IDFC First Bank Limited - First Bank Preference for Long Term Investors too?

Gargvaibhav · October 27, 2024, 5:50am

In Q1 concall, management has guided pressure easing in H2. During the conference call, management has guided 1.7 +0.4 +0.12 = 2.2% for the full year…the provisions for the H1 so far is lower than full year guidance …does that mean H2 would be worse.

Another thing, be it MFI or any other book, it is all a part of banking business. Along with business cycle, some will do well and others may not. That is where management capability comes is in managing the risk- identifying early and taking course correction. HDFC has been able to do this pretty well that is why it is HDFC. I see, IDFC has also identified the risk and also started taking the right steps from Dec last year and lastly was upfront with investors, which is great and showcase management competene. However, packaging the MFI loss or toll issue as one time expense or business cycle issue is not appropriate wrt being true with investors (I know all management does this …but IDFC claims itself to be different from the rest so expectations are high)

Correct me if I am mistaken in my analysis.

Disc: Holding for past 6 years and planning to hold for long term.

Deep_Sukhwani · October 27, 2024, 5:52am

I don’ think getting in the play of defending vs accusing management is a right way for any investor, that said, management wasn’t untrue or misleading. The merger effective date with Capital First was 18 Dec 2018.

Valuations are a tricky thing to understand, at the time of merger, bank was priced at 15 times TTM earnings (Earnings yield of 6.7%) with clearly so much work to do - as anyone could have inspected IDFC’s numbers and known the pain they are in and today, once again, bank is priced at 16 times TTM earnings. Yeah some may emphasis on P/B values, but even with that an informed investor would be aware of the quality of book back then and the quality of book today.

Why am I saying all this? My mentors taught me to stay quiet, don’t get into public debates, focus on understanding business economics, do your work yourself, don’t rely on someone else’s opinion. Ensure you always always have a margin of safety - without that, do not shell out a penny of yours. etc. - But being an attendant to so many investor calls over past several years, very few stand out as dedicated to business fundamentals, being long term oriented and not giving into short term qoq mentality, yet logic driven as opposed to over-emotionally attached that could result in overseeing basic flaws in their approach. And Mr. VV has been one of them in my humble opinion

For what it’s worth. I decided to send management an email appreciating the way they:

Decided to address queries such as those of share price movement which no management usually entertains and a few just this quarter alone quietly asked the questioner to stick to quarterly numbers.
Explained the fundamentals of banking several times so even a know-nothing investor or just a spectator (or as they like to label themselves “prospective investor”) has something meaningful to take away.
In the heat of so much coming in from all directions, staying steadfastly focused on longer term picture of building a sustainable business - In fact someone gave them examples of predictability in ICICI numbers, perhaps they might not have recalled that Mr. V.V is an ICICI guy. Comes from same pedigree of Mr. N Vaghul, and Mr. K.V Kamath disciples - addressing queries with logic and rationale as opposed to reacting with emotions.
And of course, building an excellent product/service that I and my family/friends love to use interact with in our day to day lives.

Rushil · October 27, 2024, 7:05am

With Kotak and Hdfc Bank available at high teens PE, there doesn’t seem to be any case for PE re-rating for IDFC First Bank.

In such a scenario returns can’t be much more than their ROE, which is just 10% during the last 2 years where banking NPAs were the lowest. Maybe ROE reaches 13-14% in medium term.

It doesn’t seem like any management can change the above facts even Mr. Vaidyanathan.

Dis - ex IDFC Ltd investor

Shekar_a · October 27, 2024, 7:31am

I noticed that the promoter shareholding has dropped to zero. Can someone explain why this isn’t a concerning issue? Is it considered normal in banks? The number of retail shareholders has surged significantly. For example, HDFC Bank, with a market cap of around ₹9 lakh crore, has about 40 lakh shareholders, while IDFC First Bank, with just a ₹40,000 crore market cap, has 32 lakh shareholders , ICICI Bank is at 18 Lakh. Why is the equity of this bank being distributed so widely, and why isn’t anyone questioning this? We invest our hard-earned money, yet there are reports of equity being given away in large volumes. Isn’t it unrealistic to expect so many people to become wealthy simultaneously?

joshimayank · October 27, 2024, 7:49am

Hi, The details on NCGTC (Background) for CGFMU states the following which is different than what you have assumed.

“Guarantees for loans up to the specified limit (currently Rs.10 Lakh) sanctioned by Banks / NBFCs / MFIs / other financial intermediaries engaged in providing credit facilities to eligible micro units. Further, Overdraft loan amount of Rs.10,000 sanctioned under PMJDY accounts shall also be eligible to be covered under Credit guarantee Fund.”

Further, the investor presentation slides, slide 4, mentions that the 50% of their MFI loan book is insured and not that CGFMU insures 75% of the loan book. They have just said that 75% of their loan book will be insured especially because loans issued after Jan 24 will be insured by CGFMU upto the limit mentioned above.

Or am I misconstruing your comment?

saurabhchoudhary1986 · October 27, 2024, 8:15am

Perhaps because holding company has reverse merged into the bank.

RaghuG · October 27, 2024, 9:04am

No, Deepak. Let me clarify a couple of points. It’s important to note that this is a very gray area, so there is definitely room for a lot of interpretation on both sides. While I am convinced of my position, I am simply presenting my argument. I completely agree that there can’t be a clear yes or no in this situation. I understand if you present other points, such as the cost of a banking license, and I cannot quantitatively address those.

Let me play devil’s advocate and share my perspective.

First, it was a merger; he was not hired on that specific date. When merger talks are initiated (which can be from a year to six months before the announcement), each party shares their financials. After reviewing both sets of books, they agree on a merger price.

Once the merger is announced, and the price is fixed, there are predefined rules in the agreement that allow or disallow certain actions. This is established to protect the agreed-upon value, ensuring that neither party undermines it. In this case, Mr. Vaidyanathan and his team took over the management, and the previous IDFC Bank management stepped away. It was their responsibility to thoroughly review the books and ensure nothing adverse happened from the merger announcement onward.

Second, and most importantly, Mr. Vaidyanathan was managing part of the combined entity during this period (namely, Capital First). He was not just hired on the first day of the merger.

I want to reiterate that this is a gray area. My point is that Mr. Vaidyanathan cannot completely distance himself from responsibility. This attitude would be particularly concerning for a Capital First shareholder, as they could feel impacted from both sides.

Likhitp · October 27, 2024, 11:03am

I think the whole discussion was fair. Shareholder getting a chance to voice his frustration to the main man and also getting a detailed response from him should be appreciated.

IDFCs earnings call was twice as long as IndusInd. The provisions were addressed head on in the media release as compared to IndusInd. I’m holding both so I know which management tried to be atleast more transparent and forthcoming.

People need to understand there is no point in comparing if stock price was 37 or 57. Mr market probably got excited and took the price higher on the news back in 2018. There will be investors that bought at 20 in Covid lows and sold at 100 as well. What is the point in comparing stock price selectively on 2 dates where the performance reflects exceptionally good or bad?

Focus should remain on whether fundamentally the bank is being built the right way.

The bank started from negative and took a while to reach 0 and then has now started the journey towards 10. This is different from starting from 0. Most operational parameters are trending in the right direction.

A lot of frustration on this forum and on twitter seems to stem from the fact that people expected an easy 3-4x from the stock in 5 years which hasn’t materialised. If only stock market was that simple

How am I looking at both IndusInd and IDFC -

Valuation wise at this point both look like most negatives are priced in.
Both have survived COVID. I think they will survive this MFI scare and get better.
I have not seen any lay offs or signs of major stress in employees. Slightly reassuring.
IDFC’s way of building the business looks more promising to me than IndusInd. Also their disclosures seem better. Key man risk remains higher at IDFC.
I added one lot IndusInd on Friday and I will add one lot IDFC as well if it falls.
With recent examples of other jailed bank heads, don’t think either management will indulge in fraud.
Next quarter will be the decider as both managements have taken aggressive provisions and guided things will look better from here on.

Ali · October 27, 2024, 12:43pm

saurabhchoudhary1986 · October 27, 2024, 1:41pm

I am going through investor presentation of Q2 fy 25.
PowerPoint Presentation

The convention is to do provisioning till sma 2 buckets.
Bank has done provisioning of sma-1 bucket also.
Check page 3 of investor presentation.
For me this is aggressive provisioning not conservative (they mentioned the word conservative provisioning in the presentation).
PCR is 75%

Also toll should pe re imbursed by the government.
Future payment arrangements - Mumbai’s toll waiver explained: What it means and who stands to benefit | The Economic Times

Still there is 1000 crores of extra provision. Which is without microfinance or Toll.

prashant_patil1 · October 27, 2024, 4:13pm

This session is recorded between board meeting and results con call.

Deepak_R · October 27, 2024, 6:43pm

Hi…after the merger was announced, Capital First continued to post stunning results till the last day. I.e. q4 18, q1 19, and q2 19, exactly in line with trends of five years of Capital First.

Meanwhile idfcb posted horror results in each of these 3 quarters, in fact in sep 30 2018 results they sold a lot of bad loans to ARC.

IDFC was the acquiring entity. IDFC was the standing entity after the merger. IDFC stock was issued to Capital First shareholders and not the other way around. Capital First shares were extinguished. IDFC folks were running the bank till VV came and took over in Dec 18.

So it is clear to me IDFCB was the standing entity.

IDFC BANK was the acquiring entity with some 3x market cap of cfl

Those days Dewan went down ( sep 18) and iDfc collapsed with it (simultaneously). Dewan was their own lending not Capf.

I was invested those days and he got many brickbats from all exactly the way he is getting now. I was a junior kid those days even i ranted. After 2015 suddenly he became God when results were good, you should have seen seasoned investors just adoring him.

IDFC b share price was 37.6 even good results of capf could not lift a idfcfb stock because infra was such a dreaded name.

So if you were a idfc b shareholder, then you were invested in the banks bad loans and low casa, irrespective.

If you were a capf shareholder, only then you could argue that marrying idfc was a specific choice made, he should have seen the books.

So the answer is… depends if you were a idfc bank shareholder already or capf.

Btw idfc infra exposure alone was more than the networth! Wonder what all idfcb shareholders were smoking holding the stock, with composition of 10 pc retail deposits ~30% corporate deposits ~ 30% certificate of deposits and ~ 30% odd in bonds.

I was an investor in capf so i have the full history studied them went to their branches etc.

Because i am supporting him when the popular mood is against him dont beat me up. I have been enuf against him in 2019 2020 2021 22 etc. See old posts…

Now after seeing the extent of his work am atleast an admirer of his work.

Am a user of their products and happy customer and also biased in that sense.

Have never seen anyone bashed up so much after fixing an absolutely broken bank.

I am only hoping he has the courage to stand and not chicken. In capf also he got bashed first and then the results were in his favor. Hope hope.

He was just mad about one thing bank licence bank license. Pay your price.

Btw i think he made a mistake marrying this bank. He could have gone and got a license and make Capital First bank. Life would have been better. This is a thankless job of solving MEP and Cox and Kings and dewan and reliance capital and vodafone and MEP and 100 such names. Was all this worth the price for a bank license? I personally dont think so.

Sudhakar_Subramanian · October 28, 2024, 3:09am

Why are they provisioning so much that the growth capital is locked in the provisions. It will simply increase the cost of capital and dent the NIMs.

Ragnar_Danneskjold · October 28, 2024, 5:39am

.

saurabhchoudhary1986 · October 28, 2024, 7:52am

They just now added 5% cash on the book value.
They are using the whole cash for extra provisions.
See here 600 crore of additional cash idfc first just added on October 1st.
Press-Release-Sept-2024-Merger-Final.pdf

At the end of the day i suspect it will not be that big an impact on the balance sheet as it looks on P&L.
We need to wait for the Balance sheet in next quarter results to confirm because merger just happened.

rpm · October 28, 2024, 8:21am

All said and done, the results show that the bank is in excellent shape. It has been able to more than neutralise two separate issues which were not of its making and still remained in profit. The high provisions have increased the bank’s ability to show good PAT in Q3 and Q4. Credit cards have already touched break even. Liability cost is going downward. In my opinion the dip in share price is an excellent opportunity for people to add. The probability of an upside is much higher now. This realisation seems to be slowly sinking in the market. Personally I am fully invested and I am not going to add any more. Instead of nursing a sense of injury, people should think and assess dispassionately. I am not a consultant so analyse yourself as I could be biased, being invested in CapFirst since 2018 plus several subsequent add ons.

If the guidance for Q3 and Q4 ( as expressed by VV in Q1 concall ) comes true, the upside will be steep. Once again the bank is doing fine, getting stronger, continuously adding to its capabilities. It is self defeating to attack VV as he is the main force and without him the bank would be likely nowhere.

saurabhchoudhary1986 · October 28, 2024, 12:18pm

What is the guidance for Q3 and Q4?
When was it given?

raunak_kapoor · October 28, 2024, 4:35pm

I’m not looking to start a public debate, but I would respectfully ask that we avoid posting information without publicly available sources to support it. Sharing unverified information is like throwing darts in the dark and isn’t going to be helpful to anyone here.

Sudhakar_Subramanian · October 29, 2024, 12:51am

< Quote>
He maintained that the bank would continue to support the non-banking financial institutions (NBFCs), which are facing regulatory action from the Reserve Bank of India (RBI). He stopped short of taking the names of the four NBFCs, which are in the RBI’s crosshairs.
…
…
He expressed confidence that these lenders would get back on their feet once the ban is lifted. “Yes. We do have exposure to some of these names. However, we have confidence in them. We don’t want to chase them when their chips are down. We want to support them through this tough period. I’m sure they will take necessary precautionary measures and normalcy will be restored soon,” Vaidyanathan added.
< Unquote>
Source:

Is it just IDFC first Bank which attracts troubled customers or is it the general banking trend and VV is more transparent? Qtr after qtr we see IDFC first Bank getting into all the latest trouble.

ravindra12 · October 29, 2024, 3:24am

I feel its both - they do attract troubles and yes, they are too much transparent as well. MEP toll tax waver was declared in October month, so ideally they should not have done anything about it in results of September quarter, but transparency On MFI side, they are recognizing and provisioning for 30d (SMA1) which is not what others in this industry do (I maybe wrong, but let me know if anyone else does that). So deadly combo for short term investors.

Yesterday’s recovery was more technical I feel - too many shorts built on Friday in expectation of IndusInd type scenario, and that short covering happened. We’ll see the true effect of this result in coming days - whether Mr. Market is convinced with VV’s justification or not.