IDFC First Bank Limited

Core business model performance continues to be weak. It is a sign of worry that management has not been able to improve things in core performance till date. This also does not bode well for next quarter earnings especially as “other income” can easily fall.

The only major trigger now would be Shriram merger in the coming horizon.

Disc: Invested.

https://www.outlookbusiness.com/markets/trend/strange-bedfellows-3720

Disc: no interest/stake in any co.

Hi, I met the management at the recenltly concluded JPM India conference and here are my takeways - PLease note this was before the Shriram merger talks were suspended.

My personal conclusion: Not worth investing given the low share and focus in retail banking

• Can you update us about the Shriram merger? It’s in process - swap ratios haven’t been finalized – but at big picture level – it should happen soon.

• Are the top three shareholders at (Shriram City Union Finance) SCUF – Capital, Primal and Apex on board? We haven’t spoken to them but we will soon.

• Doesn’t SCUF need a premium for its business? On the other side, IDFC remains the cheapest pvt bank in the market – therefore there is already a hidden premium as we believe we are trading at a 40% discount to our fair valuation.

• What is our growth outlook? We are doing 100k customers a month currently – we have disclosed 80k I think – we are 1.2m a year and by 2020 we should be 3.6m a yr – we should be northward of 5m on a static basis on current run—rate and here we have guided to 10m customers including both organic and inorganic routes. Also, we are doing roughly Rs50bn of retail assets a yr and this should be Rs150bn in 3 yrs. We are already at 170bn (35 organic and 135 is the bought out portfolio) so we should be at Rs320bn. The caveat here is 40% of our 320bn is priority sector portfolio which we brought out and that loses money. Lastly, We have 75 own branches. And this should go to 300 in 3 years’ time. We are at 6-8 cities and our aim to 35-40 – we are in 2 states currently and we should be in Rajasthan, Gujarat and Maharashtra as well in time.

• There have been some concerns on the CASA ratio, can you comment on that? The pushback has been on the CASA no which is supposed to be relatively weak. On SA, on a blended basis, we are doing Rs12k avg overall - From an urban customer it is Rs20k and rural is Rs2k avg. We should do Rs100-150bn by Mar’20 and this should mean a % closer to 10% of CASA from 3-4% now.

• What is your outlook on competition? We have private banks, new payment banks etc – for IDFC – doesn’t it get sandwiched between giant banks and new payment banks? Competitive intensity is not how we roll out our network. We think there is room for everyone and it’s not a big issue. On the acquisition side, acquisitions fast forward our retail journey.

• The Rs100-150bn target for retailisation – what is the organic mix of that? I don’t know the answer – SME/MSE is a part of retail which is building very fast and it should be significant in the future. Today 60% is micro loans and 30% is home loans and 10% is rest but this should change significantly.

• Organically are you thinking of penetrating high margin markets – like unsecured credit which other players are focusing on a lot right now? Not as of now. When we have some history on our customers that we can tweak products for them, we will do it then. But not as of now.

• Who will run the banks if the transaction goes through? Will SCUF will not have a role? The bank will be run by Rajeev (current IDFC bank CEO) and IDFC by Sunil (current IDFC CEO). I can’t say anything about SCUF in the management role - The big thing for SCUF and SHTF is that we maintain their independence – so we will surely take decisions accordingly.

• Do you think we should know the year end – whether the merger is going through? Yes, I think so there should be a definite answer by then.

• Will you look at cash as an offer for consideration? No, broadly at such M&A cash is left aside. Broadly there will be no capital raising as well.

• For your retail portfolio – if it goes to Rs150bn – and since it will mostly be wholesale funded – do you see meaningful upside to the 1.7% NIM? It’s a function of corporate credit growth which is weak.

• Given an option will u be happy with SCUF alone? Yes, we will – Transport business is more of a trade than investment and we don’t know what’s the future of it.

• From the corporate credit side, what are your expectations? It is tough, this and next year should be weak – growth needs to come back – Ideally, it should be approx 10% corporate credit growth if GDP is targeted around 8%.

• If the merger the not go through, will we be open to more? Yes, we surely will. Our targets are based on inorganic growth.

• Won’t there be concerns on asset quality given IDFC’s high growth rate? All these businesses are cyclical and there is always a risk of accidents in the retail economy – our experience is that having a diversified portfolio is always good. And we focus on distribution our asset base significantly – and therefore strategically we should be safe.

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RBI penalises Yes Bank & IDFC Bank for violations

Penalty was for non-compliance with RBI directions on Income Recognition Asset Classification (IRAC) norms and delayed reporting of information security incident involving ATMs of the bank

Disclosure: Not Invested in IDFC bank

DISC : Invested for very long term.

I am new to value pickr and this forum.

This is my first post.

This is first stock which I have invested, after doing very basic analysis. I felt that this is the most undervalued stock. Please correct me if I am wrong.

However when I see this stock its never been picked by foreign investors or brokers. Where as at the same time FII and brokers are very much positive about RBL bank. However I still feel this bank is not that bad when compared to RBL bank (again basic analysis using screener).

The return which people got on RBL is more than IDFC if you have entered at the same time.

My question is are the markets and share prices mostly driven by FII and brokers, don’t basics have any value in share market price. In this forum all I see people talk about basics, however I still feel this stock is most neglected stock.

If I look at this stock , I see that this is not such a bad stock when compared to other bank stocks.

Please correct me if I am wrong.

Every bank have their own strategy, for example CASA of this bank is not that great, but their strategy is to grow inorganically, I dont think they are not that very much worried about CASA. If CASA is the only one which will boost share price, I feel Indusind also should also be in this category which is not the case.

NPA - In first quarter they have sold NPA’s and in 2nd quarter again they made new NPA’s.
I think most of the banking sector is affected by NPA’s. Somewhere I read that they have hired around new 250 employees to work on NPA’s. My point here is , the banks which does not have NPA’s can make new NPAS every quarter. I think this should not alone be a criteria to determine a banking stock.

Again, please ignore this message if I have not given proper analysis. These are just my observations only as I am new to investing and not that great in analysis.

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DISC: Invested

Good point - just to bring a couple of things to your notice regarding the comparison between RBL and IDFC.

  1. RBL was an existing sick bank which is being revived under new management (in fact one of the oldest private banks - established in 1943). Their existing branch network has helped the revival gain pace - contrast that with IDFC bank which started commercial operation about 2 years ago and is busy setting up their branch network throughout the country.

  2. Foreign investors and brokers will pick IDFC bank up, provided it reaches a critical mass - personally i feel this is at least 3-4 years from now.

The primary reason of myself being invested is pretty straightforward - IDFC Bank’s strategy. They are consciously focusing on under-banked areas of the nation. The potential is immense , if implemented correctly in the long run.

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Disc- Not Invested.

Sharing a few articles for IDFC journey from demerging into a bank to position itself strategically to move up the value chain with recent call for merger with Shriram which seems to be stuck from valuation perspective.

Good info about stressed assets in Q2 conf call:

The first is the impact on our earnings on account of our stressed assets and the second is the impact on our earnings on account of our legacy fixed rate long term liabilities, that we have carried from our previous incarnation as an infrastructure finance company. Let me first talk about our stressed assets. Now our total stressed assets portfolio has been since the inception of the bank and remained around Rs. 9,000 crore. Of this, you will recall we sold 4,000 crore to an ARC and the net of provisions and cash that we received from that sale, we now hold 1,700 crore of security receipts. On the remaining 5,000 crore of stressed assets, so from the 9,000 you take out the 4,000 that leaves 5,000 crore of stressed assets. We currently hold about 60%, about 3,000 crore of provisions. Hence the net stressed assets that we carry on our books today is 3,700 crore. So 2,000 crore net from the 5,000 crore and after the sale of 4,000 crore to the ARC, 1,700 crore is the security receipt – that means that we have 3,700 crore of net stressed assets sitting on our books. Now because of the way this 3,700 crore is funded, right, it is generating an estimated annualized NII drag of about 175-200 crore. So 175 to 200 crore in NII, we are giving ourselves on account of the net funding negative carry that we have on the net stressed asset book. So that is the first point impact on our earning of our stressed asset book.
Now let me turn to our fixed rate liabilities. Now I don’t know how many of you have really looked at this carefully. But we have been carrying a big burden to tell you the truth. We have been carrying a stock of 36,000 crore in long-term fixed rate bonds which on average cost us 8.9% per annum. And this 36,000 crore in bonds was used to fund our legacy book and its transformation into the bank. The annualized drag on account of the high cost liabilities is around 400 crore.

Management has asked for 3 years to get rid of this drag and be on growth path. Well that is a very long time.

IDFC Bank(1).pdf (213.5 KB)

Disc : Invested from higher levels

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IDFC bank has underperformed the Banknifty by a whopping 71% since listing!

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A good bank for the management (options, acquisitions etc) but has been a poor investment for the owners (shareholders)! That Rajeev bhai should be given a boot for the dismal performance…

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Swap ratio is 139:10. What will be the impact of merger on IDFC Bank shareholders? V. Vaidyanathan will be the CEO of merged entity which is good news.

Disc: Invested

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If anyone buys shares of IDFC bank after the merger is announced and before April 1 which is effective date of merger completion, will he get the shares of Capital First according to swap ratio? The last merger attempt by IDFC Bank failed. Since GOI has 7 percent stake in IDFC Bank and they will not approve their equity dilution, what are the chances of this merger going through regulatory and shareholders approval?

If in any case, merger goes through will it make IDFC Ltd more valuable than IDFC bank considering it has 52 percent stake in it?

Request Valupickr community to help me understand this. Thanks :smiley:

CAPF shareholders will be issued shares of IDFC bank. So if u buy shares of IDFC bank you will continue to own the bank however if u buy CAPF shares you will allotted shares of IDFC bank in ratio of 10:139 ie 139 shares of IDFC bank for every 10 shares of CAPF.

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No you wont get Capital First shares. Its the other way round. People holding CF shares shall get IDFC Bank shares in the ratio of 139 shares for every 10 shares held. If you have 10 shares of CF you will get 139 shares of IDFC bank. The record date is yet to be announced, so you may still buy CF shares and be eligible for getting IDFC Bank shares.

There should not be opposition from GOI pertaining to merger as its very positive for IDFC bank.

For IDFC shareholders it will be a dilution of their equity interest in IDFC bank and this could be a slight negative too. But its quoting at a huge discount already to its intrinsic value so there is a huge margin of safety for IDFC.

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@rahulshares and @rknshah - Thanks for helping me understanding this scenario. Will Capital First continue to be traded and listed separately once merger is complete?

Please advise on this as well.Thanks again.:slight_smile:

Capital First will not continue to be seperately traded post merger.

considering the current trading price of capital first (i.e 845), the swap ratio translates to abt. INR 61 per share of IDFC Bank ( i.e. 10% discount to current price of 67). Am I missing something or does the deal indicate lower valuation for IDFC Bank than what the market price suggests.

Just assume it this way: The bank acquired CapF at Rs.938 per share, as per the closing prices of both on Friday.

IDFC Bank will issue 137 Cr shares to acquire Capital First. Assuming pooling of interest method, IDFC bank will have a book value of approximately 16,980 Cr against a market cap of approximately 30,000 Cr (at CMP of 63). This will give it a P/B value of 1.8 compared to current P/B of 1.5.

Analysts are hoping for a re-rating IDFC Bank based on Vaidyanathan’s track record of building a retail franchise and merger synergies. This is not an easy task given IDFC Bank’s history, size and nature of its loan portfolio.

Assuming that in 5 years IDFC Bank sells at 3 times book value and approximately 8% growth in book value per year over the next 5 years, book value of IDFC Bank works out to be 25k Cr market cap of IDFC Bank in FY 2023 works out to be 75k Cr. Compared to post merger market of 30k Cr, this will be a CAGR of 20%. Not a bad deal but execution risk is high and a large part of this CAGR is from re-rating which may not happen especially if the book value grows only 8%. A more realistic P/B value could be 2.5 and CAGR works out to be 16%.

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