IDFC soars 8% as it pips 23 others for a banking licence

IDFC shares surged on Thursday after the Mumbai-based non-bank financial company became one of the two entities to bag a banking licence. The Reserve Bank said 25 applicants had been considered and judged under criteria including analysis of their financial statements, their track record over the past 10 years and their potential to run a bank. (Track stock)

Bandhan Financial, a non-listed microfinance organisation based in Kolkata, is the other entity to win a licence to set up bank branches across the country. The RBI said the approval would be valid for 18 months during which IDFC and Bandhan Financial will have to comply with requirements laid down by the central bank.

IDFC shares, which rose as much as 8.6 per cent initially, traded with modest gains on account of profit taking. Investors have been buying NBFCs on hopes that once the licence announcement is made, these stocks will turn out to be multi-baggers. IDFC, which specialises in infrastructure lending, has been a strong contender for a licence.

The stock has witnessed a sharp run up over the last week and month on hopes that it will emerge as a winner in the race to become a full-fledged bank. IDFC shares are up 16 per cent and 41 per cent over the last week and month as compared to a 1.7 per cent and 6.5 per cent gain in the broader Sensex over the same period.

As of 10.35 a.m., IDFC shares traded 2.35 per cent higher at Rs 130.80 as compared to a 0.13 per cent drop in the broader Sensex.

Analysts said the initial jump in the stock was a kneejerk reaction, but fundamentally the stock is likely to be under lot of pressure in the near term. That's because IDFC will have to build a new business from scratch, which may lead to strain on the balance sheet.

The bank licence is a negative for shareholders in near-term, but a positive in the long term, global investment bank Macquarie said. JP Morgan said IDFC will likely get re-rated further as the bank licence is a positive in longer term. Expect some near term earnings pain, but biggest challenge for IDFC is to meet priority sector norm, it added.

Asia-Pacific focussed brokerage CLSA said there will be pressure for 2-3 years because of asset reallocation, but deposit franchise and fees would ensure long-term gains. The return on assets would compress, but higher leverage will expand return on equity, it added.

Dr Rajiv Lall, chairman of IDFC, accepted that IDFC will see margin compression in the near term.

Shares in companies like L&T Finance and LIC Housing Finance, seen as strong contenders to bag a licence, fell sharply. L&T Finance traded 8 per cent lower at Rs 71.05, while SREI Infra traded 8.5 per cent lower at Rs 27.

IFCI shares were down 7.4 per cent, while Reliance Capital traded 4 per cent lower.