IDFC First Bank Limited

Wow this post has given me a very good understanding how the valuation works for banks, it’s 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 it’s convinced about the asset quality of the bank for long term. So inspite it hitting a 15% ROE unless market is convinced of it’s underwriting quality over long term it won’t 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 it’s 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 I’ve gone through the roller coaster, but overall significantly in the positive. Agree totally about asset quality being the key determinant for future….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.


I have nothing but high regard for what VV has accomplished at IDFC FB so far. If anything they have gotten to many of their targets much sooner than what they had initially projected. And his experience at Capital First is no doubt very valuable, growing an NBFC while keeping NPA’s in check is no mean achievement.

It is just that the base rate of success in banking in India is not high. Most players have struggled to become pan India players, leave alone becoming a leading bank. In that sense IDFC FB has the right mix to become an urban centric pan India bank without having too much allegiance to a particular region or customer segment. Many banks with good underwriting skills struggle to get a cosmopolitan, contemporary culture going which prevents them from expanding successfully outside of their comfort geographies and areas. IDFC FB has this part sorted out so far.

However, in the quest to grow assets at 20% without having the advantage of low cost of funds there is always the possibility that certain risks have to be knowingly taken. Large banks have already built switching costs (credit card, demat account, insurance payments linked to account, mutual fund investments happening from the account, lifestyle benefits, automated mobile payments) for the customers who are already credit worthy.

There is a chasm that every mid sized bank needs to cross in India before it becomes a large bank with a strong competitive position. Take enough calculated risks to build scale but the risks should be granular enough to not affect balance sheet quality too much. It is a very tough task to pull this off even in a developed economy, leave alone one like India where the real addressable target market for lending is hardly 6% of the population on the retail side.

There is potential in IDFC FB for sure but investors should not conclude too much too soon, even if the operational piece of the puzzle is falling into place. We always need to do qualitative checks before developing a high conviction on lenders (any lender for that matter, not just IDFC FB) before we start thinking about whether they can become the next big, successful bank. There have been too many misfiring engines in the lending space over the past decade for a variety of reasons.

I sincerely hope that VV takes IDFC FB on the path to becoming a large, successful bank for many years to come.


The bank is growing housing loan book rapidly. The highest growth came from the housing loan book if I’m not mistaken. That’s a secured portfolio and the alpha to the nim will be provided by unsecured personal loans . It’s like running on knife edge but they have to do it to get into the big league.

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Can you please share what you mean by this? Cost of funds for idfc first is now 5.2% blended (including 22k cr of high cost legacy liabilities at around 8.5-9%).

HDFC bank for comparison is at 4.2%. I would not be too surprised if idfc bank converges to within 0.5% of HDFC within 2-3 years. Do you think that makes a material difference to what sort of customers they are able to target?

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Retiring the legacy book is the easier part of managing cost of funds. The tougher part is when legacy levers are all used up and one still has to pay higher interest on SA to keep CASA at 48%+. Real CASA strength is when the bank does not incentivize customers through higher rates, yet customers park their savings with the bank. Like an HDFC Bank, Kotak Bank or an ICICI Bank today.

The lending rates are determined by competitive forces, a customer would rather go with a large bank at 8% rather than go with a mid sized bank at 8.25%. Lending is a spread game for the most part, a 0.5% differential is huge on the cost of funds side as the lending rates are fixed by market forces. This 0.5% difference is what translates into higher NII and eventually the ROA. The last leg of 0.5% is not easy to make up.

In such a situation, to grow the lending book (without lower spread) banks with higher COF will have to look at segments where the customer is willing to put up a higher spread. Else in every quarterly conf call analysts will ask management about lower NIM’s and why HDFC Bank has higher NIM at lower NPA. This perennial treadmill forces banks into mistakes over a period of time as every management wants higher market cap and the best CEO award - which is usually given for aggressive growth and not for managing risk well. Customers put up higher spreads only when they do not have better alternatives, this is where risk gets introduced incrementally over time. Eventually a bad cycle for such a customer segment comes in and NPA’s start spiking.

It’s a slippery slope for mid sized banks if they have aspirations of become a large one. Some South India based NBFC/banks have good asset quality only because they don’t have aspirations of becoming a Top 5 bank. They are happy to run their own race but their valuation multiple suffers due to this. It is a trade off that every financial institution needs to reconcile and execute well on over time.

Going by VV’s persona and statements, he has high growth aspirations. This is what gets the market wary about over the top statements. Market generally loves confidence from the management, but with banks it introduces a bit of worry too :slight_smile:


I feel IDFC first is not competing with the leading banks. Its competing with nbfcs, the lot of them.

And it’s winning hands down. With a long track record of NPA less than 1.5%

Only formidable opponent, competition, is Bajaj Finance.

I feel, retail lending is still a raw untapped market because lending happens at 20% plus. Healthy Growth of 20% is not an issue.


Just to add on to casa point, the casa usually grows as ur customer gets older. For the reference you can check you own saving acct balance 5 years back, 10 years back and 15 years back, i am sure ull get number in some multiples.

Same happens with every branch a branch which is 1-3 year old will be 1x casa while a 5 year old can be 2-3x casa, a 10 year old branch can have 10x casa and 15 -20 year old branches can have 30-60x casa from their opening year.

So its more of a game of longetivity rather than interest rates.

Longetivity comes from salary accts and home loans. Thats where the focus should be if u want to have good casa in long run, high interest rates are just initial jump start to catch what they dont have, in long run probably above should work around.


Agree, that’s where every bank would want to be over time. Which is why cross selling payments, cards, wealth management and other services come handy, these lock in customers into regular usage and build in switching costs that prevent customers from moving to another bank.

All this takes time, normally takes 2-3 years for a branch to turn in operating profits and around 5+ years for the book to start contributing meaningfully to profits. But once a threshold is reached, profitability is non linear due to a confluence of factors since cost escalation does not keep pace.

Which is why comparing per branch revenue, CASA and profitability with a leading bank is not fair. Even within these large banks, their seasoned branches subsidize the lower throughput from semi urban and upcoming branches. A bank with 50% of the branches opened in the past 3 years will have high operating cost until it hits a threshold size on assets and fee income. But once it hits, operating leverage kicks and spikes the return efficiency rather quickly so long as provisions don’t spike too.

The key is to survive for a long period without credit events that can damage the asset quality significantly.


If you or anyone can share how much of their current overall housing loan book and current quarter growth is from developer loans and how much from retail, would be helpful…


Also, these Home loans will have tenure of 10/15/20 years and IDFCFB will have lots of opportunity to cross sell other loan products i.e. Vehicle Loan/Personal Loans/Credit Cards etc. This is good strategy.


It seems IDFCFB as well as a few other banks have put Spicejet loans on high alert.

Is anyone aware of the exposure to the airline? It would be a pity if yet another large legacy loan had to be provided for and ROEs get dented yet again.


I tried looking, but the only thing I could find was in SpiceJet’s FY21 Annual Report:

During the previous year, the Group had taken a loan of Rs. 500 million from IDFC First Bank Limited. The loan is repayable after 3 years from the date of the borrowing and carries an interest rate of 12.35% per annum. The loan has been secured by first pari-passu charge on the land of the Holding Company and one of the subsidiary (Canvin Real Estate Private Limited) and pledge on equity shares of the Holding Company for 1.0x of total facility. The loan agreement requires the Holding Company to maintain debt service coverage ratio of 1.25. The Group have not complied with this financial covenant and accordingly, the borrowing have been reclassified to current maturities of long term borrowings.

At most 220 cr. pleaase checkout the zauba charges analysis i had done a while back. Total charges created to date are 220 cr. Outstanding amount would be lower (spicejet has been paying all loans well up to date).

Also it is imp to understand that this reminds me of VI episode (banks are being conservative in calling out cashflow mismatch up front rather than wait for it to turn GNPA)

This is a non-event IMO. Not even 1% of the corporate loan book.

The bank has responded by saying that outstanding exposure is 46cr only.

Disc: invested, biased.


Atleast 220cr exposure as there might be additional exposure via NCD’s that don’t show up on the MCA website. All after 2019, so post merger and not legacy loans-


I think people do too much speculation. Here is the official statement from the bank



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An interview with IDFC First’s CFO, Sudhanshu Jain.