IDFC First Bank Limited

[Deepak_R]

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.

1. 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.

2. Cost to income ratio … 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 useless…

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 deposits… 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 place…

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 directly… it would be smiling all the way with its own deposits.

[Ragnar_Danneskjold]

For F.Y. 2024,
Total Income - Interest Expended = 22,453 crores.
Now in Q1 this year, this number has grown by 25% YoY.
If they keep growing at same 25%,
This number will be around 43850 crores in F.Y. 2027.
With 65% Cost to Income PPOP can be around 15,350 crores.
And with 1.65% credit cost on this, after provisions and Tax, PAT can be in the range of 6500-7000 crores.
So 1.4% ROA in F.Y. 2027 is theoretically possible atleast.
Please rectify if you find anything wrong with these assumptions and calculation.
.
From 2015 to 2020 Bajaj Finance doubled PAT every 2 years,
Let’s hope that type of golden period begin for IDFC First 2025 onwards…

[RaghuG]

Let me try to address each of your criticisms:

1. Where did I ever say, “He regretted the license”? Please read what I have written. He mentioned that an NBFC is more profitable than a bank in this particular conference call. I think we both agree to that.
   Now, he has always said that his model with a banking license was better than as an NBFC. Not once did he ever say that NBFC margins cannot be maintained. He always praised the advantage of borrowing at lower rates as a bank and thus being more profitable. It has not turned out to be the case. His recent U-turn, claiming that an NBFC is more profitable, is the issue.

2. When the merger was announced, the share price was 58. If I remember correctly, Capital First was around Rs 800 when the merger ratio was announced.

3. I never mentioned that he does not have a good reputation. In fact, I went so far as to say that he is building a good bank for the customer. It is the investor who has been given a raw deal.

4. The cost-to-income ratio in the past quarter was 70%. The guidance after 10 more quarters is 65%. After 10 more quarters, you will be at RBL’s cost-to-income ratio, which is a bank with many issues. This is definitely not a good operating metric. After 10 years of operations, you should compare with IndusInd or Bank of Maharashtra, not with RBL and Yes Bank.

[Deepak_R]

To clarify, I was not criticizing you, it was more an anguish that when one quarter or two comes bad, how all of us immediately attack the same guy who dug the bank out of a serious hellhole. I was his big critic, pl see my prior posts of many years, all critical … particularly about cfl decision to acquire/merge with idfc bank, he tested our patience with snail pace of loan buildout for 3 odd years while other banks were sprinting away, knocked us over with loss after loss for every quarter till december 2019, more inportantly posting low operating profits which bothered me a lot, capital raise etc., low roe … even now, etc. He tested our patience with new themes, world class bank in the making, ethical, digital, social good.

But now frankly i am coming around to his line of thinking about how to build a bank.

We know what the condition of the bank was … no retail deposits, no casa, no operating profits (serious issue), upcoming were 50000 cr infra bonds for repayment on maturity, infra loans, big bombs like dewan, reliance capital, vodafone, toll roads, defunct power plants survive? I felt he dug the bank out from trouble. Am a capital first shareholder, but let me tell you that had capital first not come and fixed this bank, you can forget even Rs. 5 on this stock with no ability to raise capital (my guess for a bank like that dont jump at me). Who would give capital for such a combination?

So when some of us called them fraud etc it didnt sit well. Have criticized the bank for many things but never felt any of those words for them watching them for 10 years… Am still critical of the cfl merger though. Imo quite straightforward explain every quarter… though with bad results.

I thought you were drawing incorrect or rather unfair inferences hence commented,

I didn’t quite see the comment as a U turn at all. Everything has a context. The question from analyst was that you brought down cost income ratio at capital first so sharply in five years and why it is taking so much time for you here at IDFC Bank. My sense from the hesitation was that VV was guessing that it may be because in an NBFC entire borrowing is given out as loans… while in a bank 70%. Something like that. It was a response to a specific question, not a U turn. He probably still thinks model of banking license is better than NBFC. That is a separate question to ask, you need not connect that answer with this question.

On Capital First, yes it was 800, it had moved from 120-130 levels in 2012, so all of us who were with him enjoyed that ride. But everyone screamed that merger with infra bank is a bad idea, to top, IDFC Bank posted very bad results again and again all three quarters, 600 crores loss in Q2 19. IDFC Bank stock came down immediately and dragged down Capital First Stock with it because merger ratio was already announced and sealed. I made many comment in social media about this… but management didn’t listen and went ahead with their merger.

Capital first was on a roll, continued to post PAT growth of 40% plus even after merger announcement like they did in prior years, so it was clear to all that it was IDFC Bank results plus infra scare that dragged itself down, and brought down Capital First with it. At merger time IDFC Bank stock was 37 something.

On cost to income, I am no expert, but when C:I is 95 and you invest a lot into branches etc, C:I would have only gone up. So if it comes down to 65% in 7 years it sounds great job to me, though I am personally doubtful they can achieve that, looks tall order. Indusind has been around for 20 odd years. There is no parallel of infra DFI with low profits converting into a bank, i cant compare.

I asked some analysts why they value them so much at such low ROA ROE. They said smell is positive and there is belief, whatever that means. I spoke to some tech vendors of the bank they said this is one bank which is cutting edge. These things made me realise ther are other factors here, but I can’t get my head around it.

Btw, they are guiding for even higher provisions in q2 23, “provisions will be more elevated in Q2 and then will come down in Q3 and Q4”. Their words not mine. So don’t hold your breath for Q2 going by their own commentary. Lets see how markets take their weak projections.

[RaghuG]

I don’t think it’s an act of attacking the guy after a quarter or two of bad performance. I can assure you that I have been very patient. However, this is definitely a case of ‘the straw that broke the camel’s back.’ Maybe your “back” is stronger than mine (just joking). For me, the last straw was the projected FY27 cost-to-income ratio at 65%.

You may think I’m obsessed with the cost-to-income ratio from my first post. Let me explain. To set the groundwork, bear with me as I give a brief explanation of how a bank works. (Most of you might already know this, but let me explain again to highlight its importance.)

For simplicity, I’m assuming a capital adequacy ratio (CAR) of 10%. (In reality, CAR is around 12%.) Assume I start a bank with Rs 10 as my capital (by issuing 10 shares of Rs 1 each). With the assumed CAR, I can only take Rs 100 as deposits. According to RBI rules, because the CAR is 10%, I cannot accept more than Rs 100 in deposits, even if someone is willing to give me more. This is because if a bank’s capital is Rs 10, it can only take on business risks proportional to Rs 10. This acts as a limit on the loan book and deposits. Naturally, since I have deposits of Rs 100, my loan book will also be Rs 100.

Now, if my bank generates Rs 2.5 as profit after a year of operations (an ROE of 25% because our bank made Rs 2.5 profit on the initial Rs 10 it started with), my capital becomes Rs 12.5. So, in the second year, I can take Rs 125 in deposits, and my loan book will increase to Rs 125.

Conversely, if my bank only makes Rs 1 on Rs 10 (an ROE of 10%), to increase the loan book to Rs 125 for the next year, it has to raise an additional Rs 1.5 from somewhere else (because the bank has Rs 10 initial capital and Rs 1 profit, totaling Rs 11). By issuing Rs 1.5 in new shares, the equity is diluted by 15% (there will now be 11.5 shares instead of 10). In effect, the market capitalization of the bank increases by 15%. If this happens over five years, the original shareholding is diluted by more than 50%. This is a significant number.( I know in the real world banks raise at multiples of book value, so dilution will be a bit less. This is for explanation purpose)

I’ve seen comments from people wanting Bajaj Finance-like growth. I’m afraid that’s not possible because Bajaj Finance has an ROE of 22-25%. Why? It has a net interest margin (NIM) of around 9% and a cost-to-income ratio of 35-40%. The business builds itself, and there isn’t much need for dilution. That’s when real value creation happens for existing shareholders.

I would recommend everyone read HDFC Bank’s annual reports from 1996 to 2005. You’ll understand what growth means. Even though they had to build new branches, start new business lines, and attract deposits, they had good ROE and grew their book with minimal dilution. That’s when value creation happens for the shareholder.

Now, finally, to explain why I’m so disappointed with IDFC First.
By Q1 FY25, all the issues from the IDFC Bank days are resolved. Their bad loan book is written off, high-cost borrowings are repaid, and most branches have been operational for 2-3 years. The current loan book is entirely created by V Vaidyanathan and his team, with no legacy IDFC issues remaining. There’s good momentum in deposits, and the brand is established.

The bank is now in a position similar to my example of starting a bank with Rs 10 capital. Everything needed has been built over the last five years. So, my assessment now is focused solely on the future, not on what happened since 2018. I will credit them for reaching this stage, but my analysis is only about the future.

If, after three more years, the cost-to-income ratio still remains at 65%, the ROE will likely still be around 10-13%. Now, please calculate the dilution for three years with the bank growing deposits at 25 %.
This is just unacceptable in my view. If IDFC First cannot generate a good ROE from FY25 onwards, shareholders cannot expect good returns. I hope my explanation clarifies why I’m so concerned about the ROE not improving substantially until FY27, which is three years from now.
This is in no way a comment about what tech they are using or how the customers feel about the bank. It is just an investor point of view.

Disclosure: I had a good investment in IDFC Ltd until Q1 FY25. I made good money too. I genuinely wanted them to succeed. Please don’t misunderstand me as being overly negative. I’m just sharing what I’ve learned.

[Deepak_R]

This is a different line of discussion, focussed on whether the Bank is a good investment or not.

On this front, your concern on ROE is valid. It is the rate at which equity is compounding, and a company which compounds equity at 10, how will it create wealth. And you have explained very well, compliments.

I had and have the same concern. In the heat of this discussion to debate here with facts, I went and compared NIFTY vs this Bank from the date of merger. IDFCFB share appreciation has been 100%, against NIFTY Private Bank which has delivered 66-67%. And meanwhile NIFTY Private Banks ROE would have compounded by atleast 15%-17%, since all good pvt sector banks post good ROE.

So backtesting of this ROE theory fails. In other words if we had applied this theory on Dec 18 on merger date, and not bought this stock, and bought bank pvt nifty, we would have lost out on the IDFC FIRST appreciation.

So I spoke to a two junior analysts about this. He said the P/B has increased even though BV ROE has not added to book value. He said P/B has been about 1.7 to 1.9, and the management has used the high currency to quickly raise capital and increase BVPS.

So raising capital at 1.8X BPPS repeatedly over last 3 years has increased BVPS, even though bank is not making good ROE. I bitterly complained that they are diluting again and again, what I learnt from the conversation is that diluting is actually good if raised at premium to book. He also said EPS comes down, so if they valued by P/E then it is not good, but since banks are valued by p/B then it is actually a good thing.

Net net they are making up for lack of ROE with selling shares at premium to book.

I then asked them why investors are valuing IDFCFB like this (remember I too say this bank is valued not on conventional metrics, there is a management premium), he said there are many factors like management quality, direction, smell, tech, (one guy said even trivial things like their own experience was so good that he got a good impression)… things like that.

Now this valuation is not academic, they have actually used the currency to sell the shares to new investors at premium again and again. Net net not only they had bad roe, bad loans etc. etc. somehow they got investors to give them 9200 cr in the last 3 years (3000 in 21, 3000 in 23 and 3200 in 24, at 57, 90 and 80 respectively).

So while we may curse management (me included) for even with a bad roe, atleast they have been able to maintain an image, deliver on core operating profits, sell the story to the market and raise fresh capital. Now bad ROE is not entirely their doing they just got a very bad hand to start with. The bad hand is not the bad loans. The real bad hand is a bank not making operating profits thats the harder issue to solve it takes years to change business model.

Remember if everyone of us curse them for bad roe, no good management will join and take over a bad ROE bank. They will probably join HDFC ICICI and any of the other good names with great ROE to begin with. Builders are always attacked when the product is under construction. An ordinary driver looks great in a Ferrari, and even Michael Schumacher will look bad in an ordinary Honda City. That’s the truth.

Finally your concern is still valid… there are so many factors…, let us assume the P/B benefit is already achieved and will improve no more…if you believe they wont be able able to raise more capital at premium anymore, or "other factors " go against us … we may have to revisit our investment thesis.

I haven’t been able to figure out the “other factors” name, quality, customer experience, direction etc, and how to value it. Federal (except until recently) for a long time was posting far more ROE about 14-15% with good clean management, but always was trading at 1.1 or so, while IDFC with wub 10 ROE commanding 1.7-1.9.

After all this analysis, even now am not sure if stock will go up or down.

ps: I reacted earlier, because someone earlier called them Fraud, lies etc. i found these words and thought they show no such traits to me. I dont know of any person transfering 100 cr of personal wealth to other people in the 40s and 50s itself… if that was so they couldnt raise equity of 10000 cr at premium and save the bank… investors would see through fraudsters. talking of Fraud, remember what happened when Yes Bank Under Ravneet (v clean guy) could not raise capital on time. it went into free fall. atleast idfc management is able to raise capital, that too at premium to book everytime.

You can also buy icici hdfc kotak they all are clean, and also making good roe.

Ofcourse we may disagree with everything else and bash the bank.

Even next quarter as guided by them is going to be weak “more elevated provisions”. at this rate, we have to prepare for even harsher words. Do your pick, am not suggesting you buy or sell, like you I am also a well wisher and believe the management, so biased.

[Ballaji_Vijayan]

Good discussion. Thanks for explaining the thesis/ anti thesis in a very productive manner. I learnt a lot and thanks for that.

Can I get opinion of what you think about high provisions due to TN flood issue/ MFI? Does that make sense from numbers wise?

In that case, pretty much all MFI would have a problem. Maybe Muthoot MF could give an indicator.

[RaghuG]

I respectfully disagree with you. Using past performance from a specific point in history to prove or disprove a hypothesis can be misleading, especially if the outcomes change when you shift the time frame by six to twelve months. For instance, starting the return calculation from January 2018 may show different results. If you calculate returns until mid-2023, when the stock was at Rs 100, you might see an even stronger case. However, I don’t think this approach proves anything. There are numerous reasons why the results turned out as they did, and I don’t want to delve into why the Bank Nifty and IDFC First Bank returns were as they were.

It’s worth noting that Rana Kapoor raised capital from the same analyst group at three times the book value, and DHFL and India Bulls raised capital at more than twice the book value. In my view, these facts don’t prove anything either. The same analyst group once praised Chanda Kochhar.

What I’m advocating for is a first-principles approach: estimating future cash flows and applying a margin of safety to arrive at a value. In this case, the management has provided a performance update for the next three years, so we don’t need to speculate further. This is the only way I know to value a business at a given moment.

P.S. I want to point out an instance where Vaidyanathan’s statements didn’t align with reality. If you recall, in FY23, he mentioned in several conference calls that the incremental new business was generating a 16-18% ROE, which explained why operating profit was rising faster than loan growth. He reiterated this point multiple times. If the business grows at 25%, most of the book will be new by FY27. If, by the end of FY27, the company cannot achieve the projected 16-18% ROE, I will definitely start to question other statements he has made.

[RaghuG]

Very rightly pointed out. The explanation didn’t make sense numerically; I mean, citing the Tamil Nadu floods as the reason for the increase in provisions. This issue was also raised by one of the participants in the Q1 conference call. I didn’t feel that a satisfactory answer was given. According to their own figures, the impact of JLG should not have been more than 3 basis points on the credit cost, yet the increase was nearly 15 basis points. It seems like there were issues in other parts of the portfolio as well.

[Deepak_R]

Your question in ps is a complex one. Will check with my analyst friends and revert in evening. They have put out a research on the bank so they would know. Thanks

[Deepak_R]

Checked with analyst and sharing what I learnt. All my info here are from public sources – concall and research reports like Jefferies, Motilal Oswal etc.

The management has not said they are making 16-18 % ROE on incremental book, instead they have said they are making 20% ROE on normalised basis “in retail assets” because the Capital First lending machine placed on Bank borrowing lines. I have checked the annual report.

So,

20% ROE on Retail Assets

14% ROE for Wholesale,

and approx. 2000 cr loss in Liab, and approx. 300 cr loss in credit cards as spoken in conference calls. To a question on how this loss is arrived, they said it is the transfer pricing to assets at approximately at G Sec rates. He specifically gave an example that if Savings account team raised SA at 6% their income would be 1% (about 7% less 6%). Similarly CA team would be compensated at 7% (about 7% GSEC rate less 0%). Plus the fees they make from branches less the cost of branches, head office allocations for technology, building products, journeys, marketing etc. is Rs. 2000 cr. He said this will continue for a while and then taper off, liabilities takes a long time to build and break even. I found the logic reasonably straightforward. Asset team carries the money from 7%, adds cost of CRR, SLR, PSL cost etc and treats as their cost of funds. (quoting from concall).

So he says if retail loan book is say 1.5 lac cr average last year and equity capital allocated is say 14%, then 21000 cr capital deployed and 20% so they should be making pat of approx say 4000-4200 cr in retail assets.

Similarly on wholesale book of say 30000 cr equity allocated is 4200 cr and 14% ROEon 4200 cr capital can be say pat of 600 -800 cr

Together they have made say 4800 cr on lending business

Less 2000 cr on liab

Less 300 cr on credit cards

They should have made pat of 4800 to 5000 cr less 2000 less 300 = 2500-2700 cr, they posted 2900 cr, so the differential could be because of some treasury gains. So ROA is about 1%. Last year average equity would have been about 29000 cr, so incremental ROE also they are making around 10% only don’t expect 15-16 etc, net of liabilities and credit card losses, on the whole they are making 10% only. Even Jefferies report talks of 9% roe for FY 25 also, so the incremental also seems in this range only.

He then computed the impact of reducing cost to income ratio from 72% to 65% over 3 years as follows:

Income 6.2% NII plus 2% fees= 8.2%. Impact of reducing C:I by 700 bps (72% less 65%) = 56 bps. Post tax increase = 56 bps multiplied by 75%= 42 bps. Currently making roa of 1% add this 40 bps looks like they will go to 1.4% ROA. In this con call someone specifically asked them (hear the end of the call) what will be the ROA he said about flat in this year FY 25, and by FY 27 around 1.4%. you multiply that by 10, for a bank you get to 14%.

Analyst research reports from Jefferies also points to this direction. Its public it says FY 25, FY26 an FY 27 at 0.9, 1.1% and 1.3%. Jefferies guesses ROE at 9, 11 and 13 with PAT at 3084 cr, 4607 cr and 6772 cr, The numbers add up to this only, say 1.3 or 1.4, and ROE at 9, 11 and 13 starting FY 25. Numbers tally, but whether they will deliver such steep increase is to be seen. If you go to page 99 of the investor presentation and page 46 of presentation, then you can see they are making loss pre merger and even on merger basically nothing. Because PPOP of 0.32 (pre merger standalone H1 of IDFC Bank, increased to 0.76 after merger because capital first increased ROA), then in 2020 for full year PPOP was 1.12%. Now if you post 1.12 % for full year after merger, and even if normalised credit cost is 1.%, you basically make nothing. (which is my basic point and grouse all along that capital first should not have merged with IDFC Bank).

From 0 they have come to about 1% will be flat at 0.9 or 1% probably for FY 25 also, they are talking to go to 1.4% in 3 years. If they do if Jefferies is right, it will be a super job, let’s take projections with a pinch of salt, you can share what you feel, whether it is achievable or not. Looks a hard climb. Other things quality of tech, management, culture etc. can be valued if these numbers are achieved, I cannot get my head around these things, this is not my core job. Have been invested from capital first times since long time and tracking them all the while and learning from this topsy turvy journey.

Sharing what I learnt, if you disagree with projections don’t bash me, bash analyst reports they are public have taken from there!

On JLG they are saying floods, heat wave, elections, general JLG market etc. in interviews so cant make out. But they said in concall 1.65% credit cost ex jlg for rest of book and add 0.2% because of jlg so total abour 1.85 including jlg. Which is not an issue, but ifbyou reversr compute, since jlg is 6.5% of book, then 0.2% multiples 13 (100/6.5) is 2.6 pc, so jlg credit cost must be 2.6 plus 1.65 say 4.5 pc or so. Normal for industry is about 2.5 to 3%.

[Deepak_R]

Returns calculations clearly makes sense from date of merger only. Prior to that IDFC Bank management was running this place. Unfortunately the FY 18 was very bad for IDFC Bank with treasury losses in Q1 19, followed by big loss in infra in q2 and q3 19. We cant stick stock price reduction by old management on new management. What can new management do about stock prices prior to their taking over date.

2. Agree with you on the capital raise point.

3. Agree also on 1st principles approach.

4. ROE thing, I already answered they are making 10% only. I didn’t find misalignment, have explained in detailed note. They are raising capital at premium which is increasing their BVPS from time to time. Hopefully by the next capital raise, the profits will start talking and stock will go up again. We should ask them in the AGM when they might raise capital again.

Ps on a lighter note, wondering why this stock is discussed so much… i dont see much discussion in icici hdfc kotak etc

[Selvaganesan]

It is discussed so much here as there are more retail shareholders owning this. Expecting 2 digit stock to hit 4 digit. Finding next HDFC…

[RaghuG]

Thanks, Deepak, for the detailed reply. I really appreciate the effort you’ve put into this. I was mistaken in thinking they meant a high ROE for the whole bank; it was only for the retail lending portion. Your explanation was spot on. Thanks again.

Regarding the activity on this forum, I feel people see potential in this bank. I believe it is very undervalued, which is why many retail investors are buying it. Last quarter, they had an NII of 4700 crore. If their cost-to-income ratio is around 45%(like the other regular banks), they would be making approximately 2300 crore in net profit per quarter (around 10,000 crore per year). Think about that figure. Unfortunately, because the ROE is low, all this potential is not reflected in the stock price.

[saurabhchoudhary1986]

Thank you and Raghu for the useful deep dive reads.

On your previous calculations 1 observations
if ROA is 1.4% then ROE < 14% because bank is currently leveraged roughly 8 times and not 10 times
so ROE = 1.4*8 = 11.2 % ROE

[Ragnar_Danneskjold]

e1c7aa80-0200-45d1-b1c6-d3acb3e5b94a.pdf (175.7 KB)
.
what is the meaning of ‘Second Motion’
Is the process expedited on request or otherwise…??

[raunak_kapoor]

A second motion is just the second step in a legal process that usually has a few stages. When companies in India want to merge or split up, they have to go through this process.

In the first step (or first motion), the company’s shareholders and creditors agree on the merger plan. The second step (or second motion) is when the court (NCLT) takes a closer look at that plan. The court checks to make sure everything is fair and follows the law. After this review, the court might take some time before making a final decision.

For IDFC and IDFC First merger legal hearing was scheduled for September 4, 2024. However, on August 9, 2024, NCLT, Chennai Bench heard the case earlier than expected. After hearing the case, the court has decided to reserve its judgment, meaning they will announce their decision at a later date.

[Tamilselvan]

It would take few days for the shares to be credited to the shareholders of IDFC

[narenarora]

Has NCLT issued the final order?

[saurabhchoudhary1986]

I heard the new LCR requirement of RBI will hurt the retail banks most.

ROA to be impacted by .05%

source RBI’s Draft Guidelines to Increase Liquidity Coverage Ratio On Retail Deposits For Banks (youtube.com)

Bad news