IDFC: The good old 'new bank' story

IDFC

Detailed report | Sector: Financials

IDFC

BSE Sensex

27,890

S&P CNX

8,430

CMP: INR167

TP: INR232 (+39%)

Upgrade to Buy

The good old ‘new bank’ story

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val(INRm)/Vol ‘000

Free float (%)

A unique business model at play

IDFC IN

1,592.8

188/108

2/14/19

279.2

4.5

1334/8925

100.0

Please refer to our sector report

“Pool of Wealth”

IDFC is well poised to build a unique banking business model, with the least cost to

income ratio. RoE is expected to be healthy at 11-12% in the first full year of operation

and then steadily rise to ~18% in the next four years. Post conversion into a bank, its

balance sheet size is likely to be similar to YES and IIB, and the loan market share is

expected to be just 80bp. In our view, cost optimization (cost to income ratio of 28-

30% v/s sector average of 43%) and focus on “Bharat Banking” would be the key

differentiators for IDFC Bank. We believe significant opportunity exists for IDFC Bank

in the expanding profit pool of private banks (click

here

for our theme report, “Pool of

Wealth”). With the banking business valued at 2x FY17E BV and 20% holding company

discount, we upgrade IDFC to Buy, with SOTP-based TP of INR232.

Highly profitable Infrastructure lending business to be key enabler

In the NBFC setup, IDFC made core PBT (ex capital gains and floating provisions)

of 3.0% average assets over FY08-14. Under the banking setup, we believe the

same business is likely to fetch a higher PBT as cross selling will pick up (higher

fees, CA float, vendor financing etc.) and cost of funds is expected to decline.

Pertinently, lending to Infrastructure segment (project loans) is exempted from

regulatory requirements. With an expected higher share of this business over

the medium term, IDFC Bank’s RoA is likely to be higher than peer private banks

with higher exposure in corporate lending. Highly profitable Infrastructure

lending business will partially compensate for regulatory requirements (CRR, SLR

and PSL – reduced by infrastructure bonds), help set up non-infrastructure

lending piece (to diversify balance sheet mix) and expand its network.

Shareholding pattern (%)

As on

Mar-15 Dec-14 Mar-14

Promoter

0.0

DII

FII

Others

30.0

47.4

22.6

31.1

47.7

21.2

29.4

52.6

18.0

Corporate business to dominate; expect RoA of 1.6%+ by FY18E

The expertise and relationships built in Infrastructure lending will be used to

grow non-infrastructure book (relationships with large corporate houses,

customers in the supply chain of infrastructure developers among others). CA

and fees buildup is likely to be faster due to dominance of corporate business

and the low hanging fruits (getting CMS business, BG and LC business of existing

customers). If executed well, we believe IDFC Bank will be able to create a niche

in rural banking (“Bharat Banking”) over the long period (absence of legacy

issues and use of technology to be key enablers). This business will have a high

yield and with the aid of technology and lower network cost, profitability is

likely to be healthy. Overall SA buildup is likely to take time due to limited brand

recognition in the retail segment and expected cautious approach in growing

brick and mortar setup (higher focus is likely to be on technology).

FII Includes depository receipts

Stock Performance (1-year)

IDFC

Sensex - Rebased

200

175

150

125

100

Transition expected to be smooth

IDFC has aggressively built floating provisions of INR18b and expects the higher

provisions to continue till it transforms into a bank. Company has aggressively

22 April 2015

IDFC

built an investment portfolio of INR250b (as of 9MFY15) v/s expected

requirement of SLR securities of ~INR115b on being a bank. The impact of

negative carry on CRR/ SLR is visible in current earnings. Further, any capital

gains on treasury and strategic investments (not factored in estimates) will be

utilized to account for bank’s setting-up cost and additional provisioning for

certain infrastructure loans. In the first full year of operations, we expect IDFC

Bank to clock an RoE of 11-12% and progressively increase it to ~18%. Our

estimates on non-interest income and operating expenses remain conservative.

Higher leverage to drive higher and sustainable RoE

Under the past monoline setup, with a high ticket size and long gestation loan

mix, rating agencies were uncomfortable beyond a leverage of 6-8x. Also, at the

regulatory level (with Tier I of 12%), peak leverage would have been ~8x

(assuming 100% risk weights and entire Tier I as CET I). Most private banks

operate at 10-12x leverage, which in our view would be followed by IDFC Bank.

On a sustainable basis, we believe that the RoE band (ex trading gains) is likely

to rise by ~500bp (led by increased asset light revenue streams and leverage).

Upgrade to Buy with SOTP-based target price of INR232

Value of the bank being set up is significantly higher (with higher retail deposits

and loans), compared to the volatile and monoline Infrastructure lending setup

of the past. Investors are likely to focus more on the expected improvement in

business and higher and sustainable RoE, healthy Tier I ratio of 24%, strong

management team and corporate governance. Foreign ownership level of ~26%

post listing (significantly higher than most private banks) will give IDFC Bank a

shot in the arm. We estimate the banking business’ net worth to be INR162b by

FY17E and assign a multiple of 2x (private banks’ average multiple). Upgrade to

Buy

with an SOTP-based target price of INR232.

Challenges in transition to a bank



Regulatory compliance (CRR, SLR and PSL) likely to be a drag on RoA (v/s

NBFC model), though the infrastructure bonds will provide relief.

Building the granular Retail and SME business; in the near term, IDFC may

buy portfolios to build this business.

Identifying talent to set up the banking entity.

Scouting for locations to set up branches and technology related challenges.

Exhibit 1: IDFC Valuation - SOTP - FY17E based

IDFC Bank

IDF

Alternative Assets Management

NSE stake

IB and Broking

Mutual Fund Business

Cash on balance sheet (Parent)

Total Value

CMP (INR)

Upside (%)

INR b

288.7

17.4

12.8

10.7

7.6

16.4

14.8

368.4

USD b

5.4

0.3

0.2

0.1

0.3

6.9

INR/sh

182

232

167

Valuation Rationale

2x NW for listed entity, 20% holdco disc

1x Net worth

8% of FY17E AUM

5.8% stake, base price of last deal

1x FY17E NW

3.4% of FY17E AUM

1x Cash

Source: MOSL

22 April 2015

IDFC

Milestones

1997

IDFC formed with

Mr. Deepak Parekh as

founding Chairman

2000

Registered with Sebi as a

merchant banker

2002

Sets

up IDFC Private Equity

as an investment manager

for Private Equity funds

2003

Successfully raised USD200m

for India Development Fund,

first infrastructure focused

private equity fund in India

2005

Raises INR13.7b through

IPO (subscribed 10x)

2006

IDFC enters the capital

markets business by

acquiring 33% stake in SSKI

2008

Enters asset management

by acquiring the AMC

business of Standard

Chartered Bank in India

2009

Company's loan book

crosses INR200b, with more

than 200 infrastructure

projects being funded

2010

Classified as an

Infrastructure Finance

Company (IFC); raises

INR4.8b in the first tranche

of Infrastructure Bonds

issue; Raises capital of

INR26.5b through QIP

2013

Mr. Rajiv Lall appointed as

Chairman; Mr. Parekh to be

on the advisory board of

IDFC

2014

RBI grants Universal

Banking License to IDFC;

Mr. Rajiv Lall to be MD &

CEO of IDFC Bank

2015

Launch of IDFC Bank slated

in October 2015

22 April 2015

IDFC

Banking Opportunity: Exciting model for the decade

USD14t+ of savings pool over the next decade; underpenetrated economy



Indian banking has been riding a strong growth curve, with business CAGR of 18%+

over the last two decades. However, in our view, there is a lot of impetus left, as an

underpenetrated Indian economy and increase in savings will drive the next leg of

growth.

Over the last two decades, Indian Banks have witnessed loan CAGR of 19% and loan-

to-GDP has improved to ~54%. Based on nominal GDP growth assumption of 12% and

multiplier of 1.4x, Indian Banks are poised to deliver a loan CAGR of 17% over the next

10 years and loan-to-GDP should increase to 82% by 2025.

India’s financial landscape presents a huge opportunity for innovators and nimble-

footed players, as demonstrated in the last two decades. We believe NPBs (including

new licensees) will be well poised to further marginalize state-owned banks and

achieve loan CAGR of 20%+ over the next decade.

Indian landscape provides huge scope for asset generation

Despite the moderation in

real GDP growth to an

average of 5%, loans grew

15% CAGR in the recent

years

The last few years have been one of the toughest periods for the Indian economy.

GDP growth has slowed down to ~5%. Even amid such challenging times, the loan

portfolio has expanded at a CAGR of ~15%. We believe this is a temporary phase and

long-term prospects for the Indian economy and Financials are intact.

Changing demographics in favor of younger population in India, rising disposable

incomes and changing mindset of people in favor of consumption would be key

drivers of growth, going forward. Focusing on the long-term opportunity and

accordingly framing strategies to create differentiation/niches would be the key

success factors for new players.

Expect loan portfolio to increase 5x by 2025

Indian Financials’ growth to

be driven by favorable

demographics, increasing

middle class population,

under-penetrated retail and

SME and infrastructure

development

India’s nominal GDP has posted a CAGR of ~14% over the last two decades, and

bank loans have expanded at a CAGR of 19%. This has translated into average loan-

to-GDP multiplier of 1.4x and loan-to-GDP of 54%, compared with ~19% in FY93. We

build 1.4x as the long-term average in our base case assumptions, as the noise of

excesses/lows will get harmonized, and the push to make India a manufacturing

economy will increase the need for credit.

Exhibit 2:

Nominal

GDP

to expand 3.5x in 10 years

Nominal GDP (INR t)

CAGR

12.0%

394

Assumption of nominal GDP

growth of 12% as compared

to ~14% over FY91-14

CAGR

15.8%

CAGR

14.0%

CAGR

10.0%

CAGR

14.8%

6 7 8 9 10 12 14 16 18 20 22 23 25 28 32 43

37 50

314

250

352

200

280

159

224

178

100 127

142

56 65 90 113

CAGR

14.4%

Source: MOSL, RBI

22 April 2015

IDFC

With long-term nominal GDP growth of 12% (real GDP growth of 7% and inflation of

5%) and average multiplier of 1.4x, the bank’s loan portfolio is likely to expand to

INR323t by 2025, 5x FY15E loans and CAGR of 17% over FY15-25E. Loan-to-GDP of

82% will, however, remain lower than in some peer nations currently, indicating the

tremendous opportunity that India provides. This further reinforces our view that

strong asset creation would continue and India is nowhere near the saturation

point.

Exhibit 3:

Factored average multiplier of 1.4x (in line with

Exhibit 4:

Even in 2025, loan-to-GDP ratio in India would be

long period average) – loan-to-GDP to rise gradually to 82%

lower than few peer nations (Loan-to-GDP, 2013 %)

Loan to GDP

Loan to GDP multiplier

Hong Kong

Japan

Ukraine

Thailand

Korea

China

India

Indonesia

Phillipines

Source: MOSL, RBI

Source: MOSL, World Bank

148

134

177

176

198

184

Exhibit 5:

Loan portfolio could expand by ~5x over the next 10 years

Loan (INR t)

CAGR

16.8%

CAGR

15.8%

CAGR

15.6%

CAGR

20.3%

CAGR

24.1%

CAGR

15.2%

Loan portfolio could expand

to INR323t from INR68t in

FY15, more than 5x rise in

next 10 years

Source: MOSL, RBI

Exhibit 6:

Indian Banking will be world’s third largest by 2025 (total banking assets in USD b)

Source: Bancon Report

22 April 2015

IDFC

Where is the money? USD14t GDS by FY25

Nominal GDP CAGR of 12%

and gradual increase in

savings to 36% of GDP could

bring USD14t plus of savings

Bank deposits have seen a healthy CAGR of 18% over FY98-13, driven by a host of

factors – acceleration in nominal GDP growth, rising savings rate, increasing

proportion of bank deposits in total financial savings, and inflow of non-retail

deposits. With an improvement in economic growth, we factor the savings ratio to

rise steadily to 36%, translating into a cumulative decadal savings of over USD14t

over FY15-25E, compared to USD3.6t during FY04-14. Further, if we assume the

share of household financial savings to go up gradually to 45% in household savings

by 2025 and the share of bank deposits to remain constant at ~75%, then the overall

retail deposit CAGR over the next 10 years could exceed 15%.

Exhibit 8:

Savings to increase 4x by FY25 (USD t)

13.7

Exhibit 7:

USD14t of cumulative savings by FY25

160

120

Savings (INR t; LHS)

Linear (Savings to GDP)

Savings to GDP

0.7

3.6

Source: RBI, MOSL

Despite an increasing retail

loan share from 8% to 18%

in the last decade, retail

credit to GDP remains at

near ~15% levels, one of the

lowest in the world

Opportunity – Where would the growth come from?

Retail Banking in India has had a strong run over the last decade, with 15% loan

CAGR and 7%+ CAGR in number of accounts. The driving force has been private

sector banks, which witnessed a CAGR of 23%+ in loans as well as number of

accounts. We believe Retail Banking in India is still at the cusp of a new era.

Consumer loan to GDP is still very low (in comparison with peer nations) at near

15%. Enabling factors are: (a) change in demographics, (b) access to credit, (c) rising

income levels, (d) nuclear family concept gaining prominence, (e) dual income etc.

Housing finance will be the key contributor to growth in consumer loans. Other

contributors will be auto loans, shift from cash transactions to cashless transactions

and increasing credit card penetration.

Exhibit 9:

Indian middle class households to increase

3x+ over FY11-25

Indian middle class household (m)

Individual (m)

Percentage of total population

Exhibit 10:

Mortgage to GDP lower compared to peers (%)

Mortgage to GDP

101

547

267

160

2011

114

2025-26

2015-16

Source: NACER

22 April 2015

Source: HDFC

IDFC

Of the overall SME funding

requirement, only 22% is

met through formal sources

India’s SME segment,

which comprises 29.8m enterprises, employs 69m people and

generates 45% of its industrial output, faces acute shortage of funding. An IFC study

reveals immediate addressable need of INR9.9t even if unviable projects, sick units

and companies without track record are excluded. This implies 19% of the existing

bank loan portfolio.

Exhibit 12:

…yet, informal sources are a major funding

source (INR t)

Exhibit 11:

Incremental share of MSME loans on a rise (%)…

Share in overall Loans

67.7

42.1

21.3 25.7

6.7

FY06

6.6

FY07

FY08

9.0

19.9

9.2

FY09

FY10

FY11

14.3

12.3

13.0

11.4

8.6

29.8

25.0

MSME Loan Growth

1.1

32.5

24.4

11.2

33.5

FY12

FY13

FY14

Supply

Formal Sources

Self-Equity Informal Sources

Source: RBI, Ministry of MSME

Source: IFC, SIDBI

Structural opportunity

remains high; however,

strong policy measures

required to boost

investments and funding

Infrastructure Segment:

India is an infrastructure-starved nation. While a lot of

development has taken place, it is not comparable with peers. In the 12th Five Year

Plan, the required investment in infrastructure is of USD1t. The way infrastructure

story has unfolded in India makes this segment vulnerable and financiers would be

shying away. However, it is important to note that the kick-start of policy reforms

and compelling need for the Indian economy will bolster growth in the near future.

Exhibit 13:

Infrastructure investment under 12th five-year plan (INR t)

XIIth five-year plan

estimates infra funding

requirement of USD1t

6.4

7.2

Infra Investment

7.9

8.4

Spend as a % of GDP

9.0

9.5

9.9

10.3

10.7

7.5

3.0

FY08

3.6

FY09

4.0

FY10

4.6

FY11

5.3

6.2

7.1

8.1

9.2

10.4

FY12

FY13

FY14

FY15E

FY16E

FY17E

Source: Planning commission, MOSL

Only 35% of India’s adults

have formal banking

accounts; in rural areas, of

the 138m households, only

41.6m have accessed

banking services

Rural Banking:

Giving unorganized/underserved areas of the country access to

financial services by leveraging technology and innovation is called financial

inclusion. It is vital in the Indian context, as only 35% of the adult population has a

bank account and only 68m of the 200m households have access to banking

services. RBI has taken various initiatives aimed at financial inclusion: (1) opening of

no-frills accounts, (2) relaxation of KYC norms, (3) simplified branch authorization

norms and (4) engaging business correspondence. There has been some success,

with bank branches in villages expanding to 40,800+, compared with 33,378 in FY10,

and SA deposit mobilization increasing from INR44.3b to INR175b+ in three years.

22 April 2015

IDFC

While the scope to increase penetration is huge, developing an innovative and low

cost business model is the key.

Exhibit 14:

Formal savings in India lower than rest of developing world and other BRIC

economies (%)

Saved Formally

Saved Using Other Methods Only

Other South Asia

Rest of Developing

World

Others

India

Other BRIC Economies

Source: World Bank, MOSL

How Private Banks are capitalizing on this opportunity?

The recent spurt in number

of branches in semi-urban

and rural areas visible as

other segments become

highly competitive

Sensing the opportunity in semi-urban/rural areas, and led by RBI’s push, banks are

venturing into the hinterland. Of the 49,096 branches added since FY09, 44%+ are in

rural areas and 30%+ are in semi-urban areas. The breakeven period for semi-urban

branches is typically 18-24 months+; however, as the Indian economy grows, these

would be a strong source of business. Private Banks have been at the forefront of

this expansion.

Exhibit 15:

Private Banks accounted for ~30% of incremental branch additions since 2000

PBs - Share in incr. branches

Incr. MS over 2000-15

Private Banks MS

2001

2002

2003

2005

2006

2007

2000

2004

2008

2009

2010

2011

2012

2013

2014

2015

Source: MOSL, Company

Private Banks gaining SA market

Exhibit 16:

Aggressive expansion of private banks into India’s hinterland (PBs Incremental

branch mix %)

share (%)

2003 2009 2011 2012 2013

SBIN

Nation-

alized Bk

Pvt Banks

Others

Metro + Urban

SemiUrban + Rural

Source: Company, MOSL

22 April 2015

IDFC

Strong branch expansion has started yielding results. This is reflected in the number

of savings accounts added in rural areas in the last three years – up from 60.2m to

100.8m. This, along with better underwriting practices, has resulted in an increase in

Net profit market share for Private Banks (42% in FY14 from 17% in FY05). There

remains huge scope for Financials to penetrate into the hinterland and bring around

a shift from informal sources to the formal segment.

Exhibit 17:

Strong gains in PAT market share for Private Banks

Foreign Banks

2005

2006

2007

Nationalised Banks

2008

2009

2010

Private Sector Banks

2011

2012

SBI

2013

2014

Source: MOSL, Company

22 April 2015

IDFC

IDFC Bank – A Unique banking model

Corporate lending to dominate | Expect RoA of 1.6%+ by FY18E



Broad structure is in place – apart from the established Infrastructure lending, Non-

Infrastructure corporate banking, “Bharat Banking” are likely to be the vital verticals

for IDFC Bank.

Due to absence of legacy issues, if executed well, IDFC Bank will be able to create a

niche in rural banking (“Bharat Banking”). This business will have a high yield and with

the help of technology/lower network cost, profitability is expected to be healthy.

Expertise and relationship built in infrastructure lending will be used to grow non-

infrastructure loans (relationships with large corporate houses, customers in the

supply chain of infrastructure developers etc).

CA and fees buildup is likely to be faster due to dominance of corporate business and

the low hanging fruits (getting CMS business, BG, LC business of existing customers).

Overall SA buildup is likely to take time due to limited brand recognition in retail

segment and expected cautious approach in growing the brick and mortar setup

(higher focus is likely to be on technology).

Broad structure in place; Infra and corporate business to dominate

IDFC has four key lines of business – Infrastructure Financing, Investment Banking

and Equities Broking, Alternative Asset Management, Asset Management and

advisory and the Foundation. Large part of the Infrastructure Financing business will

move to the bank. All the financial services companies will become the subsidiary of

Non Operating Financial Holding Company (NOFHC), which in-turn will be a 100%

subsidiary of IDFC Ltd (parent company). Thus, post setting up of NOFHC, IDFC Ltd

(parent) will have only two subsidiaries: a) NOFHC (which in-turn will have all

financial services) and b) IDFC Foundation.

Exhibit 18: IDFC’s proposed demerger structure

Exisiting shareholders to

get one share of IDFC and

IDFC Bank (47% stake)

Infra lending business to

be transferred to the

bank

Weexpect ~INR140b

NW to be transferred to

the bank

Existing shareholders

Foundation

IDFC

Non-Operating Financial

Holding Company

IDF

(49% holding)

Bank

AMC

Securities

AIF

Source: MOSL, Company

22 April 2015

IDFC

IDFC Bank’s lending

business would be divided

into four broad verticals

Broadly, IDFC Bank’s lending business would be divided into five broad verticals –

Infrastructure Lending (business transferred from IDFC), Non-infrastructure

Corporate Lending, Commercial Banking (SME and Retail) and Rural Lending

Business (Bharat Banking).

Exhibit 19: IDFC Bank business verticals – Corporate and Infrastructure lending to

dominate

Bharat Banking business to

be the key PSL enabler,

going forward

Infrastructure

Lending

IDFC Bank

Non-Infra Corporate

Lending

Commercial Banking

(Retail & SME )

Bharat Banking

(Rural)

Source: MOSL, Company

Infrastructure loans

expected to be 2/3 of the

loans and ~55% of customer

assets by FY21E

Corporate banking business (Infrastructure + Non-Infrastructure) would dominate

the balance sheet in the initial years. We expect IDFC Ltd to have a loan book of

INR575b (as of 1HFY16), and of which INR525b to be transferred to the bank. Once

the bank is formed, we factor a moderate growth of ~18% in the Infrastructure

lending book. Share of this business is likely to remain dominant in the overall

business and we expect 2/3

of the loans and ~55% of customer assets to come

from Infrastructure segment by FY21E.

Exhibit 21: Infrastructure loan book mix to remain

largely same

Project Infra loans (INR b)

% of Infra loans

Exhibit 20: Steady diversification of loan portfolio

Infrastructure loans (INR b)

% of loans

529

FY17

627

FY18

742

FY19

879

FY20

1,041

FY21

414

FY17

489

FY18

576

FY19

680

FY20

803

FY21

Source: MOSL, Company

Post conversion, IDFC Bank

will be the seventh-largest

private sector bank in the

country by loan size

Unlike other private sector banks, IDFC Bank will start with a loan market share of

80bp. Post conversion into a bank, it will be the seventh-largest private sector bank

in the country in terms of loan size. Strong profitability from Infrastructure lending

business will help IDFC Bank to build its non-infrastructure and branch banking

business.

22 April 2015

IDFC

Exhibit 22:

When did other players reach this balance sheet size

Source: MOSL, Company

Exhibit 23: Post conversion,

IDFC

Bank will be the seventh-largest private sector player in

the country (loans, INR b)

IDFC will

start here

Source: MOSL, Company

CA and fees buildup is likely

to be faster due to

dominance of

corporate/Infrastructure

business

Expertise and relationship built in Infrastructure lending will be used to grow non-

infrastructure loans (relationship with large corporate houses, customers in the

supply chain of infrastructure developers among others). We expect an aggressive

ramp-up (on a low base) in the non-infrastructure and commercial banking book,

and it is expected to reach INR127b by FY20E. Share of this segment will increase to

~20% by FY21E from 15% at the starting of banking operations. CA and fees buildup

is likely to be faster due to dominance of corporate business and the low hanging

fruits (getting CMS business, BG and LC business of existing customers).

Exhibit 24: Our assumptions on fee income remain

conservative (fee income % of assets, FY17E)

2.3

1.6

Exhibit 25: CA buildup likely to be faster

CA deposits (INRb)

CA deposits (% of Interest bearing liabilities)

3.5

4.0

4.5

5.0

1.1

0.8

0.6

1.2

1.3

1.5

2.5

3.0

IDFCB

VYSB

HDFCB ICICIBC AXSB

YES

IIB

FY16

FY17

FY18

FY19

106

FY20

FY21

Source: MOSL, Company

22 April 2015

IDFC

Bharat Banking can be a key

differentiator

For a transition from wholesale entity to diversified liability mix, IDFC Bank would

need to significantly increase its focus towards branch banking. Presently, IDFC is

largely a corporate lender with minimum branch presence. To comply with 40%

priority sector requirements, IDFC Bank can look towards portfolio buyouts or

securitization in the initial stages. However, in the long run, it would need to build

capabilities to source PSL eligible loans organically. IDFC Bank is expected take a

different approach towards branch/rural banking with the use of technology.

Exhibit 27: We build a gradual increase in in-housing sourcing

of PSL loans as Bharat Banking expands (% share of PSL

requirements)

RIDF devolvement

418

PTC/Securitisation

In-house sourcing

Exhibit 26: Steep PSL requirements as IDFC converts

into a bank (INR b)

PSL requirement

RIDF devolvement

373

297

233

336

FY19

FY20

FY17

FY21

FY18

FY17

FY18

FY19

FY20

FY21

Source: MOSL, Company

* Normally RIDF devolvement in case of non compliance of PSL targets takes place after a lag of 1-2 years. However, our estimates factor in

from day one

“Bharat Banking” business

will have a high yield and

with the help of technology

and absence of legacy

issues, can have a lean cost

model

Due to the absence of legacy issues, IDFC Bank will be able to create a niche in rural

banking (“Bharat Banking”) over a long period if executed well. This business will

have a high yield and with the help of technology and lower network cost, we

believe profitability is likely to be healthy, if the risks are managed well. We expect

IDFC bank to directly compete with NBFCs on the asset side for Bharat Banking. In

our view, the success of branch and “Bharat Banking” business would be critical for

the bank as a whole as it can enable organic creation of PSL, garner higher SA

balances and quickly build the bank’s brand image.

22 April 2015

IDFC

Highly profitable Infra business to be the key enabler

Infrastructure bonds to partially compensate for regulatory requirements



In the NBFC setup, IDFC made core PBT (ex capital gains and floating provisions) of

3.0% of average assets over FY08-14.

Under the banking setup, the same business is likely to fetch higher PBT as cross-

selling will pick up (higher fees, CA float, vendor financing among others) and cost of

funds is likely to decline. Pertinently, lending to Infrastructure segment (project loans)

is exempted from regulatory requirements.

With an expected higher share of this business, IDFC Bank’s RoA is likely to be higher

than peer private banks having higher corporate exposures.

Highly profitable infrastructure lending business will partially compensate for

regulatory requirements (CRR, SLR and PSL – partially reduced by Infrastructure

bonds) and help set up the non-infrastructure lending piece (to diversify balance sheet

mix) and expand its network.

Infra financing – a high RoA business; risk management remains a key

Higher ticket size, long

duration book, strong fee

income opportunity (special

skills set required for

project evaluations) and

lean cost structure – key

drivers to growth and

profitability

Long gestation period and higher execution risk will lead to higher yields on

infrastructure project loans. While the risk is high, we believe if managed well can

provide strong risk adjusted returns for financiers. Higher ticket size, longevity,

special skills set required for project evaluations (strong fee income opportunity)

and lean cost structure make it a high RoA business. At the system level, while stress

loans in infrastructure segment have increased to ~15%, IDFC, with its strong

domain knowledge, managed to keep it low at 6.8%. Despite going through one of

the worst period in infrastructure financing, IDFC managed to post core PBT of 3.0%

of average assets in this business.

Highly profitable infra lending piece to help build non-infra business

Unlike other new generation private banks which had to build the balance sheet

along with network expansion, IDFC has a strong existing profitable loan book,

which can be used to build liability franchise and other non-infrastructure

businesses. In our view, in the initial years, the bank’s focus is likely to be more on

technology and less on brick and mortar expansion. Based on our calculation, the

cost to income (C/I) ratio is likely to be 25-30% by FY16E-21E, aided by opex-light

Infrastructure lending business (C/I ratio of <10%) and lower leverage on balance

sheet.

Aided by a steady income

from the Infrastructure

business, Infrastructure

investment for IDFC Bank is

expected to be higher

/aggressive

YES’ network expansion in its initial years (117 branches opened in first five years)

was constrained by higher C/I ratio (average cost to income ratio of 67%). However,

supported by a steady income from the Infrastructure business,

network/infrastructure investment for IDFC Bank is expected to be

higher/aggressive, without exerting undue pressure on opex ratios. We estimate

IDFC Bank to open 525 branches by FY21E, resulting in buildup of SA deposits and

comparatively better PSL capabilities in the first five years of operations (YES’ SA

ratio stood at 1.2% in 2009). Overall SA buildup is likely to take time due to limited

brand recognition in retail segment and expected cautious approach in growing the

brick and mortar setup (higher focus is likely to be on technology). The bank is

expected to start operations with 20-25 branches.

22 April 2015

IDFC

Exhibit 28: Supported by Infrastructure business, we expect IDFC Bank to expand branches

at a rapid pace (nos.)

IDFC Branches

YES Branches

425

325

225

150

Year 1

Year 2

117

150

214

525

Year 3

Year 4

Year 5

Year 6

* Year 1 ends in March 2017

Source: MOSL, Company

Exhibit 29: IDFC Bank would focus on top 20 centers in first five years (data for top 20 banking centers; INR b)

Center

Branches

% share

Deposits

% share

Greater Mumbai++

2,338

1.9

14,523

17.6

Delhi++

3,018

2.4

8,523

10.3

Bangalore++

1,843

1.5

3,883

4.7

Chennai++

1,647

1.3

2,524

3.1

Kolkata++

1,425

1.2

2,301

2.8

Hyderabad++

1,533

1.2

2,293

2.8

Pune

692

0.6

1,265

1.5

Ahmedabad++

897

0.7

1,155

1.4

Lucknow

640

0.5

794

1.0

Bhopal

385

0.3

736

0.9

Patna

421

0.3

597

0.7

Gurgaon

365

0.3

583

0.7

Jaipur

583

0.5

575

0.7

Vadodara

371

0.3

528

0.6

Noida

290

0.2

526

0.6

Bhubaneswar

351

0.3

511

0.6

Chandigarh

355

0.3

504

0.6

Kanpur

460

0.4

495

0.6

Nagpur

362

0.3

417

0.5

Navi Mumbai

262

0.2

415

0.5

Total

123,184

100

82,736

100

++ Based on job openings posted on the website, we expect IDFC Bank to initially focus on these locations

Credit

% share

14,636

23.2

8,160

12.9

2,523

4.0

3,203

5.1

2,291

3.6

2,500

4.0

962

1.5

1,336

2.1

520

0.8

265

0.4

169

0.3

313

0.5

760

1.2

450

0.7

228

0.4

299

0.5

584

0.9

145

0.2

319

0.5

111

0.2

63,179

100

Source: MOSL, Company

Infrastructure bonds likely to boost profitability

2/3 of the loans are likely

to be Infrastructure ones by

FY21E, and of which project

loans are expected to be

2/3 . Thus, 45% of the loan

book is expected to be

qualified for Infrastructure

bonds by FY21E

To boost the credit flow to Infrastructure segment, the Reserve Bank of India (RBI)

exempted lending to the long term Infrastructure segment (project loans) from

regulatory requirements

(link to guidelines).

At the time of conversion into a bank,

IDFC’s >80% loan book is likely to be Infrastructure loans, and of which long duration

Infrastructure loans are likely to be a majority (~75%). Based on the staggered factor

(as prescribed by RBI in the guideline), IDFC would raise INR100-120b+ of

infrastructure bonds every year. These bonds will not be a part of NDTL calculation

for CRR and SLR. Even qualified loans will be exempted from PSL requirement. Thus,

in our view, profitability of this business is likely to be higher under the banking

setup v/s NBFC setup (lower cost of funds and more fee generating opportunities).

22 April 2015

IDFC

Exhibit 30: Expect incremental Infrastructure bonds issuance of INR100b every year

RBI in its recent policy has

allowed banks to

participate in Infrastructure

bonds - key hurdle resolved

Project Infra loans

Eligibility factor (%)

Eligible project Infra loans

Infrastructure bonds raised

% of Infra loans

Incremental bond issuances

1HFY16

367.5

110.3

100.0

27.2

100.0

FY16

385.0

127.8

120.0

31.2

120.0

FY17

431.2

225.4

202.9

47.0

82.9

FY18

495.9

341.5

307.4

62.0

104.5

FY19

FY20

FY21

570.3

655.8

754.2

467.4

604.4

754.2

420.6

543.9

678.8

73.8

82.9

90.0

113.2

123.3

134.8

Source: MOSL, Company

Exhibit 31: We expect 150bp+ NIM benefit in Infrastructure book...

Amount raised

Deployment in SLR

Deployment in CRR

Deployment in PSL (40% of 76%)

Deployment in Infra loans

Pro-forma P&L

Interest cost

SLR Interest income

CRR Interest income

PSL Interest income

Infra interest income

Total Interest income

Total Interest cost

Spreads (%)

Bonds

100

8.8

0.0

11.5

Deposits

100

8.0

1.7

0.0

2.4

5.1

Infrastructure bonds to

substitute term deposits.

Thus, comparison on term

deposits cost is a right

indicator, in our view

11.5

9.2

8.8

8.0

2.8

1.2

Source: MOSL, Company

Exhibit 32: …Resulting in incremental RoE benefit of 40bp+

Margin benefit of issuing these bonds

Proportion of Infrastructure and Affordable housing in overall loan book

Benefit

150bp

~55%

83bp

~60%

50bp

33%

~33bp

~6bp

~7x

230bp

42bp

Source: MOSL, Company

Margin benefit on overall book (A*B)

Loans as % of assets

Pre-tax RoA benefit (C*D)

Tax rate

RoA benefit by 2020

Incremental RoA benefit per year

Leverage

RoE benefit after full refinancing

Incremental RoE benefit per year

22 April 2015

IDFC

Exhibit 33: Cost

efficiency

to be the key differentiator for IDFC Bank (opex % of assets)

Despite technology and

branch expansion cost,

highly cost efficient

Infrastructure business to

keep opex low

IDFCB

3.5

3.9

3.3

3.1

2.6

Private Banks average

YES, KMB (in initial years)

2.2

1.1

Year 1

1.1

Year 2

1.1

Year 3

1.2

Year 4

1.2

Year 5

1.2

Year 6

* Year 1 ends in March 2017

Source: MOSL, Company

Exhibit 34: Operating

expenditure

(%) - technology related expenses to remain high in

the initial years

Employee

FY17

Technology

FY18

Other expenses

2HFY16

FY19

FY20

FY21

Source: MOSL, Company

Exhibit 35:

Our employee cost assumptions

remain conservative (INR m)

Cost per employee

1.0

Private Banks average (FY14)

1.0

Exhibit 36:

Technology costs would dominate overall

expense in the initial years of operations (INRm)

Opex per branch

107

Private Banks average (FY14)

0.7

FY17

FY18

FY19

FY20

FY21

FY17

FY18

FY19

FY20

FY21

Source: MOSL, Company

Exhibit 37: We

estimate

IDFC Bank’s opex at INR12b in FY17E led by aggressive

direct accounting of costs (details of peers when their opex was ~INR12b)

YES

KMB (SA)

VYSB

IIB

IDFCB

Year

FY13

FY10

FY13

FY12

FY14

FY17

Branches (nos.)

430

249

546

400

1,174

150

Employees (nos.)

7,024

8,804

9,758

9,730

10,268

3,750

Source: MOSL, Company

22 April 2015

IDFC

Transition expected to be smooth

Pristine asset quality to continue | One-off gains - icing on the cake



IDFC has aggressively built floating provisions of INR18b to cover the current stressed

assets book. We expect healthy profitability to leave enough room for the bank to

continue making additional provisions in the future.

We expect asset quality to remain healthy as Infrastructure lending (benefit of 5/25

and extension of DCCO guidelines) and working capital loans are unlikely to high

slippages in the near term. Conservatively, we factor higher stress in PSL and mid-

corporate portfolio.

Company has aggressively built an investment portfolio of INR250b (largely G –Sec, in

our view, as of 9MFY15) v/s expected SLR requirement of INR115b, when it converts

into a bank. The impact of negative carry on CRR and SLR is already visible in the

current earnings.

Further, any capital gains on treasury portfolio and strategic investments (not factored

in our estimates) will be utilized to account directly the bank’s setting-up cost and

additional provision on certain infrastructure loans.

In the first full year of operation, we expect IDFC Bank to clock RoE of 11-12% and

progressively increase to ~18%. Our estimates are very conservative on non-interest

income and operating expenses.

Stress loans adequately provided; unlikely to be a drag in banking setup

Risk adjusted RoA, post

conversion into a bank, is

likely to be high

Over the last few quarters, IDFC has aggressively built provisioning levels to take

care of any large stress additions that may arise, post conversion to a bank, from the

existing loan book. Total stress loans (GNPAs + RL) of the bank stands at 6.8% and

IDFC carries the provisioning of 4% of loans. We expect it to build additional

provisions till the conversion into a bank. Thus, risk adjusted RoA, post conversion

into a bank, is likely to be high.

Exhibit 38: We expect IDFC to build additional provisions till it converts into

a banking setup

(% of loans)

GNPA

Restructured loans

6.1

5.3

4.5

3.0

0.6

1QFY15

3.5

3.8

Outstanding provisions

6.1

2.3

0.6

4QFY14

0.6

2QFY15

0.7

3QFY15

Source: MOSL, Company

22 April 2015

IDFC

Exhibit 39: IDFC Limited – Energy Sector Cumulative OS Approvals

Source: MOSL, Company

RBI’s relaxation in terms of

extension of DCCO, 5/25

structure will help IDFC in

terms of asset quality

Asset quality to remain

healthy mainly led by lower

risk profile of loan book and

higher share of corporate

and working capital loans

Recently, RBI extended the flexible loan structuring guidelines for NBFCs. We expect

IDFC to benefit with the incremental stress additions in Infrastructure portfolio

being covered under these guidelines. Given the nature of working capital loans

product, the stress in this segment is likely to be limited.

By March 2017 (first reporting quarter for PSL loans), IDFC would require ~INR233b

of Priority Sector Loans to meet PSL requirements. We expect much of it would be in

the form of portfolio buyouts/securitization (thus minimal credit risk) and remaining

as balance sheet loans (factor >1% slippage ratio). Overall, we expect the asset

quality to remain healthy mainly led by lower risk profile of loan book and higher

share of corporate and working capital loans.

Exhibit 41:

Dominance of corporate and working capital loans

to drive healthy asset quality

Slippages (%)

Credit cost (%)

0.30

0.50

0.42

Exhibit 40:

Asset quality expected to remain strong

1.22

1.15

0.92

0.75

0.37

0.35

0.76

GNPA (%)

NNPA (%)

0.83

0.93

0.28

0.23

0.25

0.28

0.00

0.05

0.04

FY17

0.12

0.17

0.07

FY18

FY19

0.22

0.24

1HFY16

FY16

FY17

FY18

FY19

FY20

FY21

FY16

FY20

FY21

Source: MOSL, Company

IDFC’s stressed asset book stood at ~INR35b as of 3QFY15 (mainly gas related

exposures). Over the last three to four quarters, IDFC has aggressively built floating

provisions of INR18b to cover any eventualities. Thus, we expect provisioning to

remain aggressive till the time IDFC converts into a bank.

22 April 2015

IDFC

Exhibit 42:

Aggressive provisioning since 2014 to cover for current stressed assets book

Provisions for stress in

existing loan book to be

provided before conversion

into a bank

Total provisions (INR m)

Source: Company, MOSL

Strong treasury portfolio to provide relief on earnings

Treasury gains are likely to

help in providing for NPAs

or direct technology cost

IDFC has aggressively built an investment portfolio of INR250b (largely G-Sec in our

view, as of 9MFY15) v/s the regulatory SLR requirement of ~INR115b, when it

converts into a bank (based on our estimates). The impact of negative carry on CRR

and SLR is already visible in the current earnings. We factor a higher G-Sec portfolio

(INR160b), considering the LCR requirements as well. In our view, the company is

sitting on higher MTM gains, and with a further fall in interest rates, treasury gains

are likely to increase, which will help in providing for NPAs or direct technology cost.

IDFC also has some strategic investments which will provide healthy trading gains.

Exhibit 43: IDFC may choose to book gains on certain strategic investments

Investment

NSE India Limited

STCI Finance Limited

ARCIL

(m)

2.4

3.5

27.2

Book value

(INR m)

601

540

1,138

Mkt value

estimate (INR m)

16,375

582

2,344

Source: Company, MOSL

Exhibit 44: Capital gains on treasury portfolio – another lever to aid earnings

during transition

(INR m)

G-sec portfolio as on 3QFY15

AFS portfolio (assumed)

Total AFS portfolio

Indicative yield of the portfolio (%)

Current Gsec yield (%)

Duration (Avg. of Banking sector duration as on 3QFY15)

Total unrealized gains (current)

250,000

30.0%

75,000

8.25

7.8

3.2

1,080

Total unrealized gains (further 50bp decline in Gsec)

2,280

Source: Company, MOSL

22 April 2015

IDFC

Infrastructure financing profitability higher under banking setup

CA float, higher fees and

reduction in cost of funds to

drive RoA. Leverage levels

are expected to be higher

under the banking setup

Post conversion into a bank (removing regulatory cost), Infrastructure financing

business’ profitability is likely to improve with a) CA floats (currently it is not allowed

to accept deposits) and b) higher fee-based income (BG, LCs, CMS business among

others). Importantly, lending to Infrastructure segment (project loans) is exempted

from regulatory requirements, which can significantly improve its profitability in the

banking setup as well. Further, under the banking setup, leverage allowed on this

business is likely to increase as rating agencies will have higher confidence on the

liability side. Thus, with improved RoA and higher leverage, RoE is likely to be much

higher in the banking setup.

Exhibit 45: 70% of IDFC’s loan book can be refinanced using regulatory exempt bonds

Regulatory exemptions on

~50% loan book would lead

to structurally higher RoA

for IDFC Bank

Project Infra and Housing Loans (% of loans)

4.5

IIB

7.6

HDFCBC

14.8

15.8

24.3

25.8

28.7

YES

VYSB

ICICIBC

AXSB

IDFC

Source: MOSL, Company

22 April 2015

IDFC

Higher leverage to drive higher sustainable RoE

Strong execution track record of management | Quality demands premium



Value of the bank’s setup is significantly higher as it provides stability to business

(with higher retail deposits and loans) v/s significantly volatile and monoline

Infrastructure lending setup, which is also highly cyclical and lumpy in nature.

On a sustainable basis, in our view, RoE band (ex trading gains) is likely to move up by

~500bp led by high asset light revenue streams and leverage.

Investors are likely to focus more on the expected improvement in business and

higher sustainable RoE, healthy Tier I ratio of 24%, strong management team and

corporate governance.

Foreign ownership room of ~26% post bank listing

(significantly higher than most private banks) will work in its favor.

Our positive view is derived from management’s execution track record, especially on

asset quality in a highly constrained Infrastructure lending space.

We expect the banking business’ net worth to be INR163b by FY17E and assign a

multiple of 2x (private banks’ corporate lender average multiple). Upgrade to Buy with

an SOTP-based target price of INR232.

Leverage ratios bound to go

up with better liability

profile

Under the monoline setup, with high ticket size and long gestation loan mix, rating

agencies were not comfortable beyond a leverage of 6-8x. Even at the regulatory

level (with Tier I of 12%), peak leverage would have been ~8x (assuming 100% risk

weights and entire Tier I as CET I). Most private banks operate at 10-12x leverage,

which in our view would also be followed by IDFC Bank.

On a sustainable basis, in our view, RoE (ex trading gains) band is likely to move up

by ~500bp, led by high asset light revenue streams and leverage. In the erstwhile

NBFC business, IDFC’s ability to earn fee income was constrained by non-availability

of a bouquet of products, including LCs, Guarantees among others. Management’s

focus on targeting suppliers/customers in existing Infrastructure client’s value chain

would enable the bank to garner higher exposure to fees in the lucrative mid-

corporate segment.

Exhibit 46:

Leverage of IDFC Bank will increase gradually to ~9x by FY21E; however, will

remain lower than peers… (leverage multiple; FY14)

FY21 IDFC Bank (9.4x)

10.7

11.3

15.3

10.1

8.7

9.7

IDFC Limited (4.8x)

FY17 IDFC Bank (7.9x)

VYSB

ICICIBC

IIB

AXSB

HDFCBC

YES

Source: MOSL, Company

22 April 2015

IDFC

Exhibit 47:

…However, RoE to be similar to peers led by higher core profitability (%)

RoA

7.9

11.2

8.5

13.6

9.0

14.5

RoE

Leverage

9.2

16.2

9.4

17.8

1.6

FY17

1.6

FY18

1.7

FY19

1.8

FY20

1.9

FY21

Source: MOSL, Company

Exhibit 48:

Improvement in RoE to be largely led by higher fees and leverage (RoE %)

17.8

2.7

2.6

11.2

0.9

4.1

0.1

0.7

1.3

Source: MOSL, Company

IDFC stock price performance v/s Bankex

IDFC has been an underperformer v/s most private banks and NBFCs despite having

a wholesale business model, which should do well in benign liquidity, improving

outlook on growth and fall in interest rates. Investors are still grappling with the

issue of expected transition to a bank and the hit on earnings in the near term. In

our view, post conversion into a bank, RoE is likely to be at least 11-12% and the

transition is expected to be smooth.

Exhibit 49:

IDFC has significantly outperformed Bankex

since listing…

Bankex (rebased)

1500

1000

500

IDFC (rebased)

180

160

140

120

100

Exhibit 50:

…However, uncertainty on converting to a

bank has led to underperformance over the last year

Bankex Rebased

IDFC Rebased

Source: MOSL, Company

In our view, the expected improvement in RoE (~18% by FY21E), post conversion to

a bank, will drive valuations higher v/s the earnings trajectory. IDFC is likely to be

the most cost efficient bank in the system, with a C/I ratio of 25-30% on a

sustainable basis, due to higher corporate loans (chiefly infrastructure) and absence

of legacy issues.

22 April 2015

IDFC

Exhibit 51:

IDFC: one-year forward PBV

PB (x)

6.0

4.5

3.0

1.5

0.0

0.8

2.0

1.4

Peak(x)

Avg(x)

Min(x)

4.9

Exhibit 52:

IDFC: one-year forward PE

PE (x)

15.1

6.6

13.2

Peak(x)

Avg(x)

Min(x)

39.6

Source: MOSL, Company

Exhibit 53:

IDFC’s target price sensitivity to valuation multiple of the banking business (INR b)

Target

price

195

214

232

250

268

323

413

504

Upside %

141

194

FY17E Banking

NW (INR b)

161

Banking

multiple (x)

1.6

1.8

2.0

2.2

2.4

3.0

4.0

5.0

IDFC Bank

valuation (INR b)

258

291

323

355

388

484

646

807

Value of other

business (INR b)

Fair Value

(20% HoldCo

discount INRb)

311

340

368

397

426

513

657

802

Source: MOSL, Company

Exhibit 54:

IDFC’s target price under various scenarios

(multiple for Banking Business – x FY17E BV)

Bear case (1.6x)

280

230

180

130

Base case (2.0x)

Bull case (2.4x)

268

232

195

Source: MOSL, Company

Exhibit 55: SOTP - FY17E based

IDFC Bank

IDF

Alternative assets mgt

NSE Stake

IB and Broking

Mutual Fund Business

Cash on balance sheet (Parent)

Total Value

CMP (INR)

Upside (%)

INR b

288.7

17.4

12.8

10.7

7.6

16.4

14.8

368.4

USD b

5.4

0.3

0.2

0.1

0.3

6.9

INR/sh

182

232

167

Valuation Rationale

2x NW for listed entity, 20% holdco disc

1x Net worth

8% of FY17E AUM

5.8% stake, base price of last deal

1x FY17E NW

3.4% of FY17E AUM

1x Cash

Source: MOSL

22 April 2015

IDFC

Exhibit 56:

IDFC bank DuPont

Y/E MARCH

Net Interest Income

Fee income

Fee to core Income

Core Income

Operating Expenses

Cost to Core Income

Employee cost

Emp. to total exp (%)

Technology

Others

Core Operating Profit

Trading and others

Operating Profit

Provisions

NPA

Others

PBT

Tax

Tax Rate

RoA

Leverage (x)

RoE

2017

2.62

0.81

22.60

3.43

1.07

31.27

0.44

41.18

0.27

0.36

2.36

0.13

2.49

0.17

0.02

0.15

2.32

0.77

33.00

1.56

7.22

11.24

2018

2.66

0.90

24.25

3.56

1.08

30.28

0.49

45.06

0.25

0.35

2.48

0.14

2.62

0.17

0.04

0.13

2.46

0.81

33.00

1.65

8.24

13.57

2019

2.71

0.99

25.64

3.69

1.14

30.89

0.54

47.61

0.24

0.36

2.55

0.15

2.70

0.23

0.10

0.14

2.47

0.82

33.00

1.65

8.76

14.50

2020

2.83

1.10

26.88

3.92

1.18

29.98

0.58

49.30

0.23

0.36

2.74

0.15

2.90

0.25

0.14

0.11

2.65

0.88

33.00

1.78

9.11

16.18

2021

2.99

1.17

27.19

4.16

1.20

28.84

0.59

48.86

0.23

0.38

2.96

0.15

3.11

0.26

0.16

0.10

2.85

0.94

33.00

1.91

9.33

17.84

Source: Company, MOSL

22 April 2015

IDFC

Appendix 1: Comments by management in the run up to launch of IDFC Bank



Why get into a banking business?

Banking business is a better regulated business. As a NBFC, access to liquidity

related flexibility is limited. During the GFC, bond markets access vanished for a

few non-banking entities. Secondly, as a banking entity, we can take higher

leverage resulting in high levels of sustainable profitability to benefit all the

stakeholders.

We are looking at a nine-year time frame, where the first three years would be

about consolidation, stability and investment. The next three years would be

about growing, and the final three years would be about acquiring scale. It is not

a one-year thing. We would need five to seven years to establish ourselves. It is a

marathon, not a sprint!

IDFC Limited which is the listed entity today would be the promoter of the bank.

As per the bank regulations for new banks the promoter of the bank has to set up

the bank through a non-operating financial holding company (NOFHC). So under

IDFC, we will have a 100% owned NOFHC. That NOFHC will need to own all the

financially regulated businesses of IDFC. So the bank will be subsidiary of the

NOFHC. We expect the NOFHC to hold 53% of the bank. The balance 47% will be

owned directly by shareholders of IDFC. So as we have said for every share that a

shareholder owns in IDFC he or she will get one share in the bank and the

shareholding will therefore be, we expect, 53% owned by the NOFHC, 47% owned

directly by the shareholders

IDFC has four subsidiaries – Corporate Investment Banking, Alternative Asset

Management, Public Market Asset Management and the Foundation. IDFC, the

parent, will be the holding company. It will have one subsidiary directly, which

will be the Foundation. It will then have a non-operating finance holding

company, under which there will be four subsidiaries, three existing ones and the

fourth is the bank. Through the scheme of re-organisation, assets and liabilities

will move from the IDFC balance sheet to the bank, such that on the very first day

of its operations, the bank will also be listed.

IDFC is would meet the RBI mandate that banks must have 25% of their branches

in tier V and tier VI towns. Over the next decade, going by the 80-20 rule, 80% of

our business will come from 20% of our branches, located in the top 60 cities. We

expect to start operations with 20branches, 5 in the Tier I cities and rest in Tier IV

to Tier VI cities.

Our strategy, at least in the beginning, will be to build on the strength that we

have in the corporate market, which is one extreme of the client universe. Next,

seek to get our share of urban India and simultaneously reach out to the base of

the pyramid. Both on the consumer bank and the corporate bank, we will start at

the upper end of the client spectrum. Simultaneously, we will attack the other

extreme of the client spectrum. We have this narrative inside IDFC when we talk

about dealing with the two extremes of India and Bharat at the same time, and

then over time we will fill the middle. Our starting strength is in the high end. We

see a huge opportunity in the low end. So, we want to attack that first. Over time,

then we will fill in the blank spaces.

We are targeting a cost-to-income of 35% as opposed to the current norm of

45%. Lending to infrastructure using infrastructure bonds would lead to higher

margins led by exemptions of CRR, SLR and PSL.

In order to ensure we don't get stuck with legacy technology in the future, we are

looking to develop a flexible, open, plug-and-play system. We aim to upfront

technology investments to the initial years of operations

If all goes according to plan, we will more than meet the PSL requirement within

the first three years off roll out. In the initial phase, it may buy into the priority

lending portfolio of existing banks, but in the long run, IDFC Bank intends to

develop its own expertise. We believe priority sector lending would be our

greatest challenge. We have to develop capabilities in this area as part of our

strategy.



Long term strategy



New structure of IDFC group



Branch network expansion



Client acquisition strategy



Profitability



Investments in technology



PSL lending

22 April 2015

IDFC

Appendix 2: Infrastructure Debt Fund

We expect loans of INR50b and net worth of ~INR16b to be transferred to Infrastructure Debt Fund (IDF). We

believe the following attributes of an IDF-NBFC lend predictability and stability to its business profile:

Clear and focused

business model

Regulatory guidelines

Initially IDF-NBFCs were allowed to do takeout financing only in public private partnership (PPP)

infrastructure projects, with a minimum operating track record of one year and tripartite

agreement. In the FY15 monetary policy RBI also allowed, with minimum operating track record of

one year, non-PPP projects and PPP project without tripartite agreement. This will ensure that

projects that an IDF-NBFC lends to, do not carry any construction risk, and are generating cash

flows

Regulations mandate that IDF-NBFCs invest only in projects that have a signed tripartite agreement

between the project authority, project company, and IDF-NBFC

In the event of financial default by the project, the tripartite agreement will provide credit

enhancement to the IDF-NBFC by providing (i) the right to terminate the concession agreement, (ii)

priority access to termination payment from the project authority, and (iii) well-defined timelines

for completion of the termination process

This robust credit enhancement mechanism provided by the tripartite agreement significantly

strengthens the IDF-NBFC’s asset quality, as the quantum of termination payment will always be

adequate to cover the IDF-NBFC’s outstanding dues

Regulations are awaited for Non-Tripartite PPP projects and non PPP projects

The regulation allows IDF-NBFCs to raise only long-term funds with a minimum five-year maturity

Protection available to

asset quality

Limited asset-liability

mismatches and foreign

currency risks

This will align the duration of IDF-NBFCs’ liability profile with the long term characteristics of

infrastructure projects, thus ensuring minimal asset-liability mismatches

The regulation mandates infrastructure finance companies to hedge at least 75% of their foreign

exchange borrowings

22 April 2015

IDFC

Appendix 3: Key management for IDFC Bank

Name

Responsibility

Total experience

Past experience

Mr Avtar Monga

Chief Operating

Officer

~32 years



Bank of America (25yrs) – MD for global offshore

delivery center of expertise

GE capital – CEO, Transport financial services business

and Card business (JV with SBI)

Mr Pavan Pal Kaushal

Chief Risk

officer

~30 years



Ernst and Young – leading the risk function for financial

services division

ANZ – Head of Commercial Credit risk for Asia Pacific

region, followed by CRO for India

Citibank – Senior leadership roles for Corporate,

Investment and Consumer bank

Mr Sriraman Jagannathan

Chief Digital and

Data Officer

~25years



Airtel – Spearheaded launch of first mobile payment

platform

Citigroup (20yrs) – leading e-commerce and digital

build out in India and Japan

Mr Ajay Mahajan

Head – Financial

markets group

~25 years



Mr Ravi Shankar

Head of Bharat

Banking

~30years



Bank of America (14yrs) – MD & Country treasurer for

financial markets, balance sheet mgmt and Capital

market business

YES (founding team member, 4yrs) - Group President

of Financial Markets, Institutions and Investment

Management

UBS (6yrs) – MD to build banking operations

R-Square advisors (2yrs) – Entrepreneurial venture

Fullerton India – Head of Business and Marketing,

Rural and Urban Financing

TNS India Pvt ltd - SVP and Head stakeholders mgmt,

automotive, Finance and technology sectors

To head commercial banking and consumer banking unit our discussion with the management suggest that two senior people within the IDFC

group is expected to be appointed

22 April 2015

IDFC

Financials and valuations

Exhibit 57:

Balance sheet details (INR m)

Y/E March

Share Capital

Reserves & Surplus

Net worth

Deposits

Change (%)

Borrowings

Change (%)

Infra Bonds

Other borrowings

Other Liabilities & Prov.

Total Liabilities

Current Assets

Investments

Change (%)

G Sec

RIDF and PTC

Other investments

Loans

Change (%)

Infra loans

PSL loans

Non Infra loans

2016

33,815

114,342

148,157

39,000

19,500

1,875

741,000

110,000

631,000

30,000

958,157

32,157

333,700

2017

33,815

127,667

161,481

108,030

32,409

6,563

2018

33,815

145,368

179,182

196,074

81.5

45,751

14,766

2019

33,815

166,434

200,249

308,490

57.3

61,698

29,859

2020

33,815

192,901

226,716

451,167

46.3

81,210

50,761

2021

33,815

226,145

259,960

633,439

40.4

105,573

78,381

Comments

Bank would be well capitalized for future

growth. We factor initial net worth of INR140b

IDFCB is expected to capitalize on strong

corporate relationships for CA growth

972,270 1,111,089 1,233,962 1,353,502 1,478,024

Based on Infrastructure bonds guidelines, we

31.2

14.3

11.1

9.7

9.2 expect IDFC Bank to raise ~INR120b p.a. bonds

196,200 307,368 430,608 568,094 722,389

on an average over next 5years

776,070 803,721 803,354 785,408 755,636

36,000

43,200

51,840

62,208

74,650

1,277,781 1,529,545 1,794,541 2,093,593 2,446,073

38,981

506,560

51.8

260,000

186,560

60,000

692,640

23.8

529,000

46,640

117,000

48,205

566,040

60,553

602,708

66,737

636,091

65,885

672,166

Treasury book transfer expected to be

~INR175b

5.7

380,666

We factor in higher G-Sec in the balance sheet

167,084

124,416 Entire equity investments to remain in holdco.

1,625,907

~INR525b of loans to be transferred to the bank

(of which project loans are INR350b)

23.0

1,041,118

We factor 18% CAGR over FY16E-21E

250,626

334,164 Non Infra corporate loans to dominate initially;

Commercial banking (Retail and SME)

contribution to rise with a lag

82,115

2,446,073

200,000

83,700

50,000

559,300

11.7

6.5

5.5

286,000 314,600 346,060

208,040 201,708 186,351

72,000

86,400 103,680

867,780 1,074,256 1,322,335

25.3

626,520

89,160

152,100

23.8

742,054

134,472

197,730

23.1

878,935

186,351

257,049

460,000

9,300

90,000

Other Assets

Total Assets

33,000

39,600

47,520

57,024

68,429

958,157 1,277,781 1,529,545 1,794,541 2,093,593

22 April 2015

IDFC

Exhibit 58:

Customer assets mix (%)

Y/E March

Loans

Infra

Eligible for Infra bonds

Others

PSL loans (in-house)

Other loans

Investments

PSL related

PTC + Securitization

RIDF

Non SLR (Bonds etc)

# Loans + Investments (ex G Sec)

2016

80.7

66.4

16.6

49.8

1.3

13.0

19.3

12.1

6.7

5.4

7.2

2017

73.7

56.3

23.2

33.1

5.0

12.5

26.3

19.9

11.2

8.7

6.4

2018

75.6

54.6

29.8

24.8

7.8

13.3

24.4

18.1

10.4

7.8

6.3

2019

78.9

54.5

35.1

19.3

9.9

14.5

21.1

14.8

8.6

6.2

6.3

2020

82.0

54.5

39.1

15.4

11.6

15.9

18.0

11.6

6.9

4.6

6.4

2021

84.8

54.3

41.9

12.4

13.1

17.4

15.2

8.7

5.4

3.3

6.5

Comments

We build in a gradual pickup in

organic PSL capabilities

RIDF would be a major drag on

profitability in the initial years

Source: MOSL

Exhibit 59:

Liability mix (%)

Y/E March

Deposits

Retail term + Bulk

Infra bonds

Other borrowings

Branches

2.5

0.2

2.3

14.1

80.9

3.0

0.6

6.4

18.2

71.8

150

3.5

1.1

10.4

23.5

61.5

225

4.0

1.9

14.1

27.9

52.1

325

4.5

2.8

17.7

31.5

43.5

425

2016

5.0

2017

10.0

2018

15.0

2019

20.0

2020

25.0

2021 Comments

30.0

Access to horizontal and vertical value

chain of existing Infra clients will enable

5.0 faster buildup of CA book

3.7

21.3

34.2

We expect aggressive expansion in

35.8

branch network (YES had 117 branches

525 after five years)

Source: MOSL

* as a percentage of interest bearing liabilities

Exhibit 60:

P&L statement details (INR m)

Y/E March

Interest Income

Interest Expense

Net Interest Income

Change (%)

Non Interest Income

Change (%)

Net Income

Change (%)

Operating Expenses

Change (%)

Pre Provision Profits

Change (%)

Provisions (excl tax)

Credit Cost (%)

PBT

Tax

Tax Rate (%)

PAT

2H2016

45,119

29,382

15,737

5,350

21,087

2017

101,981

72,655

29,326

10,500

39,826

88.9

11,986

212.3

27,840

1,878

0.3

25,962

8,568

33.0

17,395

2018

122,247

84,891

37,356

27.4

14,600

39.3

51,956

30.5

15,125

26.2

36,831

32.3

2,341

0.3

34,490

11,382

33.0

23,108

2019

146,095

101,081

45,014

20.5

18,880

29.3

63,894

23.0

18,962

25.4

44,932

22.0

3,884

0.4

41,048

13,546

33.0

27,502

2020

173,267

118,347

54,920

22.0

24,294

28.7

79,214

24.0

22,851

20.5

56,363

25.4

4,793

0.4

51,570

17,018

33.0

34,552

2021

205,707

137,931

67,777

23.4

30,118

24.0

97,894

23.6

27,222

19.1

70,673

25.4

5,896

0.4

64,776

21,376

33.0

43,400

ROAs expected to rise from 1.6% (FY16)

to 1.9% (FY21)

Source: MOSL

Spreads are expected to be lower; high

capitalization to drive margins higher

Comments

3,838

We factor high technology costs and

branch expansion cost. Low CI ratio of

Infra bus. to keep CI ratio lower at

>30%

17,249

1,355

0.5

15,894

5,245

33.0

10,649

22 April 2015

IDFC

Exhibit 61:

Key ratios

Y/E March

Spreads Analysis (%)

Avg. Yield-Earning Assets

Avg. Yield on loans

Avg. Yield on Investments

Avg. Cost-Int. Bear. Liab.

Interest Spread

Net Interest Margin

Profitability Ratios (%)

RoE

RoA

Int. Expense/Int.Income

Fee Income/Net Income

Non Int. Inc./Net Income

Efficiency Ratios (%)

Cost/Income

Empl. Cost/Op. Exps.

Cost per Empl. (INR m)

ex-Infra bus. (INR m)

NP per Empl. (INR m)

30.1

41.2

1.6

0.9

5.8

29.1

45.1

1.5

1.0

5.1

29.7

47.6

1.4

1.0

4.3

28.8

49.3

1.3

1.0

4.1

27.8

Low CI infra business key enabler of lower overall

low CI ratio

11.2

1.56

71.2

22.6

26.4

13.6

1.65

69.4

24.3

28.1

14.5

1.65

69.2

25.6

29.5

16.2

1.78

68.3

26.9

30.7

Expect sustainable ROE to be ~500bp higher than

17.8 erstwhile NBFC business

1.91

67.1

27.2

30.8

2017

9.7

11.6

6.8

7.8

1.9

2.8

2018

9.3

11.1

6.5

7.1

2.2

2.8

2019

9.4

11.0

6.5

7.1

2.3

2.9

2020

9.5

10.9

6.6

7.1

2.5

3.0

2021 Comments

9.7

10.9

6.7

7.0

2.6

Sharp drop in FY17 spreads led by regulatory req.

3.2

Initial lower leverage to keep NIMs healthy

48.9

1.3 Employee strength (ex infra) to increase from

2,250 in FY16E

1.0 to 12,000 employees in FY22E

4.3

Source: MOSL

22 April 2015

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Email : kadambari.balachandran@motilaloswal.com

Contact : (+65)68189232

Contact : (+65) 68189233 / 65249115

Office Address : 21 (Suite 31),16 Collyer Quay,Singapore 04931

For Singapore

Motilal Oswal Securities Ltd

22 April 2015

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025

Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com