Motilal Oswal upgrades rating on IDFC to 'Buy'

1. The good old 'new bank' story
IDFC
Detailed Report | 22 April 2015
Sector: Financials
Vallabh Kulkarni (Vallabh.Kulkarni@MotilalOswal.com);+91 22 3982 5430
Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Ocean of opportunities

2. IDFC
22 April 2015 2
Contents
The good old ‘new bank’ story .................................................................................... 3
Milestones.................................................................................................................... 5
Banking Opportunity: Exciting model for the decade................................................. 6
IDFC Bank – A Unique banking model ....................................................................... 12
Highly profitable Infra business to be the key enabler............................................. 16
Transition expected to be smooth............................................................................. 20
Higher leverage to drive higher sustainable RoE...................................................... 24
Appendix 1: Comments by management in the run up to launch of IDFC Bank...... 27
Appendix 2: Infrastructure Debt Fund....................................................................... 29
Appendix 3: Key management for IDFC Bank ........................................................... 30
Financials and valuations........................................................................................... 31
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

3. IDFC
22 April 2015 3
The good old ‘new bank’ story
A unique business model at play
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.
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).
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
Detailed report | Sector: Financials
IDFC
CMP: INR167 TP: INR232 (+39%) Upgrade to BuyBSE Sensex S&P CNX
27,890 8,430
Stock Info
Bloomberg IDFC IN
Equity Shares (m) 1,592.8
52-Week Range (INR) 188/108
1, 6, 12 Rel. Per (%) 2/14/19
M.Cap. (INR b) 279.2
M.Cap. (USD b) 4.5
Avg Val(INRm)/Vol ‘000 1334/8925
Free float (%) 100.0
Please refer to our sector report
“Pool of Wealth”
Shareholding pattern (%)
As on Mar-15 Dec-14 Mar-14
Promoter 0.0 0.0 0.0
DII 30.0 31.1 29.4
FII 47.4 47.7 52.6
Others 22.6 21.2 18.0
FII Includes depository receipts
Stock Performance (1-year)
100
125
150
175
200
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
I D F C
Sensex - Rebased

4. IDFC
22 April 2015 4
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 room 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
INR b USD b INR/sh Valuation Rationale
IDFC Bank 288.7 5.4 182 2x NW for listed entity, 20% holdco disc
IDF 17.4 0.3 11 1x Net worth
Alternative Assets Management 12.8 0.2 8 8% of FY17E AUM
NSE stake 10.7 0.2 7 5.8% stake, base price of last deal
IB and Broking 7.6 0.1 5 1x FY17E NW
Mutual Fund Business 16.4 0.3 10 3.4% of FY17E AUM
Cash on balance sheet (Parent) 14.8 0.3 9 1x Cash
Total Value 368.4 6.9 232
CMP (INR) 167
Upside (%) 39
Source: MOSL

5. IDFC
22 April 2015 5
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

6. IDFC
22 April 2015 6
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
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
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
Source: MOSL, RBI
6 7 8 9 10 12 14 16 18 20 22 23 25 28 32
37
43
50
56 65
78
90
100
113
127
142
159
178
200
224
250
280
314
352
394
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17E
FY19E
FY21E
FY23E
FY25E
Nominal GDP (INR t)
CAGR
10.0%
CAGR
14.8%
CAGR
14.4%
CAGR
12.0%
CAGR
15.8%
CAGR
14.0%
Despite the moderation in
real GDP growth to an
average of 5%, loans grew
15% CAGR in the recent
years
Indian Financials’ growth to
be driven by favorable
demographics, increasing
middle class population,
under-penetrated retail and
SME and infrastructure
development
Assumption of nominal GDP
growth of 12% as compared
to ~14% over FY91-14

7. IDFC
22 April 2015 7
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
long period average) – loan-to-GDP to rise gradually to 82%
Source: MOSL, RBI
Exhibit 4: Even in 2025, loan-to-GDP ratio in India would be
lower than few peer nations (Loan-to-GDP, 2013 %)
Source: MOSL, World Bank
Exhibit 5: Loan portfolio could expand by ~5x over the 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
20
20
20
20
20
24
29
34
41
47
49
51
52
54
59
64
69
72
79
82
0.9
0.5
1.4
0.5
1.7
1.2
0.6
1.5
0.9
1.6
2.2
1.8
3.0
1.3
2.2
2.7
1.7
1.4
1.4
1.1
1.1
1.1
1.2
1.1
1.2
1.4
1.4
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17E
FY19E
FY21E
FY23E
FY25E
Loan to GDP Loan to GDP multiplier 198
184
177
176
148
148
134
54
35
33
Hong Kong
US
Japan
Ukraine
Thailand
Korea
China
India
Indonesia
Phillipines
1.2
1.3
1.5
1.6
2.1
2.5
2.8
3.2
3.7
4.4
5.1
5.9
7.3
8.4
11.0
15.1
19.3
23.6
27.8
32.4
39.4
46.1
52.6
59.9
68.3
79.8
93.2
108.8
127.1
148.5
173.4
202.6
236.6
276.4
322.8
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17E
FY19E
FY21E
FY23E
FY25E
Loan (INR t)
CAGR
16.8%
CAGR
20.3%
CAGR
24.1%
CAGR
15.2%CAGR
15.8%
CAGR
15.6%
Loan portfolio could expand
to INR323t from INR68t in
FY15, more than 5x rise in
next 10 years

8. IDFC
22 April 2015 8
Where is the money? USD14t GDS by FY25
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 7: USD14t of cumulative savings by FY25
20
25
30
35
40
0
40
80
120
160
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16
FY18
FY20
FY22
FY24
Savings (INR t; LHS) Savings to GDP
Linear (Savings to GDP)
Source: RBI, MOSL
Exhibit 8: Savings to increase 4x by FY25 (USD t)
Source: RBI, MOSL
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
Source: NACER
Exhibit 10: Mortgage to GDP lower compared to peers (%)
Source: HDFC
0.7
3.6
13.7
FY92-03
FY04-14
FY15-25
31 53
114160
267
547
13 20 37
2011 2015-16 2025-26
Indianmiddle class household (m)
Individual (m)
Percentage of total population
8 15 20
32 36 40 44 45
54
76
84
101
India
China
Thailand
Malaysia
SouthKorea
Taiwan
Hongkong
Germany
Singapore
USA
UK
Denmark
Mortgage to GDP
Nominal GDP CAGR of 12%
and gradual increase in
savings to 36% of GDP could
bring USD14t plus of savings
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

9. IDFC
22 April 2015 9
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 11: Incremental share of MSME loans on a rise (%)…
Source: RBI, Ministry of MSME
Exhibit 12: …yet, informal sources are a major funding
source (INR t)
Source: IFC, SIDBI
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)
Source: Planning commission, MOSL
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.
6.7 6.6
9.0
9.2
11.2
12.3
11.4
13.0
14.3
21.3 25.7
67.7
19.9
42.1
33.5
8.6 29.8
25.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Share in overall Loans MSME Loan Growth
32.5
24.4
7
1.1
Supply Formal Sources Self-Equity Informal Sources
3.0 3.6 4.0 4.6 5.3 6.2 7.1 8.1
9.2
10.4
6.4
7.2 7.5
7.9 8.4
9.0 9.5 9.9 10.3
10.7
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Infra Investment Spend as a % of GDP
Of the overall SME funding
requirement, only 22% is
met through formal sources
Structural opportunity
remains high; however,
strong policy measures
required to boost
investments and funding
XIIth five-year plan
estimates infra funding
requirement of USD1t
Only 35% of India’s adults
have formal banking
accounts; in rural areas, of
the 138m households, only
41.6m have accessed
banking services

10. IDFC
22 April 2015 10
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 (%)
Source: World Bank, MOSL
How Private Banks are capitalizing on this opportunity?
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
Source: MOSL, Company
Exhibit 16: Aggressive expansion of private banks into India’s hinterland (PBs Incremental
branch mix %)
Source: Company, MOSL
12 9
18
28
12
9
15
7
20
24
9 7
India Other South Asia Rest of Developing
World
Other BRIC Economies
Saved Formally Saved Using Other Methods Only Others
30 30 34 32 38 36 25 30 34 22 31 26 30 29 19 35
28
5 6 6 6 7 7 8
9
10 11
12
13
14
15 15 16
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
PBs - Share in incr. branches Incr. MS over 2000-15 Private Banks MS
78 79 76 81 84 85 67
53
62 57 53
39 34
21
39
4822 21 24 19 16 15
33
47
38 43 47
61 66
79
61
52
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Metro + Urban SemiUrban + Rural
The recent spurt in number
of branches in semi-urban
and rural areas visible as
other segments become
highly competitive
Private Banks gaining SA market
share (%)
20032009 201120122013
SBIN 27 27 28 28 28
Nation-
alized Bk
55 49 48 47 46
Pvt Banks 8 15 16 17 18
Others 9 10 9 9 8

11. IDFC
22 April 2015 11
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
Source: MOSL, Company
9 12 15 15 14 8 11 12 13 13
47 43 44 41 43 47 47 42 36 29
17 20 21 22 21 23 25 28 32 42
27 24 21 21 23 22 17 19 20 17
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
ForeignBanks NationalisedBanks Private Sector Banks SBI

12. IDFC
22 April 2015 12
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
Source: MOSL, Company
Existing shareholders
IDFC
Non-Operating Financial
Holding Company
Bank AMC Securities AIF
Exisiting shareholders to
get one share of IDFC and
IDFCBank (47% stake)
Infra lending business to
be transferred to the
bank
Weexpect ~INR140b
NW to be transferred to
the bank
Foundation
IDF
(49% holding)

13. IDFC
22 April 2015 13
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
Source: MOSL, Company
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 2/3rd
of the loans and ~55% of customer assets to come
from Infrastructure segment by FY21E.
Exhibit 20: Steady diversification of loan portfolio
Source: MOSL, Company
Exhibit 21: Infrastructure loan book mix to remain
largely same
Source: MOSL, Company
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.
IDFC Bank
Infrastructure
Lending
Non-InfraCorporate
Lending
Commercial Banking
(Retail & SME )
Bharat Banking
(Rural)
529 627 742 879 1,041
88
82
79
76
74
FY17 FY18 FY19 FY20 FY21
Infrastructure loans (INR b) % of loans
414 489 576 680 803
69 69 68 67 66
FY17 FY18 FY19 FY20 FY21
Project Infra loans (INR b) % of Infra loans
IDFC Bank’s lending
business would be divided
into four broad verticals
Bharat Banking business to
be the key PSL enabler,
going forward
Infrastructure loans
expected to be 2/3
rd
of the
loans and ~55% of customer
assets by FY21E
Post conversion, IDFC Bank
will be the seventh-largest
private sector bank in the
country by loan size

14. IDFC
22 April 2015 14
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)
Source: MOSL, Company
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)
Source: MOSL, Company
Exhibit 25: CA buildup likely to be faster
Source: MOSL, Company
76
95
144
170
357
364
444
406
480
638
646
666
2,606
3,471
3,753
DHLBK
DCBB
LVB
CUBK
KVB
SIB
JKBK
VYSB
FB
IIB
KMB
YES
AXSB
HDFCB
ICICIBC
IDFC will
start here
0.6
0.8
1.1 1.2
1.3
1.5
1.6
2.3
FB IDFCB VYSB HDFCB ICICIBC AXSB YES IIB
20 32 46
62
81
106
2.5
3.0
3.5
4.0
4.5
5.0
FY16 FY17 FY18 FY19 FY20 FY21
CA deposits (INRb)
CA deposits (% of Interest bearing liabilities)
CA and fees buildup is likely
to be faster due to
dominance of
corporate/Infrastructure
business

15. IDFC
22 April 2015 15
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 26: Steep PSL requirements as IDFC converts
into a bank (INR b)
Source: MOSL, Company
Exhibit 27: We build a gradual increase in in-housing sourcing
of PSL loans as Bharat Banking expands (% share of PSL
requirements)
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
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.
233
297
336
373
418
82 89 84 75 63
FY17 FY18 FY19 FY20 FY21
PSL requirement RIDF devolvement
35 30 25 20 15
45
40
35
30
25
20
30
40
50
60
FY17 FY18 FY19 FY20 FY21
RIDF devolvement PTC/Securitisation In-house sourcing
Bharat Banking can be a key
differentiator
“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

16. IDFC
22 April 2015 16
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
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.
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.
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
Aided by a steady income
from the Infrastructure
business, Infrastructure
investment for IDFC Bank is
expected to be higher
/aggressive

17. IDFC
22 April 2015 17
Exhibit 28: Supported by Infrastructure business, we expect IDFC Bank to expand branches
at a rapid pace (nos.)
* 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 Credit % share
Greater Mumbai++ 2,338 1.9 14,523 17.6 14,636 23.2
Delhi++ 3,018 2.4 8,523 10.3 8,160 12.9
Bangalore++ 1,843 1.5 3,883 4.7 2,523 4.0
Chennai++ 1,647 1.3 2,524 3.1 3,203 5.1
Kolkata++ 1,425 1.2 2,301 2.8 2,291 3.6
Hyderabad++ 1,533 1.2 2,293 2.8 2,500 4.0
Pune 692 0.6 1,265 1.5 962 1.5
Ahmedabad++ 897 0.7 1,155 1.4 1,336 2.1
Lucknow 640 0.5 794 1.0 520 0.8
Bhopal 385 0.3 736 0.9 265 0.4
Patna 421 0.3 597 0.7 169 0.3
Gurgaon 365 0.3 583 0.7 313 0.5
Jaipur 583 0.5 575 0.7 760 1.2
Vadodara 371 0.3 528 0.6 450 0.7
Noida 290 0.2 526 0.6 228 0.4
Bhubaneswar 351 0.3 511 0.6 299 0.5
Chandigarh 355 0.3 504 0.6 584 0.9
Kanpur 460 0.4 495 0.6 145 0.2
Nagpur 362 0.3 417 0.5 319 0.5
Navi Mumbai 262 0.2 415 0.5 111 0.2
Total 123,184 100 82,736 100 63,179 100
++ Based on job openings posted on the website, we expect IDFC Bank to initially focus on these locations Source: MOSL, Company
Infrastructure bonds likely to boost profitability
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).
75
150
225
325
425
525
17 40
67
117
150
214
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
IDFC Branches YES Branches
2/3
rd
of the loans are likely
to be Infrastructure ones by
FY21E, and of which project
loans are expected to be
2/3
rd
. Thus, 45% of the loan
book is expected to be
qualified for Infrastructure
bonds by FY21E

18. IDFC
22 April 2015 18
Exhibit 30: Expect incremental Infrastructure bonds issuance of INR100b every year
1HFY16 FY16 FY17 FY18 FY19 FY20 FY21
Project Infra loans 367.5 385.0 431.2 495.9 570.3 655.8 754.2
Eligibility factor (%) 70 70 56 42 28 14 0
Eligible project Infra loans 110.3 127.8 225.4 341.5 467.4 604.4 754.2
Infrastructure bonds raised 100.0 120.0 202.9 307.4 420.6 543.9 678.8
% of Infra loans 27.2 31.2 47.0 62.0 73.8 82.9 90.0
Incremental bond issuances 100.0 120.0 82.9 104.5 113.2 123.3 134.8
Source: MOSL, Company
Exhibit 31: We expect 150bp+ NIM benefit in Infrastructure book...
Bonds Deposits
Amount raised 100 100
Deployment in SLR 0 22
Deployment in CRR 0 4
Deployment in PSL (40% of 76%) 0 30
Deployment in Infra loans 100 44
Pro-forma P&L
Interest cost 8.8 8.0
SLR Interest income 0.0 1.7
CRR Interest income 0.0 0.0
PSL Interest income 0.0 2.4
Infra interest income 11.5 5.1
Total Interest income 11.5 9.2
Total Interest cost 8.8 8.0
Spreads (%) 2.8 1.2
Source: MOSL, Company
Exhibit 32: …Resulting in incremental RoE benefit of 40bp+
Benefit
A Margin benefit of issuing these bonds 150bp
B Proportion of Infrastructure and Affordable housing in overall loan book ~55%
C Margin benefit on overall book (A*B) 83bp
D Loans as % of assets ~60%
E Pre-tax RoA benefit (C*D) 50bp
Tax rate 33%
F RoA benefit by 2020 ~33bp
Incremental RoA benefit per year ~6bp
Leverage ~7x
RoE benefit after full refinancing 230bp
Incremental RoE benefit per year 42bp
Source: MOSL, Company
RBI in its recent policy has
allowed banks to
participate in Infrastructure
bonds - key hurdle resolved
Infrastructure bonds to
substitute term deposits.
Thus, comparison on term
deposits cost is a right
indicator, in our view

19. IDFC
22 April 2015 19
Exhibit 33: Cost efficiency to be the key differentiator for IDFC Bank (opex % of assets)
* Year 1 ends in March 2017 Source: MOSL, Company
Exhibit 34: Operating expenditure (%) - technology related expenses to remain high in
the initial years
Source: MOSL, Company
Exhibit 35: Our employee cost assumptions
remain conservative (INR m)
Source: MOSL, Company
Exhibit 36: Technology costs would dominate overall
expense in the initial years of operations (INRm)
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)
Year Branches (nos.) Employees (nos.)
YES FY13 430 7,024
KMB (SA) FY10 249 8,804
VYSB FY13 546 9,758
IIB FY12 400 9,730
FB FY14 1,174 10,268
IDFCB FY17 150 3,750
Source: MOSL, Company
1.1 1.1 1.1 1.2 1.2 1.2
2.2
3.5
3.9
3.3 3.3 3.1
2.6
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
IDFCB Private Banks average YES, KMB (in initial years)
45 41 45 48 49 49
26 25 23 21 20 19
29 34 32 31 31 32
2HFY16 FY17 FY18 FY19 FY20 FY21
Employee Technology Other expenses
1.0 1.0 1.0 1.0 1.0
0.7
FY17 FY18 FY19 FY20 FY21
Cost per employee Private Banks average (FY14)
107
81
69
61 57
30
FY17 FY18 FY19 FY20 FY21
Opex per branch Private Banks average (FY14)
Despite technology and
branch expansion cost,
highly cost efficient
Infrastructure business to
keep opex low

20. IDFC
22 April 2015 20
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
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
Source: MOSL, Company
0.6 0.6 0.6 0.7
4.5
5.3
6.1 6.1
2.3
3.0
3.5 3.8
4QFY14 1QFY15 2QFY15 3QFY15
(% of loans) GNPA Restructured loans Outstanding provisions
Risk adjusted RoA, post
conversion into a bank, is
likely to be high

21. IDFC
22 April 2015 21
Exhibit 39: IDFC Limited – Energy Sector Cumulative OS Approvals
Source: MOSL, Company
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 40: Asset quality expected to remain strong
Source: MOSL, Company
Exhibit 41: Dominance of corporate and working capital loans
to drive healthy asset quality
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.
1.22
1.15
0.92
0.75 0.76
0.83
0.93
0.37 0.35
0.28 0.23 0.23 0.25 0.28
1HFY16 FY16 FY17 FY18 FY19 FY20 FY21
GNPA (%) NNPA (%)
0.00
0.05
0.12
0.30
0.42
0.50
0.04 0.07
0.17
0.22 0.24
FY16 FY17 FY18 FY19 FY20 FY21
Slippages (%)
Credit cost (%)
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

22. IDFC
22 April 2015 22
Exhibit 42: Aggressive provisioning since 2014 to cover for current stressed assets book
Source: Company, MOSL
Strong treasury portfolio to provide relief on earnings
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
Shares
(m)
Book value
(INR m)
Mkt value
estimate (INR m)
NSE India Limited 2.4 601 16,375
STCI Finance Limited 3.5 540 582
ARCIL 27.2 1,138 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 250,000
AFS portfolio (assumed) 30.0%
Total AFS portfolio 75,000
Indicative yield of the portfolio (%) 8.25
Current Gsec yield (%) 7.8
Duration (Avg. of Banking sector duration as on 3QFY15) 3.2
Total unrealized gains (current) 1,080
Total unrealized gains (further 50bp decline in Gsec) 2,280
Source: Company, MOSL
63
164
73
400
199
148
34
1,151
242
424
702
445
515
487
945
399
631
978
838
1,026
305
518
1,647
592
501
365
4,825
2,039
2,812
1,532
1Q2008
3Q2008
1Q2009
3Q2009
1Q2010
3Q2010
1Q2011
3Q2011
1Q2012
3Q2012
1Q2013
3Q2013
1Q2014
3Q2014
1Q2015
3Q2015
Total provisions (INR m)Provisions for stress in
existing loan book to be
provided before conversion
into a bank
Treasury gains are likely to
help in providing for NPAs
or direct technology cost

23. IDFC
22 April 2015 23
Infrastructure financing profitability higher under 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
Source: MOSL, Company
4.5 7.6
14.8 15.8
24.3 25.8 28.7
70
IIB HDFCBC YES VYSB FB ICICIBC AXSB IDFC
Project Infra and Housing Loans (% of loans)
CA float, higher fees and
reduction in cost of funds to
drive RoA. Leverage levels
are expected to be higher
under the banking setup
Regulatory exemptions on
~50% loan book would lead
to structurally higher RoA
for IDFC Bank

24. IDFC
22 April 2015 24
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 room 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.
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)
Source: MOSL, Company
8.7
9.7 10.1 10.1 10.7 11.3
15.3
VYSB ICICIBC IIB AXSB FB HDFCBC YES
IDFC Limited (4.8x)
FY17 IDFC Bank (7.9x)
FY21 IDFC Bank (9.4x)
Leverage ratios bound to go
up with better liability
profile

25. IDFC
22 April 2015 25
Exhibit 47: …However, RoE to be similar to peers led by higher core profitability (%)
Source: MOSL, Company
Exhibit 48: Improvement in RoE to be largely led by higher fees and leverage (RoE %)
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…
Source: MOSL, Company
Exhibit 50: …However, uncertainty on converting to a
bank has led to underperformance over the last year
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.
1.6 1.6 1.7 1.8 1.9
11.2
13.6 14.5
16.2
17.8
FY17 FY18 FY19 FY20 FY21
RoA RoE
7.9 8.5 9.0 9.2 9.4
Leverage
11.2
17.8
2.6
2.7 0.9 0.1 0.7 1.3
4.1
FY17E
ROE
Margins
Fees
Opex
Trading
inc
Provisions
Tax
Leverage
FY21ROE
0
500
1000
1500
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12
Aug-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Bankex (rebased) IDFC(rebased)
100
120
140
160
180
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Bankex Rebased IDFCRebased

26. IDFC
22 April 2015 26
Exhibit 51: IDFC: one-year forward PBV
Source: MOSL, Company
Exhibit 52: IDFC: one-year forward PE
Source: MOSL, Company
Exhibit 53: IDFC’s target price sensitivity to valuation multiple of the banking business (INR b)
Target
price
Upside %
FY17E Banking
NW (INR b)
Banking
multiple (x)
IDFC Bank
valuation (INR b)
Value of other
business (INR b)
Fair Value
(20% HoldCo
discount INRb)
195 14 161 1.6 258 80 311
214 24 161 1.8 291 80 340
232 35 161 2.0 323 80 368
250 46 161 2.2 355 80 397
268 56 161 2.4 388 80 426
323 88 161 3.0 484 80 513
413 141 161 4.0 646 80 657
504 194 161 5.0 807 80 802
Source: MOSL, Company
Exhibit 54: IDFC’s target price under various scenarios
(multiple for Banking Business – x FY17E BV)
Source: MOSL, Company
Exhibit 55: SOTP - FY17E based
INR b USD b INR/sh Valuation Rationale
IDFC Bank 288.7 5.4 182 2x NW for listed entity, 20% holdco disc
IDF 17.4 0.3 11 1x Net worth
Alternative assets mgt 12.8 0.2 8 8% of FY17E AUM
NSE Stake 10.7 0.2 7 5.8% stake, base price of last deal
IB and Broking 7.6 0.1 5 1x FY17E NW
Mutual Fund Business 16.4 0.3 10 3.4% of FY17E AUM
Cash on balance sheet (Parent) 14.8 0.3 9 1x Cash
Total Value 368.4 6.9 232
CMP (INR) 167
Upside (%) 39
Source: MOSL
1.4
4.9
2.0
0.80.0
1.5
3.0
4.5
6.0
Aug-05
Jan-07
May-08
Oct-09
Feb-11
Jul-12
Nov-13
Apr-15
PB (x) Peak(x) Avg(x) Min(x)
13.2
39.6
15.1
6.6
3
13
23
33
43
Aug-05
Jan-07
May-08
Oct-09
Feb-11
Jul-12
Nov-13
Apr-15
PE (x) Peak(x) Avg(x) Min(x)
195
232
268
80
130
180
230
280
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Bear case (1.6x) Base case (2.0x) Bull case (2.4x)

27. IDFC
22 April 2015 27
Exhibit 56: IDFC bank DuPont
Y/E MARCH 2017 2018 2019 2020 2021
Net Interest Income 2.62 2.66 2.71 2.83 2.99
Fee income 0.81 0.90 0.99 1.10 1.17
Fee to core Income 22.60 24.25 25.64 26.88 27.19
Core Income 3.43 3.56 3.69 3.92 4.16
Operating Expenses 1.07 1.08 1.14 1.18 1.20
Cost to Core Income 31.27 30.28 30.89 29.98 28.84
Employee cost 0.44 0.49 0.54 0.58 0.59
Emp. to total exp (%) 41.18 45.06 47.61 49.30 48.86
Technology 0.27 0.25 0.24 0.23 0.23
Others 0.36 0.35 0.36 0.36 0.38
Core Operating Profit 2.36 2.48 2.55 2.74 2.96
Trading and others 0.13 0.14 0.15 0.15 0.15
Operating Profit 2.49 2.62 2.70 2.90 3.11
Provisions 0.17 0.17 0.23 0.25 0.26
NPA 0.02 0.04 0.10 0.14 0.16
Others 0.15 0.13 0.14 0.11 0.10
PBT 2.32 2.46 2.47 2.65 2.85
Tax 0.77 0.81 0.82 0.88 0.94
Tax Rate 33.00 33.00 33.00 33.00 33.00
RoA 1.56 1.65 1.65 1.78 1.91
Leverage (x) 7.22 8.24 8.76 9.11 9.33
RoE 11.24 13.57 14.50 16.18 17.84
Source: Company, MOSL

28. IDFC
22 April 2015 28
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.
Long term strategy
 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!
New structure of IDFC group
 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.
Branch network expansion
 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.
Client acquisition strategy
 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.
Profitability
 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.
Investments in technology
 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
PSL lending
 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.

29. IDFC
22 April 2015 29
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:
Regulatory guidelines
Clear and focused
business model
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
Protection available to
asset quality
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
Limited asset-liability
mismatches and foreign
currency risks
The regulation allows IDF-NBFCs to raise only long-term funds with a minimum five-year maturity
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

30. IDFC
22 April 2015 30
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  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
Mr Ravi Shankar Head of Bharat
Banking
~30years  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

31. IDFC
22 April 2015 31
Financials and valuations
Exhibit 57: Balance sheet details (INR m)
Y/E March 2016 2017 2018 2019 2020 2021 Comments
Share Capital 33,815 33,815 33,815 33,815 33,815 33,815
Bank would be well capitalized for future
growth. We factor initial net worth of INR140b
Reserves & Surplus 114,342 127,667 145,368 166,434 192,901 226,145
Net worth 148,157 161,481 179,182 200,249 226,716 259,960
Deposits 39,000 108,030 196,074 308,490 451,167 633,439
Change (%) 81.5 57.3 46.3 40.4
CA 19,500 32,409 45,751 61,698 81,210 105,573 IDFCB is expected to capitalize on strong
corporate relationships for CA growthSA 1,875 6,563 14,766 29,859 50,761 78,381
Borrowings 741,000 972,270 1,111,089 1,233,962 1,353,502 1,478,024 Based on Infrastructure bonds guidelines, we
expect IDFC Bank to raise ~INR120b p.a. bonds
on an average over next 5years
Change (%) 31.2 14.3 11.1 9.7 9.2
Infra Bonds 110,000 196,200 307,368 430,608 568,094 722,389
Other borrowings 631,000 776,070 803,721 803,354 785,408 755,636
Other Liabilities & Prov. 30,000 36,000 43,200 51,840 62,208 74,650
Total Liabilities 958,157 1,277,781 1,529,545 1,794,541 2,093,593 2,446,073
Current Assets 32,157 38,981 48,205 60,553 66,737 65,885
Investments 333,700 506,560 566,040 602,708 636,091 672,166 Treasury book transfer expected to be
~INR175b
Change (%) 51.8 11.7 6.5 5.5 5.7
G Sec 200,000 260,000 286,000 314,600 346,060 380,666 We factor in higher G-Sec in the balance sheet
RIDF and PTC 83,700 186,560 208,040 201,708 186,351 167,084
Other investments 50,000 60,000 72,000 86,400 103,680 124,416 Entire equity investments to remain in holdco.
Loans 559,300 692,640 867,780 1,074,256 1,322,335 1,625,907 ~INR525b of loans to be transferred to the bank
(of which project loans are INR350b)
Change (%) 23.8 25.3 23.8 23.1 23.0
Infra loans 460,000 529,000 626,520 742,054 878,935 1,041,118 We factor 18% CAGR over FY16E-21E
PSL loans 9,300 46,640 89,160 134,472 186,351 250,626
Non Infra loans 90,000 117,000 152,100 197,730 257,049 334,164 Non Infra corporate loans to dominate initially;
Commercial banking (Retail and SME)
contribution to rise with a lag
Other Assets 33,000 39,600 47,520 57,024 68,429 82,115
Total Assets 958,157 1,277,781 1,529,545 1,794,541 2,093,593 2,446,073

32. IDFC
22 April 2015 32
Exhibit 58: Customer assets mix (%)
Y/E March 2016 2017 2018 2019 2020 2021 Comments
Loans 80.7 73.7 75.6 78.9 82.0 84.8
Infra 66.4 56.3 54.6 54.5 54.5 54.3
Eligible for Infra bonds 16.6 23.2 29.8 35.1 39.1 41.9
Others 49.8 33.1 24.8 19.3 15.4 12.4 We build in a gradual pickup in
organic PSL capabilitiesPSL loans (in-house) 1.3 5.0 7.8 9.9 11.6 13.1
Other loans 13.0 12.5 13.3 14.5 15.9 17.4
Investments 19.3 26.3 24.4 21.1 18.0 15.2
PSL related 12.1 19.9 18.1 14.8 11.6 8.7
PTC + Securitization 6.7 11.2 10.4 8.6 6.9 5.4 RIDF would be a major drag on
profitability in the initial yearsRIDF 5.4 8.7 7.8 6.2 4.6 3.3
Non SLR (Bonds etc) 7.2 6.4 6.3 6.3 6.4 6.5
# Loans + Investments (ex G Sec) Source: MOSL
Exhibit 59: Liability mix (%)
Y/E March 2016 2017 2018 2019 2020 2021 Comments
Deposits 5.0 10.0 15.0 20.0 25.0 30.0
CA
2.5 3.0 3.5 4.0 4.5 5.0
Access to horizontal and vertical value
chain of existing Infra clients will enable
faster buildup of CA book
SA 0.2 0.6 1.1 1.9 2.8 3.7
Retail term + Bulk 2.3 6.4 10.4 14.1 17.7 21.3
Infra bonds 14.1 18.2 23.5 27.9 31.5 34.2 We expect aggressive expansion in
branch network (YES had 117 branches
after five years)
Other borrowings 80.9 71.8 61.5 52.1 43.5 35.8
Branches 75 150 225 325 425 525
* as a percentage of interest bearing liabilities Source: MOSL
Exhibit 60: P&L statement details (INR m)
Y/E March 2H2016 2017 2018 2019 2020 2021 Comments
Interest Income 45,119 101,981 122,247 146,095 173,267 205,707
Interest Expense 29,382 72,655 84,891 101,081 118,347 137,931
Net Interest Income
15,737 29,326 37,356 45,014 54,920 67,777
Spreads are expected to be lower; high
capitalization to drive margins higher
Change (%) 27.4 20.5 22.0 23.4
Non Interest Income 5,350 10,500 14,600 18,880 24,294 30,118
Change (%) 39.3 29.3 28.7 24.0
Net Income 21,087 39,826 51,956 63,894 79,214 97,894
Change (%) 88.9 30.5 23.0 24.0 23.6
Operating Expenses 3,838 11,986 15,125 18,962 22,851 27,222
We factor high technology costs and
branch expansion cost. Low CI ratio of
Infra bus. to keep CI ratio lower at
>30%
Change (%) 212.3 26.2 25.4 20.5 19.1
Pre Provision Profits 17,249 27,840 36,831 44,932 56,363 70,673
Change (%) 32.3 22.0 25.4 25.4
Provisions (excl tax) 1,355 1,878 2,341 3,884 4,793 5,896
Credit Cost (%) 0.5 0.3 0.3 0.4 0.4 0.4
PBT 15,894 25,962 34,490 41,048 51,570 64,776
Tax 5,245 8,568 11,382 13,546 17,018 21,376
Tax Rate (%) 33.0 33.0 33.0 33.0 33.0 33.0
PAT
10,649 17,395 23,108 27,502 34,552 43,400
ROAs expected to rise from 1.6% (FY16)
to 1.9% (FY21)
Source: MOSL

33. IDFC
22 April 2015 33
Exhibit 61: Key ratios
Y/E March 2017 2018 2019 2020 2021 Comments
Spreads Analysis (%)
Avg. Yield-Earning Assets 9.7 9.3 9.4 9.5 9.7
Avg. Yield on loans 11.6 11.1 11.0 10.9 10.9
Avg. Yield on Investments 6.8 6.5 6.5 6.6 6.7
Avg. Cost-Int. Bear. Liab. 7.8 7.1 7.1 7.1 7.0
Interest Spread 1.9 2.2 2.3 2.5 2.6 Sharp drop in FY17 spreads led by regulatory req.
Net Interest Margin 2.8 2.8 2.9 3.0 3.2 Initial lower leverage to keep NIMs healthy
Profitability Ratios (%)
RoE
11.2 13.6 14.5 16.2 17.8
Expect sustainable ROE to be ~500bp higher than
erstwhile NBFC business
RoA 1.56 1.65 1.65 1.78 1.91
Int. Expense/Int.Income 71.2 69.4 69.2 68.3 67.1
Fee Income/Net Income 22.6 24.3 25.6 26.9 27.2
Non Int. Inc./Net Income 26.4 28.1 29.5 30.7 30.8
Efficiency Ratios (%)
Cost/Income 30.1 29.1 29.7 28.8 27.8
Low CI infra business key enabler of lower overall
low CI ratio
Empl. Cost/Op. Exps. 41.2 45.1 47.6 49.3 48.9
Cost per Empl. (INR m) 1.6 1.5 1.4 1.3 1.3 Employee strength (ex infra) to increase from
2,250 in FY16E
to 12,000 employees in FY22Eex-Infra bus. (INR m) 0.9 1.0 1.0 1.0 1.0
NP per Empl. (INR m) 5.8 5.1 4.3 4.1 4.3
Source: MOSL

34. IDFC
22 April 2015 34
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