Key highlights:
1.Highest QoQ PPoP growth in entire banking sector
2.Highest Retail loan growth of 10% QoQ
3.Highest QoQ CASA growth in the industry
4.Lowest ever credit cost of 91bps(annualized) this Quarter
5.RoE almost hitting double digits
6.Credit cost for the year to be in 90-110bps range(mentioned in the concall)
7.Double digit RoE guidance advanced. Will be achieved even before Q4
my concern in IDFCFB is BVPS to achive 25% growth rate some time in future it needs external cash if cash is raised BVPS is reduced valuation is affected. Counter views are appreciated.
Most likely the cash received from sale of AMC by IDFC will be invested in IDFC FB (approx. 4k crore) before reverse merger. It might be done at a price and swap ratio which will be beneficial for both IDFC and IDFCFB. Though it will not be immediate by most probably in next 2 years.
I think few people in the media and few brokerage houses purposefully belittling the performance of the bank. They wonât appreciate the bank even when it posts highest profit in their history. They are perennially bearish on this stock.
Donât know about media, but brokerages donât know valuation at all. They will give lower target for stocks in downtrend and vice versa. This is what Iâve learnt in my little investment journey so far.
considering consistent profits from now on , this year profits will come around 2k cr, at a P/E of 25 (which is reasonable if book grows at 25% cagr) valuation comes around 50k cr , share price of 75-80 comes as the intrinsic value of the stock. what is stopping markets from rerating?
one thing i feel is idfcb raising capital at cheap valuations which hurt the company fundamentally
P/E might not be the best metrics to value banks as they tend to be cyclical. I think Indian market has not experienced this cyclicality in the private bank as some private banks have been able to capture increasing share from public sector banks even during lean years.
It is difficult to see IDFCFB getting valuation of higher than 1.5 P/B when banks with higher scale, profitability and consistent track record are also available at cheaper valuation compared to historical trends.
I believe larger Indian banks should start to narrow valuation premium with global banks over next 3-5 years as Indian market get more integrated with global capital market with growing size.
What will be incentive for someone to own combined HDFC bank at $200 billion valuation when larger and more profitable American banks are available at cheaper valuation.
Indian banks might have higher growth but valuation premium will start coming down with decreasing incremental growth especially in dollar terms.
I think due to the above stated reasons and global sell offs, the FIIs sold HDFC twins and most of the Indian banks from last Sept and DIIs and retailers are still supporting it. but how will a retail invest in the likes of BOFA, WellsFargoâŚ, no other choice he will keep investing in India, a known devil is better than an unknown angel.
Over 60% of Banking accounts just use the accounts as a piggy bank where no more than 4 transaction happen over a months time, hardly 2% of Indians invest in stock market,⌠can u imagine the money that will come to banking system and stocks in next 2 decades? were will the money go ??
HDFBank apps sucks big time, ICICIBank hidden charges will chase any honest retailer⌠I am customer of these two banks from past 2 decades , closed ICICI completely and have almost zero transaction with HDFC ⌠Made my spouse open account with IDFCBank, oh these guys are so focused on customer needs and their app is awesome , ROI on deposit is mouth watering what more do i expect?
I believe that IDFCFB can give a run for their money to any big banksâŚ
Fy19 core ppop was 1105 cr
In 3y it has become 2753 cr (36% cagr)
Our credit loss for last year was only 2.5% despite moratorium & covid 2
This year guidance is only 1.5%âŚcan imagine what that does to RoA
Core ppop now 1000 cr / Q even if we take credit costs of 1.5% it takes us to a great profitability. It is our read that our bank will never post a loss in its life
RoA is 1% & trending upwards. A good number is 2%. Direction is to be taken note of.
Will get to double digit roe before q4. Advancing the guidance to getting there in Q2 or Q3.
Lumpy assets to deal with, couldnât push it under the carpet.
Retail book is now 1 lakh cr. Mortgage is 33% of the retail & commercial loan book.
Credit card spends increased 20% sequentially
Infra book 6700 cr. 4.9% of total funded assets. Was 22% at merger.
Total customer deposits at 1 lakh cr
651 branches. 10 branches in current Q. 50 in last 1 year
High cost legacy borrowing of 2700 cr paid back in q1. Total now is 22k. Paid back 5700 in last year
Provision coverage ratio at 73% compared to 70% in last Q & 60% last year
Slippages: lower by 20% on sequential basis. Net of upgrades lower by 25%
Trending around long term sustainable targets
One large retail chain group slipped to gnpa that increased gnpa. Already 100% provided for. 550 cr.
Fee income increased 100% YoY. 899 cr. Covid base. Sequential basis increased 7%. Retail fees contributed 92%. Very granular. Fee income from toll & credit card at 68%
Had a treasury/trading loss of 44 cr. Bank proactively tightened limits, reduced treasury books, modified duration of the assft book at 0.84 years
Core operating income increased by 39% YoY. Operating expenses increased 31% YoY. Decline QoQ
C/I at 72.95%. Increased 325 bps QoQ
Annualized Credit costs in Q1 was 0.9%. Annualized RoA was 1%
Capital adequacy is at 15.77 %
Nii growth at 3% QoQ. Nim down QoQ. Lag in passing on rate increases. So we should be in upward trajectory in Q2
No one offs in provision. We see no reason why credit losses should go up in next 3Q. Could be in 1-1.1% range reasonably. Barring unforseen circumstances
Every Q opex will go up a little bit. Depending on disbursals. Could go up marginally every Q from here on. Normal collection expenses
Blended cost of funds in saving account is 5%.
Cost to income or cost to asset high due to vintage of branches. When these branches really scale up from here cost measures will measure up with other banks. Asset side opex should be a bit higher due to product mix but offset by the higher NIMs. Our cost to income in home loan might be 90% since we just started. Credit card cost to income is 130-150%. Thatâs how businesses are built.
We spend 2-2.5cr to maintain each branch. 650 branches.
As a bank we just started the cross selling journey
Throwing the best offer on the RM screen
If we bring down cost to income by 10% the RoE will jump by 5%. In long run want to be around 55%. In 2 years it should materially come down to 65%
High cost liability should give us 750 cr pbt
No plans to raise deposit rates right now.
We have not passed on the rate increases to customer yet. Comfortable to maintain NIMs around 6%
Tech costs to plateau from here. Tech costs are a bit higher due to vintage of bank. App, cash management, current account management we have been building
For our kind of bank 2% RoA is a bit of an under ball. (Can do better)
Unsecured vs secured is one dimension. Lending has to be cashflow based. Personal loan to infy etc does very well. No moratorium. 2W business is secured but does badly in economic downturns. Evaluate for cashflow. Cashflow is paying you back equity is not paying you back
Wealth management, cash management, toll collection will scale up
Blended costs is 5.2%
37% is linked to external bench marks. 63% is fixed rate book.
We donât have a 0 balance product. Quality of customer is very very important. Minimum balance is 25k but customers typically bring in 1.8L etc
great questions from @ishanagarwal89 bhai in the concall. Looks like we might hit 10% RoE in q2 or Q3 & exit fy24 with 15% RoE headed to 18-20% RoE in fy26 end
MANAGEMENT COMMENTARY
V. VAIDYANATHAN
Lending Side:
Profitability:
Provision:
RoA:
We had guided that by Q4 of this year, RoE will be double digit RoE, but we will be there even before that. We change our guidance .
MR. SUDHANSHU â FINANCIAL RESULTS
Q&A
Ishan Agarwal â Erevna Capital
(Erevna Capital â Mumbai based firm; Designated Partners: Anubhav Goel, Ronak Gala and Ishan Agarwal)
Q: Relating to NII Growth, NII growth QoQ stands at around 3%. This is the lowest QoQ growth since merger, and maybe the first time decline in NIMS QoQ. Is it because of the lag of passing on of funds from the ledning side or is it structural in nature?
Q: Provisions at 308 crore in the Quarter. look very low. 0.9% of the average book. Are there any write-backs or one-offs in this quarter?
No
Q: You had given a guidance of 1.5% provisions. Will Provisions will be higher than 1.5% in the coming quarters for the year for the credit cost to be at 1.5% in the current year?
Q: Also, OPEX has seen a QoQ decline. What is the trajectory for the next 3 quarters?
Q: On the savings side, we are offering 6% on balances above 10 lakhs. How much has it impacted our blended cost of funds? What is the blended cost of funds on the savings account right now?
It would be around 5% blended savings cost on savings account
Vishal Shah â Athena Investment
(Mumbai-Based firm; Directors: Nilesh Bhagchand Borana and Shraddha Nilesh Borana.)
Q: Our Total Expense to Assets Ratio is at around 5-6%. In comparison, only Equitas Small Finance is higher than that. Even AU Small Finance is at 3.5%. The larger, private sector banks are at below 2%. Can you just help me understand this?
Q: In the next 3-5 years, what should one expect on the Cost to Assets?
Q: I just wanted to inform you that the new app is phenomenal but Downtime of the app is very high. So, it would be great if you could look into it.
Pritesh Bumb â DAM Capital
(Mumbai-based firm; MD And CEO: Dharmesh Mehta)
Q: A medium term question, How do you look at deposit rates as we are in the upcycle? So do you feel that we have to be ahead to raise rates in the industry? Is there any change in the mix to safeguard NIMs?
Q: Do we have room in our mix to raise NIMs? Do you see any mix-changes we can do to keep NIMs intact?
Q: What are our Tech cost as a % of OPEX? As some of the banks are disclosing this
Q: We can see Solid unsecured growth in all major banks. Do you think you will take a step back to see how it works out?
Aadar Shah â Phillip Capital
Q: Regarding Opex, you said as income growsâŚpace of income growth will surpass opex growth and that will contribute to RoE. Is that right?
Q: Regarding Cost of Funds, By 20th July, you have decreased the rate on personal accounts.
Q: Have you utilized Covid provision?
Q: Infrastructure Portfolio at 6700 odd crore â are you confident of existing portfolio or are you planning to cut-down?
While we are getting revenues there and expect a resolution to happen in the coming year, we donât see any incremental stress coming in.
Ashitosh Mishra â Individual Investor
Q: How much of our loans are linked to MCLR, etc and how much is fixed?
Q: We are in a Rising rate environment. How do you plan to manage?
Q: What is our Customer Acquisition Cost?
Closing Comments
One things to note. The management has chosen not to mention Key Shareholders in the Q1FY22 Investor Presentation.
Q4FY22:
Q1FY22:
Over the last one year or so VV has become more upfront with the bank performance and future projections. At times he does not mind sticking his neck out. Perhaps the bear hammering has got to him.
VV has concentrated on restructuring and refurbishing for last 3 years and the bankâs structure has been reimagined, redesigned, expanded, restaffed and retooled with a brand new work culture. It is now looking like a formidable compounding machine but the market is still hesitant. The confidence may start coming back when the share price comes in the vicinity or crosses 60. This could entail a wait of another one or two quarters with ROE>12 and ROA>1.2.
Another point to note is how VV starts stonewalling when asked about the merger. I find it very encouraging as it shows that he prefers to delay it a bit so that the bank can get a decent deal which will reflect the immense value he and capital first have brought to the table. The bank apparently does not need any more capital this year for a 25 to 30% loan book growth. So the merger should ideally be timed for fy 24, for arriving at a fair deal for both parties. A fairly senior manager looking after 40 branches, told me in an informal chat, about 10 days back, that he is targeting 30% loan growth this year.
CLSA does not see RoEs hitting 15% even in FY25. Same thing for low estimates it has for RoAs 3 years down the line.
Disc: Invested
Banking is a balance sheet business for the most part. Lending will always be the core activity and it is not easy to run a lending book in a country like India (~6 Cr odd people filing taxes in a population of 140 Cr) without an adventure every now and then.
Lending is underpenetrated for a reason in India, a good chunk of the population is simply not worth lending to as of now. Given this situation all large and med sized banks end up competing for the same set of credit worthy customers and companies. The lowest risk lending deals are most likely to be won by those with the lowest cost of funds for obvious reasons. The least risky areas of lending like secured assets will be dominated by the larger banks.
More often than not, high NIM is a sign of risk rather than of superior lending capabilities. Capital is a commodity, which is why the rate of lending is the only thing that matters to borrowers. A loan from HDFC Bank is no different from a loan from ICICI Bank, unlike in some other business segments. A handbag from LV and VIP Industries are not the same, even if the utility is the same.
The other aspect of running a bank well is the ability to build scale and to do cross selling well. Each branch is a micro catchment area where the bank has access to customers who can consume financial products in addition to giving deposits and taking loans. Cross selling fee based services like cards, wealth management and transaction banking to companies do not induce additional balance sheet risk. They call for investment into technology, people and processes and regular operating expenditure in the form of salaries, rent and other overheads. To issues even 100 cards, technology, customer service and processing teams need to be in place from day 1. These expenses do not scale with an increase in the customer base. So when VV talks of C/I coming down over time, he obviously is taking of higher scale doing this, not more operational efficiency.
The best way of assessing these aspects is to see the cost to income ratio and the success in cross selling services and products. Ideally new customers (NTB) contribute to liabilities before they contribute to assets. Leading customer acquisition with lending has been a sure shot way to disaster in India for obvious reasons. VV himself was part of this mistake at ICICI Bank, he is unlikely to make the same mistake again.
Most smart and experienced management teams manage to do branch expansion, expense management and cross selling well.
In my book, Q1 results provide good comfort on the expense management and cross selling parts but doesnât yet do much for the first part - prudent lending. Not to say that the current lending processes are lax but that there are miles to go before the market gets comfortable about the quality of the asset side of the business.
The foray into prime loans and the focus on mortgages is good from a risk management point of view, even if it dilutes the NIM over time. Growth in the newer areas like digital loans, consumer loans, gold loan etc will take time to season and give comfort to investors.
Keenly watching developments here over the next few quarters. There are obvious positives here after the Q1 results but it doesnât yet address some of the risk investors have about mid sized banks that are under pressure to deliver 20% loan growth while suffering disadvantages on the cost of capital front.
These will only get addressed with scale and time, even if the operating numbers look very good 3-4 Qâs down the line. Even behemoths like ICICI Bank and Axis Bank have grappled with credit issues - due to both the economic cycle and the specific bankâs lending cycle.
The second part (specific bankâs lending cycle) is the more important one to understand for long term investors. Economic cycles are the same for every bank while which segment to focus on/avoid to build assets is a conscious call taken by the management. A good assessment of this is unlikely to come from going through financials or debating about numbers already declared by the bank. It can only emerge from a good understanding of the credit culture and the decision making hierarchy within the bank. It is truly an intangible and is rarely apparent even to internal folks, leave alone investors observing numbers from a distance.
While banking sector has been a wealth creator in India, the bulk of the wealth creation has been done only by a few banks while the rest of them have only burnt investor capital over decades. In mid sized banks and lenders I guess it is important to play the cycle well. I hope this bank turns out to be a successful one over time but not coming to any hasty conclusions yet based on Q1 results and the obvious improvements in operating efficiency & the steady asset quality so far.
Disc: Holding for self and customers
Kedar bhaiâŚ
When a conversation comes to credibility, VV refers to his Capital First days. And rightly so. Idfcfirst is nothing but an extention of his career from Capital First.
A chunk of that book is carried under the new banner. That business is a time tested one. Those Customers are well understood.
This also gives us relief to know that VV has been doing this core lending business since FY 10
NPA is one thing he knows how to keep under check. His team has good experience in collection systems etc.
Most importantly, he has passed the litmus test: Covid. If he can survive that, get away without major NPA, then he is good for another decade.
What appears new to his experience is the technology bit, the in-house credit card and loan disbursement tech where they will bypass the need for DSA. Hence, reducing cost. It appears, that couldnât be a huge threat.
Wow this post has given me a very good understanding how the valuation works for banks, itâs part of past track records, why hdfcbk gets a pb ratio of 3-6.
So I guess market will give it a good PB ratio once itâs convinced about the asset quality of the bank for long term. So inspite it hitting a 15% ROE unless market is convinced of itâs underwriting quality over long term it wonât get premium valuation. But if banks like Bandhan Bank can get a pb ratio of 2 I guess IDFC first bank also deserves a PB ratio of 2 because itâs loans are less risky compared to Bandhan, provided that IDFC hits 15% ROE.
Disclosure: Invested at average price of 36 so has valuation as margin of safety.
Nice post. Have been invested since Jan 2019, first with bank and then switched over in July 2020 to IDFC Ltd. So Iâve gone through the roller coaster, but overall significantly in the positive. Agree totally about asset quality being the key determinant for futureâŚ.credit costs maintained in the 1% range over several years is what is going to drive meaningful re-rating and BVPS compounding from profits and raising capital at higher multiples.
Having said that, his focused execution of the plan laid out in 2018 is very commendable and gives me confidence to stay invested and watch the story unfold here.
Thank you very much Ayshi and Sahil for so well capturing the conference call. Without hearing the call, it feels Ive heard the call.
I have been an investor in Capital First and have made multiples of my money. There was never a credit issue for 9 years and I remember those days CAPF was lending to lower income segment for purposes the banking system were not lending. I was always minutely tracking the credit loss and NPA, but credit costs was well managed. (I used to call it subprime, but he never used the term in AGMs even when asked on the same). Even at ICICI, all people I talked to swear by him. They say he practically built the entire retail banking and built it amazingly. Literally, I used to be amazed that people were falling all over him to meet him in AGMs and all that. If in that segment, the credit losses were only 2.5%, then in the current segment, it should be lower.
So credit quality is not the issue. the issue is that since the merger, there have been no profits, only losses and I was disappointed. Even now the profits are only ROE of 9%. frankly, so many banks post 12-13% ROE. I know the starting point at merger was weak with no ROA ROE and he has done a great job taking ROE to 1%, but he could have upfronted the losses in the first one or two quarters after merger, than bleeding the P and L for 6 quarters after merger. In his current approach by stretching the issue for 6 quarters, we were always on an edge. Lets see when the bank can post an ROE of 15%. Even 10-12% ROE will establish the proof of concept and we can believe the 15% after that. Lets wait and see.
