While reading an article by The Morning Context on Indian Banking and an article by The Economic Times which highlighted the pains in banking industry and those pains being reflected in the gross NPAs and specially in Write Offs, I decided to look at BASEL Pillar 3 disclosures of IDFC First Bank to understand their write off situation since the start of the bank. The disclosures used to come up with this data can be seen here: Regulatory Disclosures | IDFC FIRST Bank
Summary of observations
Since the formation of IDFC First Bank (the merger took place in Dec 2018 - these numbers includes disclosures made during fiscal year ended Mar 2019):
IDFC First Bank declared assets worth 27,997 Crores as NPAs
Against these, they provided (Gross provisions) for 21,240 crores.
Of these provisions, 14823 Crores have been written off and 5054 Crores have been upgraded/recovered back. So about 53% of NPAs have been written off and 18% has been recovered/upgraded.
Excluding write-offs (Assuming no write-offs were made - as was called out in above themorningcontext.com article that the real pain is hidden in write-offs), the closing Gross NPA would have been ā¹18,541 crore instead of ā¹3,718 Crore (as it is at the end of Mar 31 2024) - roughly 5x or (5x1.88% GNPA = 9.4%)
For the last financial year (FY24) IDFC First Bank declared NPAs: 5251 Crores (Gross NPA), out of these IDFC First Bank provided for 4437 Crores (NPA Provision). The bank wrote off 2982 Crore (~57% of NPA) and recovered 1477 Crores (~28% of NPA)
That said, write-offs have been fully taken into P&L as per accounting rules and also as required by the regulator, but this goes on to indicate the pain in banking industry.
Doubts:
Any one who has been looking into banking disclosures for a while, can you please highlight if I am looking and interpreting the numbers correctly?
Gross NPA (assuming nothing was written off) at 9.4% - does this indicate a grim situation at Indian Banking industry?
I understand your perspective on the investment in non-lending finance companies, and you make valid points. However, the dynamics of the lending business for banks and NBFCs are somewhat different, and itās important to consider these distinctions.
One crucial aspect to highlight is the relationship between loan growth and equity dilution due to regulatory requirements for core equity capital. Regulatory capital adequacy norms mandate that every lender must have a certain amount of core net worth invested in their lending activities. This means that if a bank or NBFC generates a ROE of 14-15% and wishes to avoid diluting equity, their growth potential is limited to around 11-12%.
For instance, a bank like IDFC First, which generates an ROE of approximately 11% but aims to grow its loan book by over 20%, has no choice but to continuously dilute its equity. This scenario applies not only to IDFC First Bank but also to other banks and lending NBFCs, including prominent names like Bajaj Finance, ICICI Bank, Axis Bank, SBI, and HDFC Bank.
In my experience, the only financial institution that has managed to avoid this trend was the erstwhile Gruh Finance, which generated an impressive ROE of over 27-28% while maintaining a lower growth rate of 18-20%. This exceptional performance allowed them to grow without the need for frequent equity dilution.
For coming to a conclusion, you will have to look at all banks GNPAs and writeoffs, its a mere academic exercise without comparing it with peers and multiplying the GNPA with number would not reach to accurate gnpa.
Its a standard practice - a gnpa which cant be recovered needs to be written off, while being gnpa, its already accounted out of PnL by providing for it.
So all writeoffs are actually coming out of profits and hence ROE will remain lower. While if RoE is higher, consider writeoffs as lower than profit generated and hence reserves are getting accumulated.
Great analysis. So In your view if someone has to look at the bank from 3-5 yrs investment horizon, what do you suggest 3-5x from here, assuming our country Debt to GDP ratio at a sweet spot, steeper shift from lower to middle and middle to upper middle class in coming years boosting consumer credit, FIIs waiting to invest in great businesses with tough fight from DIIsā¦
Through some forward looking numbers on Valuation.
I started using the IDFC bankās current account facility for a new venture, and am truly amazed by their technology platform. In past, I struggled a lot with bulk salary transfers, managing beneficiaries and other online banking issues with Axis and HDFC banks. IDFC, on the other hand, has made everything so much easier. Their platform is smooth and definitely very user-friendly.
This experience gives me more validations, to hold the stock for a very long time. Only complain is the sudden large fluctuations in stock price - feels like lot of operator activities.
These are normal in almost all banks. All banks have a foreclosure charge clause in their loan documents (except in products like home loan etc, floating rate loan given to MSMEs, etc). Some of these comes up in the news occasionally.
Is it separate? I donāt think so. Rs 1500 crore is part of the Rs 3200 crore. 18.6 crore shares were issued to LIC at Rs 80.63, totaling Rs 1500 crore.
No one short sells themselves. Calling someone a fraud just because of one quarter results is a strech. We have to wait for earnings call to know what caused huge provisioning.
Largest holding. Have been let down by my expectations of many companies in my portfolio. Learning to take it in the stride
Vote with your wallets, sell, crash the market price, so those who think this is a sound business being run by sound management that has demonstrated integrity, competence and energy, could buy at juicy valuations!
Even looking at quarterly results this closely is a waste of time. Management has to entertain because RBI/SEBIās Equity Listing Agreementās clause 41. Such is life!
E.g. look at what temporary hiccups have done to market valuations of businesses like Ujjivan Small Finance Bank.
Unfortunately, no concrete questions or guideline by mgmt on ROE/ROA/EPS and Equity dilution
JLGs also to impact next quarter as well
Merger expected to get completed by Sep 24
Heard the callā¦ they guided for 1.4 roa by 27ā¦ they said investors felt fy 29 is a bit away, give us a mid term guidanceā¦ so we are sharingā¦ 1.4 by '27
Re jlg they said 20 bps impact to credit cost otherwise 1.65 that was mentioned contunues to hold ex jlg. Dont know about others but i felt it was kind of fair when i heard the concall of bajaj, and other playersā¦ bajaj points to 1.85 woth upward biasā¦
so if they say 1.65, then it looks well within the bajaj rangeā¦ because the yield and book composition looks v similar to bajajā¦ (they used the words "another large institution with similar lines of business)
Well even if it is a bit more say 1.7 or 1.75 it is better than bajaj which says 1.85 āwith upward biasā
I mean ex jlg ofcourseā¦ bajaj does not do jlg to the best of my knowledge ā¦
See i was a capital first shareholder and complained hard about marrying IDFC. So think of me as a criticz see my earliest posts. Because Capital first dit so well i made lot of money like 6 times in 5 years.
Tis sttock is running only on managemtn nameā¦ else for roe of 10 it shoulnt hae been at this multiple at this price.
Despite being a critic, atleast one thing ill say they havr bailed out IDFC Bank. Idfc bank was in a terrible shape fully funded on certificate of deposits and corporate deposits. No earnings. They havr spent all their five years cleaning up somebody elses problem.
They were chasing down bajaj with somilar stock performance and similar profit performance. after merger the stock effectively has only doubled in 5 years some 37 or 38 to 75 ā¦
Am not sure of thatā¦ pls examine your facts. Many banks kotak, axis, etc do jlg it helps them meet psl targets. Pls check with MFin on theor website. Even for idfc befire the floods for 5 years they never had a problem. Atleast credit cost was low from what we can see.
mfi ofcourse has issues from time to time like what happened in AP in 2008 what happened to bandhan in east and what happened in chennai floods recently.
Fortunately this bank had only 6 pc of book in mfi unlike bandhan which had a large share of the book in mfi.
Hope this washes away in a couple of quarters
At capital first they were not doing this, maybe started after merging with idfc
Management appears to contradict its previous statements and has come up with new justifications for its performance issues. Here are a few instances:
Bank License and Merger Reasons
V. Vaidyanathan has repeatedly highlighted the benefits of obtaining a bank license. He previously claimed that Capital First (an NBFC) was borrowing at 9% and lending at 13-14%. With the bank license, he expected borrowing costs to drop to 5-6%, which would provide a significant boost to the business. However, he now suggests that the bank license is a liability compared to the NBFC model. He explained that 30% of the bankās balance sheet is not available for lending, whereas an NBFC does not need to maintain CRR and other ratios. (This was during the Q1 FY25 concall.)
High Cost-to-Income Ratio
For context, the average cost-to-income ratio at a well-managed bank is around 45%. The projected FY27 cost-to-income ratio for IDFC First is 65%, despite the bank having been operational for 10 years by then.
a) One reason given by management for this high ratio has been the legacy bonds on the balance sheet from the former IDFC Bank, which constituted nearly 35% of the balance sheet at the time of the merger. This has since decreased to less than 5% and is expected to be almost 0% by FY26. Nevertheless, the cost-to-income ratio for FY27 is projected to be 65%, which is extremely high.
b) The credit card business has been cited as a drag on earnings. As of the end of Q1 FY25, the credit card business contributed around 3% to the total loan book. The impact of a high cost-to-income ratio on just 3% of the business should ideally be minimal, which makes this explanation unconvincing.
Book Quality
During the Q4 FY24 concall, the guidance for FY25 credit cost was 1.65%. However, the credit cost for Q1 was 2% and has been revised to 1.85% for the year. The reason given was the deterioration in the JLG book, which comprises 6% of the loan book. Only 5% of this JLG book has moved to SMA status (5% of 6% of the book), contributing just 0.03% to the increase in credit cost. The rise in credit cost appears to stem more from other parts of the book than from JLG. Under ideal circumstances, there should be no need to specifically highlight the JLG book, as there will always be segments of the business performing slightly worse.
Building a Great Institution for the Future
At the end of Q1, the bank unexpectedly raised capital of ā¹3,200 crore, further diluting equity by 7%. Original shareholders from before the merger would have been better off keeping their money in a savings account with IDFC First rather than investing in the bank, which has not provided a 7% return since the merger. While Vaidyanathan may be building a great institution for customers and employees, he is definitely not for investors.
While each issue individually might not seem significant, the pattern of continuous blame-shifting raises some red flags.
Reminds of a Warren Buffett quote "What you find is thereās never just one cockroach in the kitchen when you start looking around ".
Pl dont mind, but my sense is you are clutching at straws to vent your feelings and quoting out of context. I heard the full concall.
The comment was made in the context when someone asked why the nbfc was more profitable. He never said he regretted the license. On the contrary he praised dr. Lal for acquiring grama vidyal and helping them grow psl.
Cost to income ratio ā¦ see rbl bank, yes bank these are in 60s and 70 C I ratios.
You are sayiing deapite being in operation for 10 years by 2027. Hello, 10 years is nothing for building liab franchise. It takes much longer. Anycase first 3 of thise 10 years were uselessā¦
On the contrary capital first shareholder like me should be and is upset that he cleaning the unsolvable issue of idfc bank with 1.6 pc nim 95 pc cost to income ratio. So 8 years effectively from 2019 to 2027, if vv really brings cost to income to 65, it will be a super great achievement.
I spoke to a few managers and they said they are using his name for raising deposits, customers also say if vv is there all is great and give more depositsā¦ am not eulogising, just quoting. For whatever it is worth the name is a good name
On book quality, they have clearly called out the extent and said 20 bps.
On returns i have tracked and commented on this stock feom day 1 of merger (commented negatively). Stick was some 38 at merger. Today 75. Up 100 pc. Pls check your facts.
Nifty private bank given 69 pc probably because of hdfc kotak heavyweights
All in all think they are delivering on the counts and practically saved the bank, though doing a great job of a job they shouldnt be doing in the first placeā¦
Warren buffet also said its not worth doing well what is not worth doing at all
What was the need for capital first to get banking licence so much? It should have just gone and got a banking license directlyā¦ it would be smiling all the way with its own deposits.
