Dr. Rajiv Lall of IDFC Bank is as blue chip as they come. He said five years back that IDFC Bank would be created. He stayed true to his word and got the license. In the meantime, he has also steered IDFC and built it into an institution known for its values and capabilities.
In a banking system facing capital adequacy issues, this bank will start off well capitalised and with stressed legacy loans from IDFC well provided for. Its starting book value will be INR 40 and starting balance sheet around INR 70,000 Crores.
His central proposition for the bank is - lowest cost to income in the sector and a new generation technology bank which will attack the urban and semi urban and rural markets with differentiated strategies around physical branches. It will start life as a wholesale bank and an online bank and spread out.
Both in terms of business quality and management quality this is an interesting proposition. They might rewrite the banking rules in what will eventually be the third largest banking system in the world after the US and China in a few years from now.
Some very simple calculations indicate that the bank might list around INR 60 ( BV of 40). The industry average of NP / Balance Sheet is around 1.5% for banks. Dr. Lal has said that by 2020 the banks balance sheet will be INR 2 Lakh crores. He has also said that theirs will be industry beating profitability given business model ( which I tend to believe ). Applying 1.75% on the balance sheet number, one gets a net profit of INR 3500 Crores. The Equity base is 338.9 crore 10 rupee shares. This works out to an EPS of INR 10.33. The heavy weights like HDFC Bank trade at X 25 earnings. Applying the 22 - 25 range gives a market price between INR 230 and INR 260 BY 2020; which is a 4x possibility.
Key risks are execution in this competitive industry, roadblocks in retail banking.
Asset quality steady, credit cost to remain stable
IDFC Bank conducted conference call on 28 January 2016 to discuss the financial results for the quarter December 2015 and prospects of the Bank. Rajiv Lall, MD & CEO of the bank along with colleagues addressed the call:
Highlights:
Bank has posted the net profit of Rs 242.2 crore in its first quarter of operation of Q3FY2016.
Net advances of the bank moved up 3% QoQ to Rs 42995 crore at end December 2015 from Rs 41937 crore as on 01 October 2015.
The non-fund based business touched 5% of the funded book in its first quarter of operations.
Deposits portfolio of the bank stood at Rs 1646 crore, with the CASA at Rs 324 crore and Term Deposits at Rs 1322 crore at end December 2015.
Bank is well capitalized with total Capital Adequacy Ratio of 20.3% and Tier 1 CAR of 19.6% under Basel III.
Bank has network of 24 branches (of which 16 branches in Bharat Banking, 7 in Commercial & Wholesale Banking and 1 in Personal & Business Banking), 3 ATMs and 5 Micro ATMs.
Bank proposes to expand branches network to 50 branches in next two quarters. The internet banking platform of the bank is already active, while mobile banking platform will be launched by mid April 2016.
Under Bharat Banking, IDFC Bank is focused on providing differentiated service, leveraging technology to its maximum with a low operational cost to customers in rural and semi-urban locations.
Under Bharat Banking, Bank has added 3300+ customer on asset side and 2500+ on liabilities side. Bharat banking advances stood at Rs 54.3 crore.
Under Bharat Banking, bank has also parented with 4 micro finance institutions, which would help to generate priority sector loans (PSLs). Bank has to achieve PSLs of Rs 15000 crore by end December 2016.
Under Commercial and Wholesale Banking (CWB), the bank has added 200+ customer on asset side and 100+ on liabilities side.
The headcount of the bank stood at 1759 employees at end December 2015.
The cost-to-income ratio of the bank stood at 35.6% in Q3FY2016. As per the bank, the cost-to-income ratio would pick up as bank would be stepping up investment into branches and expansion. However, the cost-to-income ratio would stabilize back of 35-36%.
The GNPA and NNPA of the Bank stood at Rs 1462 crore and Rs 453 crore, respectively at end December 2015. GNPA ratio was at 3.1% and NNPA at 1.0%.
Net restructured advances of the bank stood at Rs 4.3% of advances at end December 2015.
The asset quality of the bank remained stable, while bank is well provided on provisions front. Therefore, bank do not expects any surprise on credit cost front.
As shared earlier, the stressed asset of the bank remained stabled at Rs 8800 crore. Bank expects some slippages from stressed asset book, but do not expect any P&L impact due to higher provisioning.
Bank has not received any communication from the Reserve Bank of India (RBI), which RBI has sent to few banks regarding NPA classification of identified 150 stressed accounts with the banking industry.
With niche acquisitions and use of digital banking to its fullest, I think IDFC bank is on path to becoming solid investment for those who have patience to hold for long term.
Disc - invested before demerger. No transaction in last 6 months
21 percent fall in net profit at Rs 191.26 crore for the December quarter on account of rise in bad loans. The bank had earned a net profit of Rs 242.16 crore during the same quarter of the previous fiscal, IDFC Bank said in statement.
Total income of the bank rose to Rs 2,585.9 crore from Rs 2,007 crore in the year-ago period. Its portfolio quality deteriorated with gross non-performing assets (NPAs) rising to 7.03 percent of gross advances as against 3.09 percent in the same quarter of the previous fiscal.
The bank’s net non-performing assets also jumped to 2.57 percent, from the earlier 0.98 percent.
As a result, provisions and contingencies other than tax of the bank rose nearly 19-fold to Rs 231.75 crore during the quarter as compared to Rs 12.29 crore in the same quarter a year ago.
Net interest income rose 34.80% to Rs.520.77 crore in the third quarter compared with Rs.386.31 crore in the last year for the same period.
One of the major provisions made this time for the NPA’s was because of Ruchi Soya. I believe it’s about 200 cr.
IDFC Bank had filed a petition in July in view of this and sought for a wind up of Ruchi Soya.
I read a news article today; the winding up petition has been dismissed by the court. You may read more here:
One of the major irritants for investors were the management’s words. Initially during the demerging of IDFC and IDFC Bank, it was promised that bad legacies wouldn’t be passed on to the new Bank, but they ultimately were passed on to some extent. And during the q2 result also, they announced more NPA’s (and provisions for them of course) and again re iterated that these seem to be the last and next quarter should not be an issue. And in q3, they come out with provisions 10 times more than the last quarter. And if I am not mistaken, out of this 10 times increase in provisions, about 200 cr (or 80%) is because of Ruchi Soya (please correct me if I am wrong). Had this been sorted out, the result would have been good.
It’s not the NPA’s only which is painful for investors, but why repeatedly it is happening; Making one think that are they having a reasonable system in place to screen their clients for loans. Of course, this is easier said than done, and easier for us to say it retrospective once we see those NPA’s. And no doubt, IDFC Bank management has a clean and respectable name. We can only pray than their NPAs turn good and money gets returned.
Since it’s a new Bank, It will definitely be a while till it catches up, since setting up of new branches would be a money intensive affair and the profitability starts only after some quarters have gone.
IMO IDFC Bank has got on a growth path and with this and their low cost model ,we may see improvement in other metrics (ROE, ROCE , CASA etc) in next few quarters …
Invested, hence views might be biased. Inviting views from fellow members.
I have dug up a little bit since I was recommended IDFC Bank about 7 months ago by one of the better known investors in India.
Even after hearing it from him after my research I decided to stay away for a few simple reasons.
The hero worshipped Mr Lall had clearly stated that they would not pass i legacy debt to the new bank. They then went ahead and passed it on anyways. To me that speaks about management integrity.
This is not much in public domain but there is currently a lot of bad blood between the bank and McKinskey as they are involved with this project and it might lead to a lawsuit. Yes, it’s that bad.
Their whole idea of micro ATM’s is tablets with panwalas and kirana shops. They intend to ask the shopkeeper to pay the customer and they will then return the money to the small trader the next day. Because these small guys have very little liquidity they will constantly keep running out of cash and also have an increased security risk as they do not have the security that is available even at a small ATM.
Now they seem to have realized this and are proposing a cap on withdrawals from these micro ATM’s.
There is no clarity of thought at the management level just apart from the fact that they want to push their boss’s pet project at any cost.
IMHO, This is a story that literally can go any way on one man’s whims.
I think there are much better options to look at so this fails my management tests.
Thanks for the information - however, this raises the question if the panwalas / Kirana shops have any incentive to run the Micro ATM ? This might lead them to run with the idea inspite of temporary liquidity crunch. Agreed this is yet to be a “proven” banking / cash disbursement channel - but in a largely under-banked nation as India - this has huge potential.
I see IDFC Bank as a government backed initiative with significant holding (7.7%) by government of India - success of Aadhar Pay and their rural focus will be key to delivering any sort of returns to investors in the long term.
Dear Moosa. Apologies for the delay in my response. I agree that it might be opportunity in the long run… Do we have better opportunities with a clearer picture with no legacy issues? That’s what was my question to myself so I stayed away from this one. Best.
There were sales of NPA’s to ARC’s, amounting to around 2000 Crs during Q4. This resulted in the fall from Q3 to Q4, with obviously no new NPA’s being added in a substantial way. Net NPA, has fallen because there are security receipts from ARC that have been account for.
GNPAs dropped by 57% in QonQ
NPAs too dropped by 150+basis points
Provisions came down by 98% QonQ
Dr.Lall suggested that there will be pressure on margin over next 4 quarters. Guidance on future growth is increase of retail lending by targeting 10million customers up from 1.4mil currently, reduction of infra loans(which constitute more than half of the loan book currently), and 300% increase of no. of branches overall. Although their micro ATM plan seems fraught with danger, it seems to be the key to expand into interiors and hinterlands to aggressively grow the retail side. I am hopeful that the management would have thought through this aspect(assuming this is a critical aspect for IDFC’s growth) before pushing for the initiative. Among other private sector banks the likes of Axis, Icici, Yes Bank are grappling with provisions against rising NPAs… and Kotak, IndusInd, HDFC are pretty expensive to buy in… The latest actions by IDFC put it in the right path to a sustainable growth, coupled with their digital banking initiatives.
A bit more on the current situation is given in the below article:
This post is more of a query rather than interpretation of scheme of the things unfolded. I don’t understand how it is a win win situation for shareholders of either of the company. The business they cater are not only poles apart it lacks synergy as well. Idfc may get a readymade retail division it is looking for but for those invested in shriram group, it is certainly not a happy situation. The equity will get bloated, it will lose credibility as a niche player also an nbfc is better placed @efficiency / effectiveness rather than a bank.
Brokerages raise doubts over IDFC-Shriram deal
Several brokerage houses have raised doubts over the viability of IDFC Bank’s proposed acquisition of Shriram Group’s businesses, calling it a complex deal that is riddled with regulatory challenges but offers limited synergies. It also may not add value for investors, they said.
This bank will never improve it seems. NPAs again increased this quarter !
Last quarter only they had sold major chunk of bad loans, dont know from where these new ones came up in a quarter’s time
