IDFC First Bank Limited

But is IDFCFB holding any bonds?. Bank is giving 6 to 7% interest on saving. Why will it own bonds which provide very low returns?

Sir if the bank has excess liquidity and currently is unable to build the asset/lending book aggressively isn’t it better to redeem them and save interest cost. Why i asked this question because currently I see a bank redeeming its bonds which have maturity after 1 year from now

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Subject to those conditions, yes. However if a bank is growing its loan book as rapidly as this one, at the rate of lending it does, then it may not want to.

There could also be other considerations not apparent to us. For eg because these bonds carry tax breaks, it may be the case that they cannot be sold or bought back till maturity (like 54EC REC bonds).

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Check the Basel disclosures made by the bank.
Q3


Q2

Q4

The bank has to disclose the interest rate regime sensitivity to their govt bond portfolio. What we can see is that for last 3Q bank has been silently preparing for a high interest rate regime.

That for a 250bps increase in rate, the 1-off 1-time loss might be 48cr. Now, since Indian interest rates have been adjusted <1% the estimated loss should be < 20cr by linear extrapolation.
Do keep in mind that this is the calculation according to the duration & coupon rate of the bond. Market forces can cause a larger or smaller loss, so to be safe i expect a 20 ± 10 cr loss in treasury in Q1

As we can see, bank has been shifting monies to rbi repo to make it’s ride smoother in anticipation of an interest rate cycle.

Can we please go back to analysing the core biz & not the non core 1-off 20 cr potential loss in next Q?

Disclaimer: invested biased,
Data based on discussion with @manikya_saiteja_gund

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Not referring bonds in assets, they’re not significant. My question was about the bonds that are liabilities, the bank is paying high interest for these. Because of merger the bank had to own responsibility of these bonds that were issued by the erstwhile IDFC Bank a long time ago.

These bonds have a significant (negative) effect on profitability so I wanted to know if the bank can get rid of them without big losses. But based on @diffsoft’s answer looks like we have to live with them till they mature.

Friendly note to investors new to IDFCF: if you weren’t aware of these bonds (and other legacy issues), please go through all the material bank provides and at least one year’s worth of discussions on this forum.

@Puch has already discussed the impact earlier, you can see his post here IDFC First Bank Limited - #2634 by Puch

Credit card data for March, April and May is compiled and is given below.

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As compared to March 2022 number wise credit card growth seems to be slowed down in May 2022.

I think some points in this post needs to be corrected

The Basel-Pillar 3 disclosures made quarterly cover a broad range of risk based disclosures. The specific disclosure you are referring to is to measure the risk arising out of asset liability duration and rate mis-matches. It is not sensitivity to the govt bond portfolio.

Banks being in the business of borrowing funds to lend out, have a risk of timing and amount mis-matches of their assets and liabilities. If, say, their deposit maturity profile matches exactly with their lending profile, then the world is ideal - the spread just beautifully falls into the bank’s profit lap. Reality is unfortunately not as kind. For instance banks may borrow / get deposits that mature sooner than their lending matures. If such is the case, then the bank needs to find other ways to fund maturing deposits/ borrowings than solely from its lending and while it can refinance, it runs risks of changes in interest rates and spread. So is the reverse case where banks liabilities stretch out longer than their assets (this is quite a risky situation).

These are risks that the bank needs to manage (called ALM risks - asset liability management), and is managed via Asset-Liability Committees. To help know these risks, measures were introduced called Traditional Gap Analysis and Duration Gap Analysis. They are quite simple. A bank puts out all maturing assets and liabilities in specific time buckets (maturing in 1 day, 2-7 days,…3-5 years, >5years) and a positive or negative gap of A-L would give an indication of the gap in every bucket. If it is positive then there are risks associated with repricing the asset and if it is negative then there are risks associated with funding the liability, in each time bucket. Changes in interest rates amplifies these risks. And we need to remember there is an interest rate for every duration; overnight rates are different from 3 month to 1 year etc, and these interest rates plotted over the duration of the asset is a curve and is called an yield curve for Govt (i.e risk free) assets of such duration. Now if assets and liabilities are of different maturity then they are at different points on the yield curve (adjusted for risks).

A shift in the yield curve, esp suddenly can create unforeseen risks for the bank and for the system (Lehman was unable to roll-over its papers). This risk is captured via Traditional Gap Analysis, which says how much of Earnings is at Risk if the yield curve moves up or down; and Duration Gap Analysis, which adjusts these risks for time value of money and says how much of net worth is at risk (fancily called Economic Value of Equity) for such movements.

This is done for the whole book of the bank and not just a govt portfolio (termed as Interest Rate Risk in the Banking Book).

Separately it cannot be seen that ‘the bank has been shifting monies to rbi repo’ based on these disclosures. To be clear repo is a borrowing mechanism and not an investing mechanism used by the bank, generally for short term liquidity management. The bank has to provide high grade collateral, which by itself the bank will not have much of (maybe to the extent of SLR). Reverse repo is an investing mechanism, where the bank can park funds with RBI as rates (obviously) lower than repo rate. At heights of Covid banks were seen parking substantial sums as rever repo with RBI.

This is perfect. There is however a negative as well, which a good banker will always keep in mind. Rising NIMs with rising borrowing costs will impact both, credit quality and credit demand negatively. The bank’s existing book can deteriorate at the margin, and new book can be slow to come by.

I once had the great fortune of meeting someone senior from India’s foremost financial institution. He said ‘credit is not about lending, anybody can, it’s about collecting’. Keeping this in mind brings a certain attitude towards risks always present in a bank.

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They’re quietly working on building the bank’s own network for collection - MyFIRST Partner SmartCollect. There’s also a mature referral network now with more than a million downloads. With enough data this can also help ensure quality of new borrowers remains consistent - by rewarding people who consistently refer quality borrowers and by penalizing others who don’t (pay them less per referral).

Both of these apps were introduced post covid and seem to be very successful. Digitizing processes like this early on will go a long way in reducing opex long term.

They also seem to be planning to go big on education loans - IDFC FIRST Uni. Released only couple days ago, just saw this as I was looking up the other apps. App itself is snappy and has lots of features for students! I would encourage everyone to download and check it out yourself, there is no need to sign up.

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Credit Card spends were expected to slow down as their co-braned partners are shifting away from them especially ONE card.
With new regulations on Fintechs credit card sector is bound to have disruption with advantage banks.
If you get time check out debit card data with similar comparision on spends.
The have stated to charging debit card charges and will be interesting to see how it affects the spends.

IDFC bank gets into agreement with STAR for selling insurance policies

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IDFC - IDFCB ratio currently close to the highest its been at 1.6x. Historically this has been a good time to switch from IDFC Ltd to IDFCB.

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Q1FY23 Results to be announced on July 30th, 2022.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/e617447c-2005-4fb8-a0ac-deaf4200b98d.pdf

Credit Rating released. Worth look into it. Gives insight about interest rate and NCD maturity.
72507c61-3dc6-4c50-8e1c-1490beb60d66.pdf (1020.2 KB)

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cfe3e7a3-7b3b-4503-862b-6827ab238ce9(1).pdf (783.3 KB)

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If we keep aside the merger, macro economic threats, etc , core business of the bank is progressing well. Consistency in CASA , increasing retail loans and now good news that the SMA is lower than pre covid level. Eager to know how it is progressing on profitability parameters now.

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Growth in funded assets is in line with expectations. I also expect profits to be in line with expectations set as such by the commentary in last Quarter:

Due to three specific factors (a) legacy high-cost liabilities, (b) retail branch/ ATM/ liabilites set up expenses, and (c) set up of credit
cards, there is a net profit impact of ~ Rs. 500 crores/ quarter. This is reducing every quarter.

It will take a good year for the effect to start showing. Or at least three more quarters. Till then, it’s best to keep low expectations from the stock price, and very high expectations from the management.

Note how we early investors are showing patience with the stock price. During Covid it was provisioning after provisioning every quarter that kept the net profit subdued, and now it’s operation costs.

I mean to highlight this because there are other big investors that are attached with the stock who have voting rights and will want the reverse merger to go a certain way.

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The growth in assets QOQ is decent even if it’s lower than last quarter, however the big issue this quarter is the hit the bank will take on their Treasury book due to the increase in bond yields. The 10Y Gsec has moved up by around 60bps in this quarter alone which is an 8.5% move. This is more than close to double of what it moved last quarter and IDFCB had reported a loss of Rs 9 crores in Q4 on account of this. IDFCB has an investment book of Rs 40,000cr and a further investment of close to Rs 20,000cr in NCD’S etc. That’s a total of Rs 60,000cr that will be impacted. Now all bonds don’t need to be MTM but even if we assume that half the holdings need to be then even a 2-3% hit on that book of Rs 30,000cr will mean a loss of Rs 600-900cr. That’s massive for IDFCB as its PBT is just around 450cr before accounting for any trading losses. So my question is are we looking at another loss generating quarter for IDFCB? If bond yields move up to 8% this quarter as predicted by many economists then will we have another loss in Q2? The losses are notional yes but it impacts the reported profitability and if the first half of the year is a total washout earnings wise then we are looking at a low single digit ROE for FY23 as well. I am a long term bull on IDFCB but every year seems to throw up a new surprise, and frankly I find it hard to justify even a 1x P/B multiple for a low single digit ROE Bank in the current market.

I have all my exposure to IDFCB via IDFC and I am going to use the current 20% appreciation in the IDFC stock to reduce my exposure by 50% and move into cash until more clarity emerges on the earnings. As mentioned by @Puch above the IDFC-IDFCB ratio has moved to 1.6x, which is at top end of the range and considerably reduces our margin of safety. At best the merger ratio will be at 1.8x but even that is a good 18 months away and I am worried that the AMC deal might collapse as market conditions have changed significantly. At a 1.6x multiple I don’t feel the margin of saftety is sufficient and I am happy to wait on the sidelines for a better entry price. Lastly if you see the current delivery data on IDFC then you will see that it’s the lowest its ever been at just 14% on Friday. This means that the increase in the price currently is being driven not by long term buying but by day traders. The stock is up by 22% in just 10 days and close to my average price, so will utilize this opportunity to reduce my exposure.

Edit: Added delivery data below-

Edit 2: IDFC-IDFCB ratio-

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