Am key to watch how the asset quality pans out, while they have inherited a ‘clean’ book from IDFC Bank, eager to see if some skeletons will come out of the closet
CASA and liability, only time will tell. So many times Vaidyanathan has evaded this question, that it is a bit of a question mark ! While one can’t talk about the nuances around the approach, his articulation that the market is big and we will ‘capture’ the incremental growth seems quite naive.
Finally, the ride will likely be bumpy as he expands branches and sacrifices medium term returns.
Am invested from Capital First days (over 2 yrs now) and my worst case assumes a 7% BV CAGR and 1.5 P/B Exit multiple. This should give a 10-12% return over the next 6 yrs
Agree casa is tough. If any team can get it in the market its them and Indus Ind…will require re-thinking…12% IRR in worst case is good !!Can sleep well
CASA @10-11% is tough when compared to ~50% from kotak and HDFC. This is also driven by high interest rate currently being offered on savings account (As much as 7%, much higher than incumbents)
Also they are still not into credit card business, which is a risky bet but has given HDFC a better foothold in the retail market. Kotak also catching up, although long way to go.
IDFC is clearly a multi year play, the management might give you just the right amount of optimism to stay invested for long.
Thanks for the presentation.
I am not expecting much in next few quarters. They need to build the synergies soon with the 2 entities.Building the CASA going to be the biggest challenge.
Only thing I wish they had done was to rename the brand to a different name with no IDFC in it, so its given a much cleaner slate. Carrying IDFC in the name, IMO, carries all the more baggage of the past and makes the job all the more challenging for the management.
This is clearly a long term play for investors with the faith firmly based on Vaidhyanathan.
Sonal,
Excellent deck, clear and concise. Thank you for preparing and sharing it. Just wanted your take on tech use in banks since you touched upon it - I’ve heard about Yes Bank’s use of tech in really glowing terms as the best user of fin-tech. How would you compare IDFC Bank (now) with Yes as tech is increasingly becoming a business differentiator even in the relatively staid banking industry.
Working on that to share something analytical. My take is: the new age ones dont have legacy issues. Indus Ind, Yes, ICICI and RBL have had good tech. I have read IDFC using their e-adhar machines for withdrawls. Doing my scuttlebutt. Opening a back account with them
I opened an account today, was fairly easy with the portable machine they carry. The whole operation took less than 10 mins as it was authenticated by adhaar. Pls note that my city still doesn’t have an IDFC branch. This was done through an agent visiting my premise.
Tech-wise, they have made it fairly easy to add funds to your account by integrating ccavenue (although it should cost them much more than the IMPS/NEFT based fund transfer). Other than that the interface is clean and is customer friendly.
I have been studying the evolution of banking and customer experience associated with it. In the west as well, during my days as a student, I had an online bank account with a bank with no physical branch. It was cheaper to open an account and it gave better customer service compared to traditional banks there. However the story in India is tad different. Banking is still in its nascent stage when compared to the west and the customer experience piece in banking is also fairly new, and brought by private banks like ICICI and HDFC. Legacy problems may be there for PSUs but the other private banks are fairly well equipped and have leapfrogged various technological barriers. API banking and white labelled product/services will drive the next growth cycle in Indian banking after the recent slowdown and for that, my bet is higher on YES and RBL more than IDFC simply because they are better equipped. Although the Zerodha partnership with IDFC is something to look forward to.
Disc: invested
Possibly under-appreciated and will possibly sound strange, but many of IDFC first bank shareholders themselves (in addition to millions of capf customers) could become interested in opening accounts with them after they increased interest rates (I know of quite a few shareholders having opened multiple accounts for self and family etc.)
Anshul,
ccAvenue is one of the lowest cost processors/gateways but still I’d think UPI will be the way to go to cut even that cost. Totally different, because of brokerage costs (even with prepaid) I’m considering leaving ICICI Direct and going with Zerodha. How would you compare them ? I’m not a trader and typically buy and hold for atleast few years unless something is a dud/mistake, when I book losses and move on.
It’s a good strategy imho. Specifically the slabs; 2 lac+ balance only will fetch you 7% pa. This can help in 2 ways i suppose 1. Savings balance per customer will become amongst the highest. 2. Ratio of savings balance to FDs will become high. Rest only time will tell.
Unofficial news, but getting to understand from few folks at Increed capital that they are being acquired by IDFC First bank. I have not verified the news yet and cursory google search shows some linkage with the parent IDFC but no such news.
ccAvenue is a low cost gateway but I referred to deposits. Usually it is done through cheque, cash deposit or NEFT/IMPS from a different account.
I have been on Zerodha’s platform since 2016 and it has improved a lot. Transferring money was a pain before UPI came into picture. Above all that Zerodha has become a big platform with numerous products build on it (like smallcase, coin, balance). You should give it a try.
Customer retention in banking sector is usually high. Closing an account is difficult hence many banks use different strategies to draw initial customers. Kotak also used to give 6% pa before everybody took notice. I think they will gradually decrease the interest rates once they reach their desired goal. But from the looks of it, 7% interest rate, along with the slab is aggressive.
In terms of loans, Capital First has customers paying higher interest rates when compared to other banks; hence IDFC has that margin to play with deposit rates. Only growth in CASA will tell us whether this model is working or not
What you mentioned could be a reason, and the number (not the percentage holding) of public shareholders in idfc first bank are as high as any bank stock (icici, hdfc, YB, kotak…)
Given current CASA is ~6500 cr, that’s a steep goal. I called customer care after no response to my website registration. Tele-banker informed that they weren’t able to pursue leads from the website, took my details, assured that I’d get a Visa Signature debit card for my savings account, and promised a response within 24-48 hours which has almost passed now. Still waiting.
Zerodha is a discount broker. A trader will benefit the most. For an investor, security of equity in demant form is an issue. Strange but true. I am inclined towards an established bank, for that very reason.
Morgen Stanly came out with target price of 30, why there is so much passimism, are we forgetting some scuttlebutt or Vaidhyanathan is given too much hype. IDFCfirst has huge equity of 475 cr. Growing even at 20% CAGR looks a challenge here if any hidden NPA comes out from current Infra loan book.
True, Vaidyanathan might be given too much hype… but IDFC First Bank is trading at 1.3 PBV (BV of Rs. 38.3 per share as of Dec 31, 2019 and CMP of Rs. 50 per share today) which is one of the lowest… and Morgan stanly is targeting the price of Rs.30 which is below the current book value… that too when company has management which has prooven track record…
Now about growing… What I have observed is few investors are misunderstanding growth as growth of loan book… Yes growth of loan book can lead to overall growth but that is not the only way… What I am expecting for next few years is, the conversion of wholesale asset to retail… If retail portion of the loan increases, then yields will increase… looking at the track record of Mr. Vaidyanathan, I don’t think its a big challenge… along with this, a growth of CASA (I am considering a slower growth in CASA) cost of funds will either remain stable or decrease slowly…
so Increase in yields along with decrease in cost of funding will increase the NIMs and NII…
One has to also consider that synegrgies will take place as the time passes… which, I am expecting to be reflected in to lower operating cost…
Overall this will increase the profits and return ratios… while keeping the Loan growth either slow or zero…
Also, one have to consider that, it is difficult for any bank to evergreening/window dressing the retail loan…
Now, if I comeback to valuation by morgan stanley, they have assign a PBV of 0.7… But I feel the bank which has management with proven track record, and tremendous growth opportunity, should not trade below 2 PBV… Even Yes Bank in the current time is trading above 1 PBV…
