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.