IDFC Limited’s first nine months of fiscal 2014 were characterized by slow loan growth (up 1%) as the infrastructure sector struggles with slow project approvals. Notwithstanding, profits were up 18% on the prior comparable period, with key drivers being lower provisions (down 21%), high fee-income growth (up 38%), and largely principal gains, which grew threefold. Excluding the effect of principal gains, profit was up a more modest 6%.
Overall, we continue to believe that if IDFC is successful in securing a banking license, the company will be able to substantially diversify its loan book and its liability profile significantly. This will make it more resilient to economic cycles in certain sectors it lends to, and also have a more reliable funding base. If IDFC gets a banking license it would also benefit from lower capital adequacy requirements that apply to banks, which should allow IDFC to quickly boost its returns on equity. We expect an outcome on the banking license application later in calendar year 2014, and retain our INR 134 fair value estimate, and no-moat rating.
Other key numbers in the results: a 12% increase in operating income outpacing the 9% expense growth. Net interest income was up 6%, as the 10% growth in average loans was partly offset by lower net interest margins, which fell back to 4% on a trailing twelve month basis (versus 4.1% previously). Provisions for the period also fell, as IDFC wrote off INR 1 billion on a non-performing account.