.0 9,710 11,364 12,288 13,312 14,496 Net Interest Income 1,972.5 4,287 5,342 6,263 7,827 9,933 Growth (%) - 117 25 17 25 27 Non Interest Income 1,119.9 1,092 1,340 1,632 1,990 2,431 Fees and advisory 433.3 542 683 860 1,084 1,365 Treasury Income 394.0 236 296 355 426 511 Other income 292.5 314 362 417 481 555 Net Income 3,092.4 5,380 6,682 7,894 9,817 12,364 Employee cost 786.4 945 1,453 1,712 1,857 2,053 Other operating Exp. 1,010.5 2,952 3,556 3,723 4,388 4,971 Operating Income 1,295.5 1,482 1,673 2,459 3,571 5,340 Provisions 160.3 1,904 2,122 1,443 1,588 1,965 PBT 1,135.2 (422) (449) 1,017 1,983 3,374 Exceptional items 2,599.0 - - - - Taxes 179.7 (1,381) (202) 305 595 1,012 Net Profit 955.5 (1,641) (247) 712 1,388 2,362 Growth (%) - (272) (85) (388) 95 70 EPS (|) 2.8 (3.4) (0.5) 1.5 2.9 4.9 Source: Company, ICICI Direct Research

Exhibit 39: Balance Sheet (| Crore) FY18 FY19E FY20E FY21E FY22E FY23E Sources of Funds Capital 3,404 4,782 4,782 4,782 4,782 4,782 Reserves and Surplus 11,870 13,417 13,195 13,835 15,085 17,211 Networth 15,274 18,199 17,977 18,617 19,867 21,992 Deposits 48,039 70,478 86,503 106,026 130,008 160,478 Borrowings 57,287 69,983 68,946 65,783 60,925 55,302 Other Liabilities & Provisions 5,781 8,562 8,764 8,972 9,508 10,086 Total 126,382 167,222 182,189 199,398 220,307 247,859

Application of Funds Fixed Assets 800 899 943 995 1,057 1,130 Investments 60,904 44,582 49,040 55,170 63,445 72,962 Advances 52,165 109,369 113,075 125,363 141,178 161,336 Other Assets 7,636 6,971 13,194 11,343 7,451 4,542 Cash with RBI & call money 4,877 5,401 5,937 6,527 7,176 7,889 Total 126,382 167,222 182,189 199,398 220,307 247,859 Source: Company, ICICI Direct Research

Exhibit 40: Growth Ratios (% growth) FY18 FY19E FY20E FY21E FY22E FY23E Total assets 32.3 9.0 9.4 10.5 12.5 Advances 109.7 3.4 10.9 12.6 14.3 Deposit 46.7 22.7 22.6 22.6 23.4 Total Income 47.7 19.6 11.8 14.6 16.1 Net interest income 117.4 24.6 17.2 25.0 26.9 Operating expenses 116.9 28.5 8.5 14.9 12.5 Operating profit 14.4 12.9 47.0 45.2 49.5 Net profit (271.7) (85.0) (388.3) 95.1 70.2 Net worth 19.1 (1.2) 3.6 6.7 10.7 EPS (222.2) (85) (388) 95 70 Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 19 Initiating Coverage | IDFC First Bank ICICI Direct Research

Exhibit 41: Key ratios FY18 FY19E FY20E FY21E FY22E FY23E Valuation No. of shares (crore) 340.4 478.2 478.2 478.2 478.2 478.2 EPS (|) 2.8 (3.4) (0.5) 1.5 2.9 4.9 DPS (|) 0.8 - (0.0) 0.1 0.2 0.4 BV (|) 44.9 38.1 37.6 38.9 41.5 46.0 ABV (|) 42.3 35.7 34.4 35.8 37.9 41.9 P/E 14.5 (11.9) (78.8) 27.3 14.0 8.2 P/BV 0.9 1.1 1.1 1.0 1.0 0.9 P/ABV 1.0 1.1 1.2 1.1 1.1 1.0 Yields & Margins (%) Net Interest Margins 2.8 3.4 3.7 4.1 4.5 Yield on assets - 9.0 10.6 10.8 11.0 11.1 Avg. cost on funds - 7.9 7.7 7.5 7.3 7.1 Yield on average advances - 10.6 11.9 12.5 12.8 13.1 Avg. Cost of Deposits - 7.5 7.3 7.2 7.1 6.9 Quality and Efficiency (%) Cost to income ratio 58.1 72.5 75.0 68.8 63.6 56.8 Credit/Deposit ratio 108.6 155.2 130.7 118.2 108.6 100.5 GNPA 3.4 2.0 2.7 2.6 2.4 2.2 NNPA 1.7 1.0 1.4 1.2 1.2 1.2 ROE 6.3 (9.8) (1.4) 3.9 7.2 11.3 ROA 0.8 (1.1) (0.1) 0.4 0.7 1.0 RWA/assets 68.0 69.0 70.0 71.0 72.0 RWA/ NW 16.0 14.3 13.3 12.7 12.3 Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 20 Initiating Coverage | IDFC First Bank ICICI Direct Research

RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

ICICI Securities | Retail Research 21 Initiating Coverage | IDFC First Bank ICICI Direct Research

ANALYST CERTIFICATION

We /I, Kajal Gandhi, CA, Vishal Narnolia, MBA and Harsh Shah, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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