In 3QFY11, IDFC reported a strong growth in core earnings. NII increased by 23% qoq (+65% yoy), while loans grew by 2.0% qoq (+50% yoy). Fee income growth

moderated on qoq basis, in line with the moderation in loan growth. IDFC (consolidated) trades at 2.0x FY12F book value and 13.4x PE, we maintain Buy.

Sharp growth in net interest income
􀀟 Net interest income on infrastructure assets increased to 3.5% (3.3% in FY10) while net interest income on treasury operations were largely stable at 0.3% (0.3% in FY10). However, reported spreads (12 month rolling basis) came down to 2.4% (2.7% in FY10) but were stable qoq.

􀀟 Note, that IDFC had raised equity capital in 2QFY11 and the momentum in NII is partly due to the same. Further, loan growth in 2Q was back-ended, which has led to sharp growth in NII on qoq basis.

􀀟 Fee income increased by 25% yoy (-35% qoq) largely on the back of moderation in fee income growth related to lending activities.

Operating expenses increase at a fast pace
􀀟 Operating expenses grew by 50% yoy (+33% qoq). Operating costs to income ratio was at 24.5% in 3QFY11 compared to 20.8% a year ago (18.9% in 2QFY11).

Business growth moderates, inline with management guidance
􀀟 Loans grew by 2% qoq (+50% yoy) on the back of 54% qoq fall in disbursements during 3QFY11. Approvals fell by 81% qoq (-44% yoy) in 3QFY11, suggesting that incremental loan growth in 4QFY11 will be moderate.

Return on assets
􀀟 On a rolling 12-month basis, reported ROAs came down by 20bps to 3.1%. Net interest income to average assets increased by 20bp qoq to 3.8% which was more than offset by the 40bp qoq decline in non-interest income to average assets to 2.5%.