IDFC First Bank Limited

Stock Opportunities
1128

The investment thesis in IDFC First bank rests on superimposing the retail lending model of CapF with the retail liabilities franchise of a bank (Retail CASA + Deposits). One of the critical aspects here is that of credit risks, and how the company manages its credit risks. I analyze the Gross Yields, NIMs, Provisions+Write-Offs, NIM-(Provisions+WriteOffs) for IDFC First bank and Bajaj Finance. All data is taken from their Annual Reports. Data for IDFC First bank uses Capital First data from 2013 to 2018. Hence, the AUMs will be much smaller than the 2019 AUM (blended book of IDFC bank and Capital First).

Raw Data for Bajaj Finance:

Field/Year 2020 2019 2018 2017 2016 2015 2014 2013
Provisions + Write-offs (cr) 3929 1501 1045 803 543 384 258 182
Total AUM (cr) 147153 110000 84033 60023 44229 32410 24061 17517
Interest Earned (cr) 22970 16348 13442 9966 7304 5381 4031 3092
Interest Expended (cr) 9475 6623 4634 3803 2926 2248 1573 1205
NIM 0.091 0.088 0.147 0.102 0.098 0.096 0.102 0.107
Gross Yield (cr) 0.156 0.148 0.159 0.166 0.165 0.166 0.167 0.176
Provisions + Write-offs / AUM (cr) 0.026 0.013 0.012 0.013 0.012 0.011 0.01 0.01
NIM - Provisions / AUM 0.065 0.074 0.135 0.089 0.086 0.084 0.091 0.097

Raw Data for IDFC First bank:

Field/Year 2020 2019 2018 2017 2016 2015 2014 2013
Provisions + Write-offs (cr) 4800 195 642 453 236 105 49 22
Total AUM (cr) 107000 110000 26997 19824 16041 11975 9579 7510
Interest Earned (cr) 15867 11948 3770 2772 1882 1424 1053 800
Interest Expended (cr) 10000 8749 1382 1160 897 787 647 483
NIM 0.054 0.029 0.088 0.081 0.061 0.053 0.042 0.042
Gross Yield (cr) 0.148 0.108 0.139 0.139 0.117 0.118 0.1099 0.106
Provisions + Write-offs / AUM (cr) 0.044 0.0017 0.023 0.022 0.0147 0.0087 0.0051 0.0029
NIM - Provisions / AUM 0.0099 0.027 0.064 0.058 0.046 0.044 0.037 0.039

Some observations from this data + trends:

  1. Bajaj finance’s provisions + Write offs (net credit losses) have been inching up over the years. From ~1% in 2013 to ~1.3% in 2019 and 2.6% in 2020. In the meanwhile their NIMs have been coming down, as they have expanded the assets to lower yielding ones, over the years. From ~10.5-11% in 2013 to ~9% in 2020. Hence, their (NIM - Net credit losses) has shrunk from ~10% in 2013 to ~6.5% in 2020.
  2. The merger happened in 2019. Capital first’s NIMs expanded sharply from 4% in 2013 to ~9% in 2018. Post merger, the NIMs came down due to large low-yielding infra book of IDFC bank. NIMs have started to expand again in 2020, reaching 5.5% in 2020. Annualized NIM in Q1-FY21 is 6% (source Q1-FY21 results). The Gross yields have expanded from 10.5% in 2013 to ~15% in 2020. This is despite having a large portion of loan book in infra and corporate loans. When the infra book is driven down to 0, the gross yields would expand even more. The Net Credit Losses have expanded from < 0.5% in 2013 to ~2.5% pre-merger (2018). However, the NIMs have expanded much faster, meaning that by taking incremental risks, they created higher values. (Lend to riskier segments at higher rates, resulting in higher write offs, but price the product appropriately to absorb the credit losses). The NCLs have been rather odd in last 2 years due to several one-offs (including a few tax related ones). The NCLs will be a key monitorable going forward, specially the relation to NIMs. As long as NCLs expand slower than NIMs, the bank is creating value. It’ll be interesting to observe how the NCLs turn out after the book goes out of moratorium period. One thing which should help the NIMs are the falling Deposit rates for TD (which are still one of highest in the industry by a reasonable margin).

PS: I’ve compared IDFC First to Bajaj finance because both have a very similar lending profile. Also because first 6 years of data is for Capital First which was also an NBFC.

14 Likes