The price before 2019 is not fully relevant now, and unlike what many people believe, a loan given to a toll project that turned ‘bad’ or exposure to the periodically struggling microfinance sector are not the real problems of the bank.
Before obtaining a banking license in 2015, IDFC was originally set up to finance infrastructure projects. It had no access to cheaper funds from current and savings accounts, and infrastructure projects had very high NPAs.
Only in December 2018 did IDFC Bank and Capital First merge to become IDFC First Bank. Hence, the price before 2019 should not be considered fully relevant now.
V. Vaidyanathan, the MD & CEO, came from Capital First with prior experience at ICICI. The new team reduced infrastructure exposure from 22% of the loan book to just 1% and brought down legacy high-cost funding from ₹50,970 crores to ₹6,682 crores, thanks to fast-growing bank deposits.
As they turned profitable by overcoming legacy issues, they increased spending on many new lines of business. On one hand, the bank was becoming profitable, and on the other, operational expenses were rising as they heavily invested in building the new bank from scratch.
Currently, ₹43 out of every ₹100 they earn goes toward operational expenses. In comparison, ICICI and HDFC spend just ₹20 to ₹24. This highlights both the opportunity for improvement and the reason for thin profits, making the bank appear inefficient.
As a new bank, instead of starting one line of business after another, the management aimed to become a universal bank and launched multiple lines quickly. That’s why their margins are thin. However, as per them, they have completed most of the major investments, and margins are expected to improve.
Microfinance, which will soon be fully insured, accounts for only 4.8% of the loan book and affects the entire industry. This, along with a single infrastructure loan, should not significantly impact profits. However, since margins were already thin due to operational expenses, these issues appear more prominent than they actually are.
As operational expenses decrease, margins will automatically improve, leading to a rise in the share price. The CEO has also considered providing fixed and variable expense details in the future, which increases my confidence.
While banking services are increasingly commoditized due to similar pricing across banks, customer service remains a real competitive edge that cannot be easily replicated. To objectively measure their service quality, check Google Maps ratings for multiple branches across India and compare them with those of other banks in the same area. Also, check their mobile app ratings—they are far ahead of HDFC and ICICI.
Thanks to Trump, microfinance, and a toll project, the stock is available at ₹57, whereas the book value is ₹51 ₹45 edit.
Disclosure I have invested for the reasons mentioned above. I started my capital markets journey a couple of months ago, and I am a novice. The price may go down even further after Q4 results due to Microfinance loans.