Naveen, can you elaborate which meeting is scheduled in Chennai today ? NCLT ?
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https://nclt.gov.in/case-details?bench=Y2hlbm5haQ==&filing_no=MzMwNTExODAwMTI3MjAyNA==
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You can check it here
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Yes. Case link has been given by @Ragnar_Danneskjold. But I am not sure how many days NCLT takes to approve after the meeting.
I am also holding IDFC with the same goal however, recent results have reduced the arbitrage difference. IDFC first bank is about 20% below 52W high. It remains to be seen how the bank fares in the next two-three quarters when the merger gets completed. Hereafter I think the arbitrage difference between the two will only reduce.
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NCLT has given another listing date. Next meeting is scheduled for 04th March 2024.
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@naveen062000 Thanks for sharing this info. This is helpful. I hope youâll keep us updated going forward also 
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About the future potential / present inefficiencies in the operations of the bank.
One major issue with the bank is its high operating expenditure (opex). Because of this, the bank has one of the highest Cost to income ratios (72%).
A common reason given by management is that since it is an early-stage bank, the expenses are higher.
Let us look at some figures.
Increase in Loan Book vs Opex
|A | Increase In Loan Book | Opex|
|â | â | â|
|Q1 | 10,000 Cr | 3607 Cr|
|Q2 | 11,700 Cr | 3870 Cr|
|Q3 | 6,200 Cr | 4200 Cr|
In the Cnbc interview post Q3 results ( link : https://www.youtube.com/watch?v=BpQ-AR6FIaU&t=8m50s).
Mr Vaidyanathan gives a break up of opex. (Q3 Opex = 4200)
Employee expenses = 30 % = 1260 Cr
DSA and other Commissions = 22 % = 924 Cr
Variable Expense = 22 % = 924 Cr
Marketing Expenses = 7 % = 294 Cr
Still leaves a huge 19 % unaddressed = 798 cr .
I will just highlight one component of this opex : DSA and other commissions comprising 22 % of the opex.
DSA commission is the fee paid to Direct Selling Agents and external entities for originating a loan. In this case, DSA commissions will also include fees paid to Flipkart for its Flipkart Pay Later program.
DSA commission generally ranges from 1.5 % to 3 % of the loan amount. The average is 2 %.
DSA commission is generally paid 8 to 10 months after the loan origination. DSA commission payments in Q3 FY 24 are for loans originated in Q1 FY 24 and Q4 FY 23.
For most banks, the retail loans originated from DSAâs are around 50 % of their loan book.
Please stay with me here, I will make two assumptions to arrive at the value of loans for this commission.
Assumption 1 : Assuming new loan disbursement for the quarter is around 15,000 Cr.
The increase in loan book for Q1 was 10,000 Cr.
Because some old loans will be repaid and closed during any quarter, it is reasonable to assume new loan disbursement to be 1.5 times the increase in the loan book.
Assumption 2 : Assuming loans originating from DSAs to be 70 % of new loans.
Being very liberal let us assume 70% of new loans originated from DSA compared to 50 % industry average.(.7 * 15000cr = 10,500 cr)
Conclusion : A liberal estimate of loans originated by DSAs(Outside entities)during the quarter should be around 10,000Cr.
The bank is paying 924 cr to generate 10,000 cr of fresh loans from outside entities. (9 % commission compared to 2% at other banks)
We have made quite a few assumptions and the commissions may contain some payments related to the liability side too.
The point of this exercise is to highlight the amount of opex spent relative to the increase in loan book.
This looks very high anyway we look. And remember this expense is not something we would categorize as investing for the future. Its an inability to raise loans internally.
Comparing one last Data point.
Operating Expenses for a similar sized bank ie Bank of Maharashtra. (With PSUs generally being inefficient)
|Expenses | Bank of Maharashtra | Idfc First|
|â | â | â|
|Increase in Loan Book | 5500 Cr | 6200 Cr|
|Total Opex | 1133 Cr | 4200 Cr|
|Of which Employee Expenses | 646 Cr | 1260 Cr|
|Other Operating Expenses | 487 Cr | 2940 Cr|
Viewing it both ways
Negative: There is a lot of work to be done at the bank. Even after 5 years, operationally does not seem very good.
Some of the earlier partnerships were not done well.(Flipkart Pay Later).
Opex may not drop materially for next 2 Quarters.
Positive :An incredible opportunity , where fixing the commission expenses will almost double the profit.
As it was stated on the concall, one of the earlier partnerships is ending in 2 quarters. Expect the new terms to be better.
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Very interesting analysis. The high opex also reflects in low ROA/ROE/ROCE of this bank (which is improving over the past few years). What remains to be seen is how Guidance 2.0 that has been given will be executed by the management. If ROE comes up to 17-18% over the next five years, it shall be very positive development.
Excerpt of Interview by Mr Vaidyanathan
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Has anyone seen book value per share being disclosed by IDFC First?
I could find disclosure about networth here: https://www.idfcfirstbank.com/content/dam/idfcfirstbank/pdf/announcements/BM-Outcome-Quick-Results-Q3FY24-combined.pdf but book value per share is not mentioned there.
There are additional regulatory disclosure from banks at: Regulatory Disclosures | IDFC FIRST Bank but I couldnât find link for this page from âInvestorâ menu on the IDFC First. I found it odd and in general I get a feeling that mgmt is trying to nudge investors towards looking at investor presentation over required disclosures such as financial result document. Not sure why financial result document is in such a bad readable quality. It seems to be scanned version of a printed document.
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Can someone please help me in valuing a bank on its Total Asset to the market capitalisation multiple. IDFC FB looks me cheap if there is not any significant asset quality problem.
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Another point to consider is that once the bank grows, the brand and customer touch points also grows.
It can be leveraged to open other businesses: Insurance, Mutual Funds etc
Rs. 44.5âŚits there in the Jan 2024 ppt on slide no. 83.
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Ok today I got a call from hsbc offering a credit card. Since It said no joining fee and lifetime free I agreed to take it. Shared my personal details, salary slip and aadhar over whatsapp. Then saw the ad for idfc credit card so applied to that too. The application and kyc for idfc are already done, while the hsbc rep is still filling out the form and asking me for more info like copy of pan card.
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I have a big exposure in IDFC First so I could be biased, but my reading of VV is that he would not do anything wrong, not violate any regulations, would be always complaint, and above all, would not like to compromise the image of himself and the bank.
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Yes it can if they start playing fast and loose with regulations.
For e.g. not issuing payment terms calculations to their borrowers or ignoring KYC requirements etc.
Based on management quality, so far it seems much less viable, but certainly it can happen. Humans are emotional beings, if emotions of greed and feeling powerful/in control ever take over the logic of playing by rules, any management can act stupidly.
This said, recent episodes of IIFL, PayTM and in the past of Bajaj Finance, HDFC Bank, etc. would have caused a lot of managements to introspect their processes and tech stacks to ensure they are in as much compliance as one possibly could in order to avoid regulatorâs and investorsâ wrath. So this is probably a really good time in invest in quality financials given availability of decent valuations (this doesnât seem to be the case right now, but valuations are subjective, expensive to me might seem alright to you depending on your time horizon and how far out you are willing to consider growth).
An additional thing that can be used as a gauge of how likely it is that the management would do stupid things is to see how they fared during previous growth outbursts - see 2006-07, 2013-14, etc. If management during those periods stayed calm and didnât get over excited, it probably is likely that they would stay consistent to their behavior.
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Ethical banking is one of their top agenda in their business strategy. I am personally less bothered, with the assurance by management that the bank wonât do anything wrong wilfully. But thatâs me, you guys have all rights to be sceptical as itâs your money.
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Anyone having a update on the merger process of IDFC First bank?
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In the cover page of the NCLT website the hearing was scheduled for 4th March but in the order copy of last hearing, the mentioned date is 15th March. So I am not sure whether the hearing happened or it is scheduled on 15th March. So we need to wait for update from company if they have got any approval letter if the hearing happened on 4th March. Case Status is still showing âPendingâ.
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Merger related answer in video
https://m.youtube.com/watch?feature=shared&fbclid=IwAR0AHA6wxa_2PSZKaU8cjTx8FYR-uO9hkUxQiW4XquarmtlF_Ixns1hKvik&v=wzW4VKJU2uQ
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VV says :
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That he is aware of the cost to income ratio although it did not merit any concern as everything is going as per plan. To assuage the concern he says Growth in number of branches will be as per deposit requirement and branch target may be scaled down.
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The next 5 year targets of liability and assets are conservative targets and easily achievable keeping past performance in mind. Some of these targets like asset quality, recoveries, GNPA etc are already achieved and bank has to only strive to improve further.
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No worry on sustainability of High NIM of 6.3% as it is primarily due to business structure, and faithful implementation.
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Completion of reverse merger, expected by June - July.
In my opinion, banking sector is a reflection of the state of economy and governance. As the economic performance is continuing to give positive surprises, good banks should perform well in the next five years. As usual, Private banks will perform better and out of these, smaller well run banks like IDFCF should do even better.
The monitoring by the regulator RBI is better than I have ever seen in last 30 years, which is a big comfort.
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