Fundamentally, I love all the various points being made by all of the people.
Personally, I believe that almost all of these points are not touching one significant aspect in this particular stock.
IDFC First has a significantly higher cost of funds than the PSU and Big 4 Private Banks AND also lends at significantly higher interest rates. Now this in my thinking means that it’s a fundamentally riskier proposition than the Big 4 Private Banks or even the smaller banks such as Federal Bank and Karur Vyasa and the like which are significantly more conservative in their lending profiles.
The real key is whether IDFC First can continue to lend at these rates without any type of major credit issue at all. I don’t even have an idea of where exactly they lend but they’re in my mind probably similar to a Bajaj Finance or Chola Holdings or other similar NBFCs if they’re able to successful with their risk selection whilst there are tons of average NBFCs with less risk management. The microfinance being an example because IT DID also provide the high yield loans. If we’re going to ignore the writeoffs then we should also ignore the profits from this segment.
Personally, I’m not sure what exactly was the rationale for the bank itself rather than just being an NBFC because probably similar or lower rates of borrowing (when you take out the bank expenses such as branches…) could have been obtained and also the loan book yield could be similar.
Has anyone thought through this aspect and is this even relevant? Accordingly I would like to make my decision to invest in this bank or not.
Earlier in this thread there was comparison with Bajaj Finance. Both have similar cost of funds, as opposed to larger banks, who offer 3% on Savings account, whereas idfcfirst offers 6%
Recent rate cut on savings, made me think as the banks popularity grows it can reduce the gap further, and probably be a significant edge up above Bajaj Finance.
Bajaj Finance has granular lending hence NPAs will be good. Idfcfirst lends like an NBFC. That is in the DNA. They aren’t keen on building Home Loan vertical which has lowest spread and least risk as well.
Idfcfirst went all in with credit card department, and i suppose they intend to much lending there.
For an Investment Decision I’m just trying to place IDFC First. To me they’re at present less comparable to the conventional banks and somewhat bank with an intention to become a big bank on the liability side and somewhat NBFC in the lending side. And I’m a bit confused as to what the exact USP is.
Cost to Income will partially depend upon scale I would think but also upon the business segments and their respective business contributions. Home loans and Corporate loans would have the lowest cost to income ratio because of the larger ticket sizes and long tenures. And smaller loans with lower tenures such as personal loans, vehicle loans… would be significantly higher. I’m seeing lots of CI Ratio comments but I am not sure about the loan break-up and tenure and how much of the CI is due to the structure of the lending.
The higher yields to me seem like the loans are probably lower tenure and lower ticket size as compared to the more conventional banks.
To be honest I’m not exactly sure why this Bank gets so many messages when it seems to me that there’s better or more clear cut investment cases out there. There’s a bit of FOMO in terms of not understanding what everyone is or isn’t seeing so trying to understand myself.
Personally, I think that the key aspect is whether IDFC can continue to lend at these higher yields with lower than expected NPAs similar to Bajaj and Chola. And if so why? I do believe that the last decade has seen banks largely cleaning up their act and no major credit events besides COVID (which was more temporary) and recently the Microfinance sector related issues. I’m wondering which models would hold up well in terms of default just in case something goes wrong in the market and certain types of loans start having increased default rates. With HDFC at least you know that you are safe and if not then India’s going down anyways. And Bajaj seems to have something extra in their credit analysis. Is IDFC really going to be the best of them both or an unfocosed entity trying to be both without really being as good as either?
@shka you have asked a very good question. I will share my thoughts on the same.
What exactly is Vaidya trying to do on the long term. He is trying to build a bank with the liability side of HDFC Bank, the asset side of Bajaj finance, and the operating efficiency of a Fintech.
How successful is IDFC in the journey towards that goal?
Liability side of HDFC bank - There is quite some success in this dimension. A highly granular liability deposit franchise has been built up with 80% retail deposits. The cost of funds of IDFC used to be 220 bps higher than average of scheduled banks. Now that gap has narrowed to only 60 bps, and is expected to continue narrowing in the coming years.
Asset side of Bajaj finance - I would say that there is good progress on this dimension too. 80% of loan book is retail, with a focus on high yielding unorganised segment, consumer finance, etc. There were two credit mishaps in IDFC bank - legacy infra loan book, and the microfinance book. It must be noted that both the infra loan book and microfinance book were inherited by Vaidya from the erstwhile IDFC Bank - and both these books are now run down and contained. As regards the rest of the loan book - the lending record of Vaidya from Capital First days is quite stellar, with not a single credit mishap in the 15 to 16 years since Vaidya took control of Capital First.
Operational efficiency of a Fintech - I would argue that IDFC has managed to build a class leading digital stack and class leading digital experience among all major banks. However this is yet to reflect in low operating costs. In fact operating costs are at elevated levels, mostly due to the upfront investments required to build the bank.
If IDFC indeed manages to become the bank with the liability side of HDFC, the asset side of Bajaj Finance and the operational efficiency of a Fintech - then I would say that the sky is the limit - it will be a bank generating 25% ROE. If anyone can do it - then it would be Vaidya. I don’t see anyone else who comes even remotely close. But it’s going to be a long journey, but a fun journey too.
The wild mix of excitement and disappointment around this bank is because it’s doing so many things incredibly well, but still none of it has yet translated into significant profitability. But then, that’s exactly what should be expected from Vaidya, because he is playing the long game.
One could be buying a stock for a variety of motives. These could arise from some virtuous, honorable, righteous, noble or just principles - an underdog deserves to succeed, someone who was saddled with so many issues cannot go unrewarded, such a hard working man deserves to get the best etc etc.
These motives are different from the motive to make money (legitimately of course). That money making does not follow or necessarily arise out of purely such virtues is difficult to accept. But it is true. Someone rigourously working the stock market may end up a loser (my uncle #1) vs someone who bought HUL early on and forgot about it (my uncle #2). Not because of anything but because he was too lazy to sell. Here, lazy won versus hard work!
Shiv Nadar is one of the best business men of the 90s-2000s (we often forget he is the third richest Indian now passed to his daughter). But even he could not make his hardware business (HCL Infosystems) succeed - same jockey but a different game. However one of his engineering batchmates N Srinivasan (who reveres Shiv and considers him far better) created a success out of the IT Hardware business by creating Redington Ltd., by doing distribution of IT Hardware instead of manufacturing it. No one would have bet on N Srinivasan vs Shiv Nadar if asked, but N Srinivasan won.
In Banking itself, when we often see the thoughts like “Is IDFC the new HDFC / Kotak”; we need to pause and ask - “did anyone ask is HDFC Bank the new SBI when HDFC was started?”. The market has evolved, competition is extremely intense, their jockeys and their underlings may not be in the press but are all very smart, and they are in a far better economic position. The very asking of the question betrays the intensity of the competition that will not allow an IDFC Bank to become an HDFC Bank or Kotak Bank.
Even our sport comparison is not good enough. A business is more akin to an F1 sport than a horse racing. There’s the business (or the car engineered by 100s of people) and there’s the CEO and the team (the team and the driver), not one rightbred horse and one jockey. Mercedes E Class with Max Verstappen is still worse than a Ferrari LaFerrari with an unknown driver. Business matters maybe more than the CEO.
Net net, the considerations for a share owner who is intent on just making money out of his investment (a banana seller in the example above) is very different from those holding with other motives (which are no doubt right in their own moral way).
In 2016, the erstwhile IDFC Bank acquired 100% of Tamil Nadu based microfinance NBFC named Grama Vidiyal. This nbfc continues as the microfinance subsidiary of IDFC Bank, and has been renamed as IDFC Bharat Ltd. This acquisition was much before Capital First was merged with IDFC Bank. Capital First never did microfinance business in its entire life.
You have raised extremely good questions. Let me share my perspective on them.
Does IDFC bank have a right to win against HDFC Bank on the liability side? I think yes. Simply because IDFC excels HDFC Bank in customer service (both digital service and offline branch service). And you can see that playing out over time. The cost of funds gap with HDFC is being narrowed each quarter. I don’t see other banks being able to do that - for example Indusind Bank or Federal Bank are unable to narrow their cost of funds gap with HDFC Bank. In that sense, IDFC is an unique challenger.
Does IDFC bank have a right to win against Bajaj finance on the assets side? I think the answer is again yes. As IDFC keeps lowering it’s cost of funds, it will be able to provide cheaper loans than Bajaj Finance. This will demolish the main advantage that Bajaj Finance has - which is not it’s credit analysis - but rather it’s very low cost of funds. Once the cost of funds of IDFC is much lower than Bajaj Finance, it can provide cheaper loans, and then cherry pick the most credit worthy customers. If IDFC finances a mobile phone purchase at 250 bps lower interest rate than Bajaj Finance, where will borrowers flock to? They will flock to IDFC and not Bajaj Finance.
Third question is - can IDFC do all of this operationally more efficiently than the other banks and NBFCs. Well, IDFC has invested hugely on tech/digital and I hope it translates into operational efficiency. We do see some signs of this. For example, the quantum of business done by an IDFC bank branch which is only 2 years old is often larger than a HDFC Bank branch which is 20 years old.
We will have to wait for next 5 to 7 years and see if IDFC wins on all three counts above. If it does, then we are looking at a bank that generates 25% ROE. I think chances are good based on how Vaidya has played the game the last 6 years.
But VV still had a chance to run it down if he really wanted to, as he did with legacy infra book. He liked the micro finance business, because it made good profits (his words, not mine). So while microfinance may be a legacy business, it was not a legacy issue and VV supported it. Hence VV didnt inherit a bad business.
I feel, lending via Credit Card is going to work well. Reasons:
Other verticals, home loan, vehicle loan gold loan are saturated businesses. incumbents have been around for multiple decades.
building customer relationship is a long drawn process.
In spirit of disclosure, I had started banking with them. I keep enquiring with them under various pretexts about their products.
Their homeloan, vehicular loan in cities is not a competitive product. Whereas their personal loans are super attractive. Beats even Hdfc Bank. Converting CC charges to emi is also good.
Shows the managements focus.
which leads me to the conclusion that their net interest margin is going to be significantly higher than the leading banks and probably provisioning too.
what gives me the confidence that VV will pull this off is his decade long experience with capital first.
MF’s business has to be done to achieve the PSL targets set by the RBI. This is also true that in this business, profit and yield are higher, but the risk and potential losses are equally high. Every bank has to lend a part of its portfolio in the form of PSL, and MF’s business did not deteriorate because of VV.
If we look at media reports, when the RBI removed the cap on higher yields, banks started lending at high yields, which had a very negative impact on MF’s business. However, the RBI accepted its mistake and reversed the decision. Sooner rather than later, this problem has also been largely resolved and will improve further going ahead.
Hopefully, after this quarter and the next one, no one will even remember the MF business related issue. In fact, it turned out to be good for us, as we got an opportunity to accumulate the bank’s stock at cheap rates due to the MF business concerns.
Disclosure: Invested during the Covid lows and accumulated around the March lows as well.
This is the Press Release dated July 2016 from erstwhile IDFC Bank, regarding acquisition of microfinance business. This acquisition of microfinance NBFC was two years before Vaidyanathan came on board IDFC First Bank. Yes, Vaidya decided to keep the microfinance business as it helped meet PSL (Priority Sector Lending) requirements - but it was a business he inherited from erstwhile IDFC Bank.
The good news is that Vaidya has learnt (the hard way) the pitfalls of microfiance business and has significantly run it down. Now its only 2.7% of the loan book, and he will probably maintain it at such levels or even lower levels. Also, he has decided to insure 100% of the microfinance loan book going forward. Thus, microfinance book will not be an issue for the bank going forward - and the serious issues of past two years in microfinance should be seen as legacy issues.
Over the last 5 years, Federal Bank has shown very strong profit growth. Its PAT has increased from around ₹1,600 crore per year to more than ₹4,500 crore. At the same time, the stock price has also moved up from the ₹70–80 range to around ₹270–280.
Now, haven’t the problems at IDFC First Bank reduced significantly? With profit growth driven by cuts in savings account rates and term deposit interest rates, a quarter-on-quarter reduction in the cost-to-income (CI) ratio, and lower provisions and write-offs, why shouldn’t we expect a very strong profit growth?
Can we expect profits of around ₹5,000–5,500 crore in FY27 if there is no dilution? And if the market assigns a PE multiple of 35 to a growth stock, can we see a Federal Bank–like move in the next 2–3 years—from around ₹80 to ₹280–300?
For all bank investors - please keep a tab on what RBI is saying to HDFC and ICICI - they have recently told both the large banks to take proper provisioning on PSL loans. If larger banks are not doing it properly, consider tier 2-3 banks in a hotter soup. Please be cautious on it as it might start another round of provisioning. And VV will say oohhh it’s one time.
5000 cr profits in FY27 is a reasonable expectation. What multiple the market will give to that earnings depends on future outlook of FY28-FY33. If market senses that IDFC profits are going to follow the hockey stick curve, then 35 PE is very much possible. For market to get that confidence, IDFC has to post steadily increasing profits for the next 6 quarters - Q3 FY26 to Q4 FY27.
Going by market conditions, any negative news on the stock, and it can tank by 10%-20%. Hope VV is not going to give any one offs this time. Also, anybody has any clarity on the new labour code that’s affecting results of banks and IT?
The new labour code has impact across industries. Because of the new definition of wages (it has components that were excluded in the old regime), there is a likely increase in bonus payment for the FY25-26 and onwards. So the companies need to make extra provisioning on account of that for this FY. Plus there will be some provisioning for additional gratuity liabilities going forward for which provisioning would be needed (companies may defer it to next year as the exact amount of provisioning depends on actuarial valuation which may take time). Further, depending upon the wage levels in the bank, more employees are likely to be eligible for ESI entitlement for which there could be additional contribution from the employers (though it wouldn’t be that big).
