I have projected 15% growth for Fee & Other income, while loan book is growing at 20%. I think I have been conservative and actual growth could even be 30%. Let me explain why.
On the liabilities side - IDFC does zero fees banking. What happens to Fee income when IDFC starts charging fees for various services like other banks do?
IDFC also doesnât make cross-selling efforts so far. I have a savings account with IDFC and no one has called me to cross-sell insurance or mutual fund or kids account or anything else so far. I also have an account with HDFC and I get weekly cross-selling calls. What happens to IDFC Fees income when they start cross-selling like other banks?
The Fees & Other income of IDFC is slightly higher than 2% of assets right now. This is class leading - most banks have it at 1.5% of assets. I will argue that IDFC can still raise it to 3% of assets or higher.
Why is it that IDFC alone can reach such high Fee income? Because it has the most granular assets and granular liabilities among all major banks. You can raise the 1 trillion deposits from a million customers or from 1 lakh bulk customers - IDFC has chosen the former path. You can disburse 1 tillion loans to a million customers or to 1 lakh customers - Against IDFC has chosen the former path. This means higher Opex upfront to build a granular scalable business model - but huge profits downstream.
Why can IDFC have such large number of both liability and asset customers, while other banks canât? Because its a Fintech in its operations. Its highly digitized, allowing it to serve millions of customers every month, like no other established bank can (because they are stuck in old processes and systems). Bajaj Finance may be the only exception - they are as digitized as IDFC in their operations.
whatâs the rational of opex growth? How have you calculated it? It seems arbitrary - b cause 45% of opex is linked to disbursalsâŚthe more they disburse, the more they spendâŚ
Opex growth will keep falling, due to various reasons mentioned below
- Liabilities side - CD ratio has fallen from 140% to 93%. By end of FY27, CD ratio would reach around 85, after which deposits only need to be grown at the same pace as loans (right now deposits are being grown at 25% while loans are being grown at 20%) - which means lesser opex for deposit mobilization.
- Assets side - increasingly more and more loans are being sourced by branches. Branch sourcing of loans is growing at 35% to 40%, while loan book is growing at 20% (as per Q3 earnings call). This means lesser payouts as sourcing fees and commissions.
- New businesses - the scorching 100% growth in credit cards, fastag, gold loans, transaction banking, etc will keep moderating and fall to 20% over the medium term. Opex growth at 20% growth will be much lower than opex growth at 100% growth.
- Fixed costs - lots of investments into Technology infrastructure, branch infrastructure, etc will keep moderating as they mature.
Can IDFC grow its opex at half the rate of business growth? On the long term, then answer would be No. But in the next 3 years, the answer will be Yes, simply because of base effect - the Opex is currently inflated due to various factors enumerated above.
If ur risk weights decrease - ideally ur NIM should fall even with cost of funds falling b cause ur yield on assets falls drastically
In 7 years since merger, IDFC has brought down its cost of funds by 150 bps relative to mid-tier banks. In Q4, management guided another 15 bps fall in cost of funds - that means 165 bps reduction in cost of funds relative to mid-tier banks.
If IDFC can bring down its cost of funds by 165 bps in 7 years when its CD ratio was between 140 to 100 (and it was forced to grow its deposit book at a scorching 35% cagr), cant it bring its cost of funds down further by another 80 bps to 100 bps in the next 3 years when its CD ratio is between 90 to 80 (and deposits only need to grow at 20% cagr)?
If cost of funds can be brought down by 80 bps to 100 bps - cant 30 bps to 50 bps be passed on in the form of less risky loans - thus achieving 50 bps higher NIM and lower risk weighted assets at the same time?
That also brings out another question - Among mid-tier banks, why is IDFC alone able to bring down its cost of funds in a relative sense? Because it gives fintech kind of differentiated experience to its customers. I have been a customer of IDFC bank for 9 years and I had to visit the branch only twice - once at the time of starting the account (even this is digital nowadays), and once to make a demand draft. IDFC doesnât call me and disturb my peace unnecessarily. And their digital experience is superior to the other banks that I have accounts with.
I did a similar exercise in past, I have already posted my excel in this forum, you can review it too. I did it in dec 2023.
I couldnt find it. Pls share the link.
A general comment I have on IDFC Bank analysis is this. IDFC is trying a build a very unique and differentiated model vis a vis other banks. Its a combo of Bank liabilities (low cost of funds) + NBFC assets (granular high yielding loans) + Fintech operations (cost efficient and highly scalable operations) - the best of all 3 worlds.
If one analyses IDFC like any other bank - then one would be led to wrongly assume that Fee income can only be max 1.5% of assets (No, for IDFC it can go to 3% of assets), cost of funds wont reduce like it hasnât reduced for other mid-tier banks (No, IDFC has been reducing cost of funds and will continue to reduce cost of funds), highly granular loans and deposits are not scalable (No, IDFC has tech-based model that is highly scalable), RoE for mid-tier bank cannot go above 15% (No, IDFC is going to surprise on this front IMHO - it is likely to generate super-normal profits and returns), etc etc.
The con of this highly differentiated model is that it comes with huge upfront costs to build it up - and thatâs exactly what we have seen the last 7 years. But then I believe that the model is close to start bearing huge profits going forward. In summary - I think that IDFC needs to be analyzed like a Fintech, and not like a bank. Vaidya has somehow failed to communicate this - its his biggest failure in the last 7 years.
Its a two edge sword..good for long term