IDFC First Bank Limited

sritej_king · January 23, 2024, 7:54am

Cost to income would decrease only when the bank stops increasing branch count qoq.

Absolute GNPA numbers have actually decreased YOY and only marginally increased QOQ. PCR has reached 85% which is great. NIMs have improved. Fundamentally the bank is in a strong position.

At 12,000 cr PAT, the bank would command a mcap of 2.4 lakh crore at 20 P/E. We can expect 3-4 times increase in share price in the next 5 years.

For me it is a steady compounder from now on. I would cut my position in IDFC (almost 50% of my portfolio) after merger which is a trigger for the stock.

Pradeep_Jadhav · January 23, 2024, 11:23am

Hope you have accounted for the dilution before arriving at the target price.

chaitanyakhanna · January 23, 2024, 4:37pm

I have some concerns and would really appreciate if someone with more knowledge about BFSI sector can help.

How would the NIMs play out during rate cut cycle? We all know that rate cut cycle will start possibly coming financial year. And although I don’t know how severe the rate cycle will be but my guess is that we could 150 bps rate cut over 1-2 years.

Now rate cut would certainly have an impact on the NIMs as the liability pricing will take time but asset repricing happens pretty much in real time.

With NIMs touching as high as 6.2%+ and yield on funds also one of the highest in top private sector banks. I don’t see ROAs touching 2% specially in medium terms or NIMs sustaining. Sure Cost to Income can go down but unsure of the impact there.

Can anyone give more insight. We have data of banks such as HDFC, Kotak, etc for previous rate cycle (when there were cuts) which certainly instils some confidence.

PS: I understand the bank has given 5 year guidance - However, I am not taking that on face value.

Disclosure: Invested and evaluating

naveen062000 · January 23, 2024, 5:42pm

As I understood from 1 of TV call, Mr. Sudhanshu informed that 65% of the IDFC loan book is in fixed interest cost basis. If the repo rate comes down, this would help bank. Also around 13000 crores high cost borrowings will be replaced with low cost funding. NIM would continue at around 6 %. If the opening of branches is slowed down, the expanses will reduce & profitability will increase.

sritej_king · January 24, 2024, 4:40am

Yes. That’s why I said 3-4 times and not 4 times. IMO the bank’s PAT would take care of some of the capital requirement (10% ROE as of now and I assume that it will improve going ahead).

Ayshi · January 24, 2024, 10:31am

EARNINGS CALL NOTES:

Part 1
MANAGEMENT COMMENTARY
VEMBU VAIDYANATHAN

The key highlight I think for this quarter is that we have come out with guidance 2.0 - so when you think of guidance 1.0, which is what we gave at the time of the merger in December 2018, we had guided for at that point of time we almost thought that the first year will be gone and just dealing with many, many matters so we gave guidance for 2025
So while that guidance stays and we will still keep it on the website and we’ll track ourselves to it, you will continue to see it, in the interim we just saw that this quarter marks exactly the end of five exact years after the merger so we’ve come out with the guidance 2.0
When we gave the guidance of 1.0 - let me just share that we really had very little visibility very little because the merger had just happened, Capital First & IDFC had just merged and the retail deposit book was something like about 10,000 crores - 10,400 CR to be precise - the loan book was something like about 1,00,4000 crores, we had bonds of about maybe 50 or 55,000 crores, we had wholesale deposits of about 30,000 crores, we had Certificate of Deposits which was about 28,000 crores - so that’s sort of an odd base on the deposit and borrowing side – which was largely institutional. We call it 92% institutional.
So frankly for any management to guess how quickly we will fix this and make it retail would have been just a good educated guess - again on the asset side a lot of things would have been still been uncertain, and under those circumstances, we still came out of the guidance, and then after that, we saw Covid, we saw many things, but I’m happy to say that almost literally on every Benchmark we are coming good
On one front probably maybe one or two elements they’re not right up there, but I think we’ll get close
Let me just say that during this period Over The Last 5 Years, the key success for the bank has been deposits
Just to share with you that the retail deposits of as of 31st December 2018 was precisely 10,400 crores
Today just 5 years it is 1,39,431 crores - that is a growth of 129,000 crores
If you take the total deposits, we also had 29,000 crores of wholesale deposits with us, so 10,400 plus wholesale deposit of that 29-30,000 crores
That 39,600 crores is today 1,76,481 crores
So that is again a good growth on deposits
So third is CASA ratio - CASA ratio now has come to about 46.8% which is again quite strong
So let me just say that one defining factor for the last five years has been deposit growth, period
And all of us know that deposits are the foundation of any bank, and this kind of deposit growth has come despite the fact that along the way, we dropped interest rates - most people thought that we stay with a 6%-7% strategy for like will be long time, but literally within three years we dropped it and now we pay on 0 to 1 lakh we just pay 3% - just three - and still last quarter we saw deposit grow by 43% YoY
Frankly, once deposit is strong we are sorted
Because the contra side is loan book
The loan book has not grown very much during this period over the last 5 years
The loan book has grown from 1,04,000 crore to 1,89,000 crore in 5 years
So you might say that if the loan deposit grew so fast - 4.5x in 5 years - from 39,000 CR to 176,000 crore then how come the loan book only grew this much?
All of you seasoned investors know the reason that we slowed down the loans just because we wanted to fix the CASA ratio
So basically the point is that both on the asset side we have a strong stable business model
I’m actually happy to share that our NPA is now - for its 14th year running - it’ll become the 14th year in March of 2024 - now 14 years is a really long time I hope you all agree, that our gross NPA net NPA has been 2% and 1%- really long time
And in this 14 years we have broadly migrated from lending to the largely unorganized segment - when we started to now we have become more, more relatively Prime Banks like for example if you to give a loan against property, say 8 years ago - 10 years ago, we would lend loan against property at maybe 12 or 13% because the banks were doing the prime lending against property at maybe 9-9.5% then.
Today we lend at 9-9.5% on the LAP and then maybe the other NBFCs at 13-14%
So we’ve come down the risk curve and therefore we’re feeling much more stable about our credit quality going forward
Now the gross NPA at the end of this quarter is just about 1.5% on the retail side, retail, MSME, and rural side - 1.45% and the net NPA is only .5% - so it’s been a very long time to have sustained know quarter on quarter, year on year for 14 years - let me say 13 years and three quarters to be more precise - it really gives us a lot of confidence
And now anyway since we come down the risk curve to become a little more like the mainstream Banks I think this should continue now for a while
So therefore there are three things that jump out at our last four-five years of work is that the deposit grew, the loan book grew, the asset quality is stable
Second part is that when we look at our bank there’s a lot of Harmony within our bank -harmony means the way the bank is working, the way the system is working up and down across, up and down the chain into division, there is a lot of tranquillity, and we just focus on our work and that gives us the ability to move smoothly move smoothly ahead, and this is all a lot of teamwork going on in the bank you know
Today myself, Sudhanshu, speaking to you, Saptarshi too, but frankly we are speaking on behalf of all our employees - that this success is actually coming from Dr Rajiv Lal
I really don’t want to go back in time and say this was the issue or that was the issue because really someone worked very hard, almost against impossible odds got this Bank a license
So let me just say the first note of thanks starts with him, it’s like an impossible feat but after that, if he had not got the license I guess there be no IDFC Bank today or IDFC First Bank
And after that about how the bank has built over the last 5 years and things have all come good
Now basis what has happened and how the foundation is built, and also based on the moment that we are having, we are now looking for to how the next five years would look like
When you look at the next 5 years frankly today we have a lot more visibility as this conversation - we had less visibility when we started then we give the guidance 1.0 - but now we have far more visibility
We have a stable lending model, we know we’re originating about 45,000 crores a year on deposits, and now we are trying to only extrapolate what it would take for us over the next 5 years, so we are now guiding that our deposit base as of December 31, 2023 is 1,76,000 CR as we spoke as the close of this quarter
We believe that we will be something like about 5,85,000
Now if you think that’s a very steep climb just remember that we came from about 38,000 CR to here
Now the other reason why you should feel reasonably confident about this is that currently deposits are growing upward of 40% - for the next 5 years we’ve assumed a deposit growth of only 24.8%
We think this should be reasonably easy for us
Next is assets - on the assets front, as you know we started with 104, today we are 189 - now we are guiding that our assets will be 5 lakh crores in 31st March 2029 - so again don’t think too steep a jump from 1,89 to 5 lakh crore because we are guiding for only a 20.3% growth as 5 year CAGR
We’re currently growing 24.5% - 20% should be easy, should not be a problem
So a 5 lakh CR loans and advances book now including SLR Etc will take us to an assets of about 7 lakh CR
Third thing is after deposit and the assets is asset quality
Now asset quality today, our gross NPA is only 2.04% - but remember this has infrastructure
We know infrastructure will go away, we’re bringing it down
So if you see infrastructure today our gross NPA is 1.66% and our net NPA is 0.47% the way we are trending, we are guiding for a gross NPA of 1.5% and net NPA of 0.4%
Maintaining this should not be a problem
Fourth is, profitability. Now we believe that the bank is comfortably moving towards an RoA of 1.9-2%
If you do the maths, multiply 1.9 or 2% on 7 lakh crore of assets – 7 lakhs is closing number – so you can see the average assets of 2028-29 should be around 6.3 lakh crore
6.3 lakh crore you apply a 2% on, you will get at 12,500 crore
So our broad guess is that we would be at around 12,000-13,000 crore in profitability in March 2029.
For context, this year would be around 3,000 crore – so this 3000 crore going to 12,500 crore should be very possible and frankly, if we deliver the 1st four items – if we grow the loan book to about 5 lakh crore, deposits to 5,85,000 crore – the rest should fall in line
Now, roe is the last one – we have had a tough time dealing with out Cost to Income ratios and roes, etc – because our Cost to Income was also high – we have branches, ATM network, tech, we told you but net-net we had to do what we had to do to build the bank for the future
In Phase 2 we will be able to reap the benefits of such expenses in Phase 1
We are guiding for an RoE in the range of 17-18%
So, I would say these are all in good faith as you know results may vary it can happen- we may have achieved, overachieved ,underachieved whatever
These are numbers which we believe are reasonably achievable and frankly for a bank starting where it was in 2018 December - in 10 years to reach a position of 5 lakh CR of loan book and 7 lakh CR of deposits - sorry 6 L CR of deposits - and 12,000-13,000 Crore of Pat with an RoA of 1.92 by 2029 will be a solid position to be in
And more importantly directionally will be looking good and other things anyway apart from these numbers the bank is a good bank, really high quality Bank, good customer practices good culture, good practices, good you know governance, really very, very good board very you know high quality board with high quality people, all of them have been very sensitive to regulatory commentary and so on and wanting to work within the guidance of the law, and guidance of regulations - so that sort of you know compliant bank I think that we are reasonably well set

SUDHANSHU AGARWAL – CFO

Balance sheet expanded by 22% on a YoY basis
We continue to see strong momentum on deposit as well as lending book
Growth in retail deposits was higher – at 47% on a YoY basis
CASA ratio also you would have seen has improved sequentially to 46.8%
CASA deposits increased by 29% on a YoY basis
Average current accounts have increased by 33% on a YoY basis
We also continue to see a faster growth in term deposits which grew by 59% on a YoY basis - as customers to lock in which are prevailing in the system
the growth here also was predominant driven by retail
Retail deposits ratio to Total customer deposits continues to improve and has increased to now 79% Vis-à-vis 76% at the start of the year
We have opened about 35 branches during the current quarter thereby taking the branch down to close to 900 branches
The high cost Legacy borrowings for reduced by about, 1400 odd crores during Q3 and another 1,300 crores is scheduled for runoff in Q4 24
We have given more details around this in the presentation
Moving on to the asset side overall funded assets grew by 24.5% on a YoY basis to reach 1.8 lakh cores
I will cover this in four segments
Retail book comprising of mortgage, vehicle portfolio that’s essentially car, and two wheelers then Consumer loans, credit card, education loan, and vehicles - this portion of the book grew at 29% on a YoY basis
We have seen strong growth across all categories - growth in certain segment like vehicles and consumers were also relatively higher on account of higher demand due to festive season and other increasing presence
Talking of credit card within retail the bank has now issued more than 2.2 million cards
The book has almost touched rupees 5,000 crores
The gross spend of credit cards increased by 61%
Also happy to note a report that infrastructure book is now just nearly 1.6% of the total funded assets and is now below rupees 3,000 crores
moving on to asset quality the gross NPA of the band further improved by seven basis points during the current quarter and stood at 2.04% and net NPA ratio stood stable at 0.68% during the current quarter
As Vaidya mentioned if we exclude the infrastructure book, the GNPA improved to 1.66 and net NPA improved to 0.47
GNPA in the retail, Rural, and SMA segment also improved by eight basis points to 1.45% and the net NPA is now just at 0.51%
The overall standard restructured book continues to come down and has further reduced to 0.35% of funded assets as compared to 0.38% last quarter
More than 93% of the restructured book is secured in nature
moving on to profitability - profit after tax for 9MFY24 increased to Rs 2232 crores versus Rs 1635 crores in 9M of last year - up by 37%
for the quarter profit grew by 18% YoY to rupees 716 crores
This was largely driven by strong growth in core operating income
Core operating profit which is NI plus fees excluding trading gains for 9MFY24 grew by 35% YoY
For the quarter it grew by 24% to Rs 1515 crores for the quarter NI increased by 30% on a Y0Y basis to rupees 4287 crores
The net interest margin improved by 10 basis points on a sequential basis to 6.42%
Operating expenses increased with 33% on a YoY basis due to strong business volumes witnessed during the quarter – I would say branch expansion and some increase in in in other expenses, like marketing and so on
We had a trading gain of Rs 48 crores during the quarter and Provisions came in at Rs 655 crores for the quarter
The credit cost as a percentage of average funded assets for 9MFY24 stood at 1.26% - which is well below the guidance which we had given earlier
We are not impacted by the guidelines recently announced around AIF Investments at all
On an annualized basis RoA stood at 1.16% as against 1.05% in 9MFY23, and RoE stood at 10.7% for 9MFY24 as against 9.9% for the same period last year
The bank has maintained strong Capital adequacy - the capital adequacy now stands at 16.73% at December 31st ‘23 with CD ratio at 13.95%
This takes into account the capital of Rs 3,000 crores which we mobilized in early October
We continue to maintain healthy liquidity levels and average LPR was at 121% for Q3 FY24
We have been maintaining this for on a consistent basis across quarters if you see our previous numbers - with this I’ve covered all broadly all the facets

Q&A
ISHAN AGARWAL – EREVNA CAPITAL

Q: Hi good evening thank you for the opportunity. I would say decent but slightly underwhelming performance by the bank - three questions. The first one is that management has always highlighted that core total income will go faster than OPEX for FY24-25 and FY26 and that is how operating leverage was going to play out. It is slightly disappointing to see OPEX here growing 33% YoY and income growing 31% - which in turn has upped our cost to income from 72.1% last year to 73.3% this year. What is really causing this pain in OPEX? What are the factors playing out? And what the management could not envisage while giving the past numbers?

Thanks for that very crisp question see the thing is I always mentioned to you I don’t know Sudhanshu may have told you again and again - that listen please don’t track every quarter by quarter –
Wee we are early stage Bank - sometimes you know one odd item expense catches up, some digitization expense catches up, on some other product something happens one quarter of the other – If you go YoY, own, I want just point out one number to you that if you take you know a five window that is 19 to 23 - four years -you know you’ve seen that the balance sheet has grown by 9%, from the time of merger today five years but PPOP (Pre-Provisioning Operating Profit) has grown by 43% so my point and by the way I’m not claiming it is still the jaw will be that wide still, but definitely for a balance sheet loan book growing by about 20%, which we guided for, for the operating profit to increase about 32 to 33% should be the kind of Zone you should look for the next four-five years

Q: Understood. But this was a YoY increase in cost to income and that is why I highlighted this - so it’s not quarter on quarter which I’m comparing. Even Year on Year, from 72.1 it is up to 73.3, whereas we are expecting a maybe a plateauing or maybe a decline from here on…

So I agree with that. I fully agree with that.
I say this result is a bit underwhelming actually…we should have expected to post a little better - at least at the PAT level should have posted a bit better

Q: Core operating even Pat – there may be some one-offs but even that is slightly underwhelming on that part

I agree, I agree 100% I agree could have done a bit better, could have expected do a little better, but it’s you know like I said we’re running a long game here – a 10 year game out of which five we’ve finished maybe even longer from there - maybe many, many decades after that right

Q: So going ahead do you expect that cost to income should start declining from here on or do we still expect it to keep at this level for a year or two?

Our sense is that Q3-Q4 of FY25 should begin to see material movement downwards
If we take digital loans for example in the digital loans you know for period of time there was there was no FLDG permitted for example, and last quarter FLDG got permitted
Now we have a certain structure with the counter-party, now we’ll move to another structure with is FLDG (Firs-Loss Default Guarantee), when we move to FLDG structure, the benefit of not having credit cost because the counterparty will guarantee - that benefit will come two quarters from then meaning when the credit cost would have hit us - they would have supported us, they would be paid for it but in the interim the impact would be there
So the I don’t want to confuse all of you with all these mathematics but the point is that our own sense is that next quarter we will move over to the FLDG structure so the benefit of moving to structure will come in Q3 Q4 FY25 and which will show up in credit cost line
So therefore these movements will slightly give better benefits for us by exit quarter FY25

Q: So now as you mentioned about FLDG, my next question was actually regarding credit cost. While our loan book has grown by say 24% YoY, our Provisions have grown by 45% YoY - in spite of all collection efficiency numbers, SMA numbers improving YoY, so what is the reason for this?

I said this to you earlier also often times when you compare YoY for early stage Banks either last time there would have been something very much…so we were running really very low credit cost for a book that was giving the kind of yield and NIMs it was giving us, our credit cost is running so low - in fact many people can us to scratching their head…how can a credit cost be only 1.1%?
It is even lower than many top Banks - so during post covid we were getting certain recoveries because, if you remember during Covid we took Provisions - now many of the recoveries had started coming, so for the last two years - we were getting benefit of the recoveries – and now some of the recoveries are tapering off
We moved over to the 90th-day recognition of NPA rather than 91st day and that also had some impact
What we are seeing is our collection percentage which we reported at 99.5% now for literally like two years at a stretch - now last month in December it was 99.6% right let me call it 99.5% for clarity’s sake- so if collection percentage stays the way it is, cheque amounts is very low
Very low meaning very low - it’s like 6 points something which also collected during the same month in a big way
So the point is that the underlying parameters are strong so there’s no reason like fundamentally to be disturbed or anything like that
I mean you watch our next quarter you see the results for yourself.

Q: One more for my end with the new RBI Norms on risk weights for unsecured credit, our tier one capital adequacy is down to less than 14 in spite of the capital raise that we did last quarter, that is in October. So now given that it is at 13.95% when do you think we’ll again have tier one Capital to show up the capital adequacy?

We will watch the numbers with the way the profits emerge over the next four quarters and then make our

Q: We do have an idea of the capital consumption that the bank will do so what is your target - that okay we don’t want to go below tier one say 12.5 or…

no we don’t we don’t spell out precisely when you raise capital
you know it’s not a good strategy for any bank to exactly put out in the market capital I hope you’ll agree so we’ll make up a mind as it goes along depending on the numbers

Q: So if I look at the cards data released by RBI it is unusual to notice that the number of debit cards in force for IDFC in November has reduced for the first time as compared to September - from 67.8 to 66.5 lakhs - so is there some reason? Were there some dormant accounts that were closed or what?

Could have been some dormant account clean-up being done by the respective teams
See basically the bank is more and more moving towards quality - we are very firm about it
So we are opening lesser number of accounts than before on the bank account especially on the digital side - but we focusing on quality
So the inflow is very strong that’s how we saw growth of close to about 4,000 crore a month of deposit which kept coming in so let me say deposits are rising very well
That would have been some closure of some customers inactive and those kinds of respective product teams keep doing the work

SUDHANSHU MISHRA – PHILLIP CAPITAL

Q: Two or three questions - the first one is around the personal loans - just wanted to understand the Run rate of personal loans that we originate from various fintechs and the level of FLDG that we do from these fintechs. My fair understanding is that a lot of lending Partners do slightly above 5%, or maybe about 5% which is the mandated requirement of FLDG. The second is on the vehicle Finance - if we can give out the split of a car finance new car finance and used car finance, and the Outlook for the industry as such and our own growth estimates there in FY25 these are my two questions

We do work with fintechs broadly but we have not exactly put out how much who’s doing how much and all
Let me say broadly growing they are very conscious that on the personal loan front - personal loan meaning basically unsecured personal loan given our model is largely lending to salaried people who want to take personal credit typically term loans so in that model I think things are running pretty well for us, some originated to Partners, some originated by ourselves etc etc
Second question is about vehicle Finance – I say we have more on the used car financing side than the new car type, though we also do new cars, but you know new cars have no margin, and it’s just a waste of time and money - so we give it only to our customers who come to our branches and you know our base, we give new cars - With a limited Capital we have to use it for either two wheeler Finance or for used cars
And frankly the credit quality we are getting is so fantastic - so why waste money on new cars

Q: one last question in terms of fintechs when we onboard a customer onto our balance sheet when we taking the risk -that customer permanently becomes ours. What I mean by that is that once it’s on boarded to our balance sheet, it’s only we who own the customer in terms of any kind of cross-sell up-sell of credit products or the fintech through which it was originated, can also do any kind of cross-sell up-sell?

This is the typical complication that happens in this industry so typically digital Partners like to also do offer other things with the same customer
But we are very clear… one condition that is non-negotiable for us is that we have full rights to access the customer, and we will do business with the with the customer it’s very important to us

Q: So the status of the customer is transient and not permanently ours - so that’s a fair understanding?

That’s a fair understanding yeah but when we get our salary customers and we lend to them, we feel more in control because it’s our customer 100%
But when it’s originated by a party sometimes party also does something with the customer

Gau (?) Zisuan – Shanfeld

Q: First question is just data -can you share the numbers for gross and net slippages?

Yeah slippage was for the quarter was about, 1400 crores
If you see it’s broadly flattish as in the previous quarter, and even the net slippage is flattish - right it’s at about 850 Crores for the current quarter got it

Q: So last quarter there were some timing issues and one offs - is there any such issue that is repeating this quarter or are we expecting ? You know slippage to be gradually trending down from here?

so we feel quite comfortable as Vaidya mentioned that we are seeing a consistent asset quality right so even in this quarter the slippages have not gone up while the book has expanded
so we feel that we should be quite okay on this plan

Q: So why does our credit cost is trending up, while our you know if our slippage number is similar to last quarter - you know our credit cost should not be tending up?

So if you see that credit cost has been for this 9 months has been just 1.26% right. We had guided the market for 1.5%
This quarter we have seen a slight jump right - but that’s a combination of existing book where as the Aging happen some more Provisions come in
So as you rightly said the gross slippage that has been quite stable right
And other indicators also like if you see the check bounce right which we have presented the data in the presentation - that it continues to be lower - first check bounce is about 6.3%.
Even the collection efficiency is quite stable right over the quarters in 99.6%
So which talks of that the incremental book which is getting built is quite pristine
We may have as I said some of these provisioning impact may come because of aging and so on
but we feel quite comfortable
The point which I was trying to mention was that gross slippage and net slippage has been quite stable
If you see the asset quality indicators right in terms of our check bounce - that’s down from 9.9% to 6.3% right over a period
And similarly collection efficiency is quite stable for early buckets at 99.6%
so we feel quite sort of confident or on the incremental assets which are getting generated
As I said some of these Provisions would come in because of Aging, there could be some smaller lesser recoveries during the quarter
So that is precisely the imp which some of that impact which has come during the current quarter
For the 9 months if you see the credit cost has been just 1.26% and which is well below the guidance which we had given earlier
so we feel that things should normalize from here and should continue to stay so
Of course we are very cautious in terms of sourcing, in terms of credit underwriting, and and so on
So we’ll continue to exercise Prudence on this front

Q: If I remember correctly previously we were talking about next four to five years 25% growth is quite sustainable. So I’m just wondering our 20% kind of guidance now is it just on a conservative basis or is there some you know changing strategy that we maybe focus a bit more on the profitability side? Maybe slow down growth a little bit or it’s you know some RBI related issue

See basically when you look out it’s probably just better to be guiding at a number which we feel is reasonably safe and in the bag

NITIN AGARWAL – MOTILAL OSWAL

Q: So one question on CD ratio - while bank has been doing well and the CD ratio has been coming down pretty consistently every quarter. And any discussions about this with the RBI given the ongoing media reports about this? And any near-term Targets therefore that you have?

So if you see that we have been Bringing Down the CD ratio because deposits have been growing faster
Of course we had Legacy problems right that’s why our CD ratio was 137% at merger
If you see even into this year so far we have brought it down from 109% to 101% and maybe by the end of the year we will be lower than 100%
So we feel that and even in the guidance if you see our deposit growth is tad faster than the loan growth which we are guiding
so this should keep coming down as we sort of we move along
One data point - the incremental CD ratio - if you see for this year is about 80% and for this Quarter it was just 65%
So as long as the deposits continue to come strong right and we feel that we should be able to improve on this ratio.
We feel quite confident of bringing it down

Q: Second question is on the OPEX where we are seeing a fair bit of an increase - so if you can provide some color as to what are the key drivers within this number so that we can better appreciate the operating leverage that is likely to play over the coming years and from Q4FY25 that you indicated?

If you see that a guidance see because you go to the specifically go to the guidance - see for you to really appreciate where this game is headed and I read out the operating leverage numbers at a bank level that we’ve been seeing year on year, this year let me say that the operating leverage has not paid out that much because you know this digitization expenses and technology, and we are really building the bank for the future - and that has been our consistent strategy as you know thus far
So therefore we feel that from next year onwards like we said Q3-Q4 of FY25 we should see meaningful movement
Our own estimate is that the OPEX of FY25 for example should just increase by about 20% where the loan book or the income could Rise by let me say maybe 24-25% because of the reason so we feel that in FY25 we should start seeing material opening of the jaw - and again
Because see one thing you should note in the way we are building out story 2.0 that the deposit numbers we have kept very modest- the requirement imagine this going at 25% -we are used to grow at 40%, so 25% is nothing and remember what is something unique will play out after FY26 onwards which is FY 27 28 29 - I’ll tell you what is unique
Today even are growing the loan book at 25% - 24.5% bank is funding the growth of 24.5 from deposits - as you know we not borrowing anymore - funding it from deposits - plus we are repaying bonds pertaining to the pre-merger
so we are carrying double burden - you fund yourself and also pay your past liabilities
Now one and a half years from now, lot of it would have gone away - two years and then after that you’re only funding a loan growth for somebody who’s used to carrying such heavy weight - that should be pretty lightweight actually for us
I mean relatively lightweight
So that is a material change coming in our life from FY26 onwards let me say FY27 on to FY30 and we’ve done the maths - there is there is a big relief in the requirement for deposits then
And actually who knows we might even cut deposit rates and that might be positive for the bank
Or we put less branches you know one of the two

Q: Last question is on the guidance 2.0 where you are giving guidance on very key metrics -but when you look at the RoA of 1.9 to 2 by FY29 what levels of margins and cost and income ratios are you breaking in?

Cost income ratio looking like more like about 55% by the exit year FY30
Margins resonate similar stuff

SAMIR BISE – JM FINANCIAL

Q: Just wanted to get a sense on the others portion of the loan book which is roughly 15,000 CR and growing at a fast pace?

We have given in the presentation that it includes digital loans, it includes some portfolio buyout which we have done, and some revolving credit - so that’s part of the others book

Q: And would this portion be secured or unsecured?

Depends on what you’re buying no? but chances are you’ll be buying the secured portfolios to the extent they buy out
And to the extent digital loans could be unsecured also

Q: Secondly I think in the opening remarks it was mentioned that there’s no impact of the AIF guidelines on the bank - just wanted to reconfirm ?

Yeah that’s correct we have nil impact on that count

Ayshi · January 24, 2024, 10:31am

EARNINGS CALL NOTES

Part 2
ROHAN MANDORA – EQUIRUS SECURITIES

Q: Just on that guidance for FY29 what would be the normalized credit cost that we assuming there? that’s first and secondly what would be the losses that we are incurring currently on the credit card portfolio and on the branch liability space right now?

All everything all products are mixed up when we announce a bank level or a credit cost - we guide for 1.5-1.6
So what current numbers include everything
Let me just say that the for the upcoming five years we have assumed a little higher credit cost than what we are currently incurring - because there’s one benefit we have been getting in our credit cost thus far - one is that I mentioned earlier you know in Covid there were charge-offs and those obviously recovery is happening, because you may charge off a loan but so that kind of a recovery has been coming to us last two years. And we believe that all those benefits will go away
And also you know we should be we should be we should be prepared for you know just for the sake of it be prepared for slightly higher credit cost generally in ecosystem 9 nothing to do about us so we assume slightly higher numbers than what we currently incurring

Q: Sir so this essentially means the RoA expansion is predominantly driven by Improvement in the OPEX is flattish and credit cost would marginally go from current and on the question on credit card portfolio losses that we entering right now…and the branch expenses…

I told you now we not calling out how much we lost in Loan Against Properties or this or used car - we’re not giving product by product - but broadly we at a bank level we are in very, very good control - it’s super low

Q: I was trying to understand operating losses in the credit card portfolio

I told you when we put out our numbers we put a credit cost numbers at an entire rate level and the overall Bank level because some products you have a good quarter, some more slippage - something has less slippage, but you should look at a composite manner from quarter to quarter and year to year- and that number is trending very well
You know last year the credit cost was 116 basis points
Even in the worst period of covid our credit cost average book was frankly among the best among the peers
You would imagine for a book that is yielding a NIM of you know 6.306.5% You can imagine 2.5% or maybe 2% even in normal conditions - in covid we had only 2.51 right
So and then moment Covid vanished that is FY22-23 it came down to 1.17% - this is super low so we are very confident that they’re underwriting good credit
But we believe it cannot stay this way all the time so we have now factored for higher number
With respect to your question on a credit card -definitely economics have been improving there as we are building in more book right, cost income if you we had given out numbers that that was 164 % as of the previous year and we expect that to come down meaningfully to around 110% for this year
And so we have we have been guiding that we expect credit card to sort of Break Even into next year and be profitable in the year to follow
so we feel that it takes some time right - it has been just 3 years before when we had launched this product so we feel that we are well on course
We have never let you down in credit cost and asset quality for like 14 years now - anybody who’s been with us since Capital first years will testify that we never have credit problem. It’s been five years we haven’t put one foot wrong on credit - not one foot wrong.
Obviously you know such a long period of time comes from a disciplined underwriting processes, continuous tightening of the norms and revising the Norms, continuously staying in The Cutting Edge of Technology, good governance in terms of the number of people who inspect a portfolio - so all these things we have no intention to relax
And we at least while we have mentally factored for a slightly higher credit cost because we believe we should be pessimistic about these things but

ANAND BAVNANI – WHITE OAK CAPITAL

Q: From our business model perspective, I just wish to understand how much of the collections we do is outsourced?

It is increasingly becoming more and more digital and online you know
There’s a massive shift underway there so
let me say a few years ago it was largely you the whole thing is changing to give you one very simple idea for you to understand - earlier if a customer bounces a check we have a call to the customer and request a customer to pay and some agent would go and collect the money from the customer
Now it’s not like that - now you there’s lot of analytics and technologies that happen calling itself is not necessarily done by a human being - the call will probably be done by a bot and the bot will take some promise and then the bot will send a link to the customer saying that you know you promised to pay me here’s the link for you to pay and customer just pays from the link and the bank gets the money
So the bank is very digitized bank and we are able to do such massive progress

Q: I specifically want to understand the outsourced collection cost… so if I were to look at the 9 month total other operating expenses it’s around 8,200 crores -approximately how much would be the cost we pay out of the 8,200 CR to Outsource collection agencies?

I don’t think we know the number off hand nor have we put it out but broadly speaking the directionally we’re trying to become a more direct to Consumer bank - but of course we do have agents
By the way lot of our collections in in rural areas happens directly by our own employees not even the agents
Just for information many locations we don’t use agents in rural India
There are many products in which early bucket collection done by employees themselves

JAY MUNDRA – ICICI SECURITIES

Q: I have just one question that earlier we had a guidance of you know 65% cost to income by exit FY25 and 1.4 - 1.6% RoA by F525. Does that still hold - both these things or you know or how should one look at it?

The first of all we’ll keep the slides out there so that we don’t want to escape from our guidance of you know 1.0 so just to share with you that we will be true to that guidance
God knows how we’ll perform again
We’ll retain the guidance for sure we’ll keep it publicly out for you till the till the last day that’s our commitment
Now second part your question about how we’re going to perform - you know the cost to income ratio - I think we are a little behind what we what we set out to do
The good news is let me tell you, one countering factor for being behind schedule supposing we are at 65 and we turn out to be 68 I’m just making up a number - how does this play out? What plays out is the income line turns out to be higher than what we guided
Remember we guided for 5.5 now we’re delivering 6.3 - so you’re already delivering about 1.3% more on income
So even if your cost income is higher your RoA may still get there
But we are going to be in zone of meeting our you know deposit numbers, we are in the zone of meeting our loan numbers ,let me say our asset quality number, Capital liquidity numbers we’re hitting all the buttons, all marks
We don’t expect to meet exactly the cost to income numbers but because of the equation I told you right now we may still meet the RoA and the lower end of the RoE Mark by that time

Q: Is this RoE is a more normalized kind of an Roe?

You’ll be a little surprised about how that game will change because what’s happening is that the we believe that from 2025-26, we do expect a positive movement on cost income ratio definitely and Improvement in RoA and RoE
Okay just take that as our as a sense as of now when you move forward into 26 now remember we are talking of a loan book of only 20% we’re talking about deposit growth only 25%
So our need for investing OPEX is going to be much lesser than before
The first five years we were in complete buildout stage
It’s not going to be that tough now
So our expense requirement will be lesser - so FY26 over FY25 that will be our expense requirements growth will not be very much, and also by the time bonds should be paid back, needs will be much lesser - so we feel that things will get easier

MANISH SHUKLA - AXIS CAPITAL

Q: If I look at your sequential growth in assets or loans it is one of the slowest in the last 8 or 10 quarters. Anything particular to read into this?

No we want to keep for asset growth you know within a Zone where our capital adequacy and our credit deposit ratio are all good
Sometimes we do IPC - sometimes we do assignments meaning direct assignments with other Banks - basically we are clear that we don’t want to grow the loan book too much even now
So we have taken out some of these loans and done IBPC - Interbank Participation where other bank purchase these loans off from us

Q: Specifically on personal loans and credit cards - any change of strategies since RBI regulations changed?

No change of strategy
Good phenomenal products in what the customer needs, cash flow is analysed, and they make good returns.
We have increased interest rates on these products as cost of equity has gone up.

Q: The 20% loan growth CAGR over the next 5 years will be a step-function now? Compared to 25% right now…

5 years ahead you can’t make judgements on step functions
What we have done is extrapolated 20% for each year
We have not done step-up, step-down
Even large banks having 10 lakh crore – 20 lakh crore – all are going 20% - 20 is nothing, it will just happen
At 25 we have such good asset quality, then we can further cut out the edge customers and further improve the asset quality
We have no doubt about achieving this 20%

JAY MUNDRA – ICICI SECURITIES

Q: Just a small clarification – it looks a bit confusing – can you clarify is what we have done is that we have been growing at a faster pace and now we have unveiled a new guidance with 20% - so is it going to be the new normal? Or because of conservatism, forecasting 5 years out, you have given this range…

It’s our job to clarify this
This thing about 25 to current growth
It’s not like it’ll come to 20 in the next quarter itself
But if you wake up in FY25, and see the book growth – you might see the growth at 20 – it is possible
We are planning to slow down
20-22% is the zone
There’s a reason for this – it eases a lot of requirements on the deposit side – we need to put branches, etc
Two is that, everything looking so fantastic on credit cost front, but we want to remind ourselves, trim out the edges, we might tighten credit
The intention is to slow it down in a way that on a sustainable basis this can compound for a long period
You may be disappointed with 20% but trust me, even at 20 compounded for a long period of time – as operating leverage will unfold – we will realize it is a good strategy, a sustainable strategy
For now we have assumed this strategy – we could do slightly higher, slightly lower – but this is the intention

Closing Comments

Are you disappointed with the 20%? Or are you okay with it? What is the feel of the house

Jay Mundra – ICICI Securities

You are clearly right, this helps in maybe more better filtering of the marginal customers and will ease off some pressure on deposits
On a system level, this could be the narrative build-up, that growth needs to be a bit calibrated

V Vaidyanathan

There is a message from the regulator also to curb exuberance
- It is time to trim the marginal customers to give a more stable story
- Hopefully even if you are disappointed right now, hopefully you will become a convert to our line of thinking in the coming quarters.

X.

Akash_Padhiyar · January 24, 2024, 12:26pm

In a hypothetical scenario where the management successfully achieves the projected goals, with a market capitalization of ₹200,000 crore in 2029, considering average valuation say at 15 PE, the calculated Compound Annual Growth Rate (CAGR) falls little below 20% considering current marketcap. This observation prompts a cautious consideration of potential future risks that may impact the bank’s performance.

Acknowledging the inherent uncertainties in the market and the potential for unforeseen challenges, a prudent analysis suggests that, under a mildly bearish scenario, investors might anticipate a CAGR return of 15%. In a more pessimistic or highly bearish scenario, the estimated CAGR return could be conservatively positioned at 12%.

It’s crucial to emphasize that these projections are based on hypothetical figures and assume the successful realization of the management’s guidance. Any deviation from these anticipated outcomes could impact the actual returns. Investors are advised to closely monitor the bank’s performance, market conditions, and the management’s ability to navigate potential challenges.

narenarora · January 24, 2024, 4:05pm

@askash_padhiyar

Basis market cap of Rs.2 lac crore on 31.3.29 the XIRR comes to 28%. Please refer the calculations below.

# of Shares of IDFC first bank (31.12.23)	7066816465
Less: Reduction of share due to IDFC merger	166462472
Net Shares	6900353993
Price	80
M. Cap (Rs. Cr)	55203

24/01/2024	-55203
31/03/2029	200000
Xirr	28.2%

Working of reduction in shares
Shares held by IDFC	2646438348
New share to be allotted to IDFC shareholders	2479975876	(1.55 x 1599984436)
Reduction in shares of IDFC first bank	166462472.2

All readers may check and inform errors if any, would be happy to correct it.

28% XIRR over 5 years is a decent return IMO.

swsriram · January 24, 2024, 4:11pm

these calculations are missing one crucial point; equity dilution resulting from fresh capital infusion from time to time. IDFC First Bank is currently generating a RoE of 10.7% approx. for it to grow at this projected rate from here on, fresh equity infusion is inevitable until RoE reaches mid-teens.

raunak_kapoor · January 24, 2024, 8:28pm

While we may not have precise information on the exact amount IDFC First Bank plans to raise from the market, if we extrapolate the same equity base growth observed in the last five years, we can make an estimate. In my opinion, they may not need to raise the same amount of equity as the Profit After Tax (PAT) has significantly improved, which was almost negligible five years ago.

Total number of shares as of January 5, 2018: 478.15 Crore
Total number of shares as of December 31, 2023: 706.68 Crore
CAGR of the Equity base(2018 to 2023): 8.143%
Total shares after the merger of IDFC First and IDFC Ltd: 690 Crore
Projected total number of shares as of January 1, 2029, with the same CAGR of 8.143%: 1013.84 Crore

Projected EPS : 13000(Guidance 2.0)/1013.84 = 12.84

These are rough calculations and do not constitute a buy or sell recommendation.

Ballaji_Vijayan · January 25, 2024, 8:24am

Hi All,
Can you please help me understand the high NIM that IDFC has?

Their cost of funds is not cheap, and with thier low credit cost, I assume that they have a high quality loan book and such that will not fetch a super high yields. So, NII has to be average as that of other banks. Their CASA is relatively good though but all considered, How does IDFC First generate such a good NIM compared to its peer banks? I am trying to do the calculation myself to see what sets them apart and unable to do so. Appreciate your thoughts on it.

antson_m · January 25, 2024, 9:35am

Effects on banks on reducing rate scenario:

When interest rates go down, income from loans also decreases, while the interest paid on deposits might not drop quickly. This can squeeze the spread between what the bank earns and what it pays, lowering NIM.
1.1 But note that deposits are a portion of their cost. Banks also borrow money to fund their lending activities. Lower interest rates can reduce their funding costs, potentially offsetting some of the decline in interest income.
Increased competition for deposits, as customers may be less keen to keep their money in savings accounts. Banks have to compete to offer higher interest rates, reducing margins.
Bank treasuries borrow short-term at lower rates and lend long-term at higher rates. Existing short-term loans mature and are repriced at lower rates, the bank earns the higher interest on longer-term loans, temporarily benefiting NIM
Low interest rates stimulates capex cycle, thus higher growth rate.

As per me, effect on NIMs will be temporary, i believe that improved credit offtake will offset the impact in margin.
Another point to be to be considered is the bank’s specific lending and funding mix, customer composition, etc. Bank’s with higher % of fixed rate loans will be less impacted, for instance.

chaitanyakhanna · January 25, 2024, 11:09am

Thank you Antson for the wonderful explanation.

About this point in particular - Do you think as customers will be less keen to make deposits owing to lower interest rates. This can particularly help bank with CASA?
CASA obviously is even cheaper. So that could also potentially offset some margin pressure.

Is this a trend that has been seen in the past?

antson_m · January 25, 2024, 11:45am

Not necessarily, they will look for other option like MF/Equity/Bonds, etc. What has happened earlier that i can recall is that SA rates were almost equal to short term deposits. So people were keeping money in SA for short term needs instead of FD.

Ballaji_Vijayan · January 25, 2024, 1:36pm

Good thoughts. They are doing unsecured retail/ rural loans mostly but have a low creidt cost. So, Bank obviously has good underwriting process in place.

What do you think of their spread or Avg yield on advances? I couldn’t get that number… should Yield be like 11-12% to be able to get 6+% NIM?

valueinvesting101 · January 26, 2024, 5:39pm

This exact question was asked to Mr Vaidya on the recent CNBC interview after earning. https://www.youtube.com/watch?v=BpQ-AR6FIaU Listen from 0:45 mark onwards.

Here is explanation from the MD:
“It just a specialization it’s a specialization you have and people should be should appreciate able to lend a particular segment in a very low risk model with a low credit cost I think we should get used to.”

rpm · January 28, 2024, 2:58pm

After looking through the results and going through the comments and VV’s videos on TV channels, it is absolutely clear that the bank fundamentals continue to be sound. The bank has taken a higher provision in Q3 which has caused the PAT to stay flat and share price to drop. Since no requirement apparently exists to raise capital in FY 25 so the intent could be to create some reserve ammunition to ensure a good PAT when the time arrives in maybe FY 26. It would be a good strategy for ensuring proper pricing of the new shares.

The infra book is now 1.6% as it is reducing in rupee terms and the total loan book size is increasing. However it is still around 3000 crores. How much hit it would cause to the balance sheet before it completely goes off the book is not known to us. Perhaps this question could be posed in next concall.

VV says “he needs approx 50,000 crores every year as deposits for which he has already got adequate machinery in terms of branches. He has set a new goal of 20-22% asset growth, to reach a conservative guidance 2.0 in five years. He can exceed the targets if he finds it safe to do so. The reduced capex will start showing up as higher profitability in next 3 quarters.”

I believe this, as it is doable, especially considering their past performance.

james_kerala · February 7, 2024, 2:07am

Anyone who is closely tracking IDFC and bank, what are the regulatory hurdles remaining for the reverse merger. From the past experience and guidance, any timelines we can think for merger.

Disc: invested in idfc with intention to hold bank.

naveen062000 · February 7, 2024, 7:03am

There are 2 last steps remaining. 1. NCLT approval for merger. Meeting is scheduled in Chennai office today.
2. Share holders approval. This would be taken up after NCLT approval.

I am hopeful of merger completion by April or May of this year.