The Vodafone write back will attract Tax.
We must deduct 33% tax which was rate applied in Q4
Therefore, 528 Cr must be deducted from 1600 Cr.
However, there has been no official statement from the bank.
Iām expecting a scenario where the liabilities keep increasing because of the ~7% interest rate offered, and assets will grow at a lower pace. VV has said in interviews that MSME demand may come with a 6 month lag though consumption demand seems to be picking up. Provisions will definitely spike up, but to what extent and for how long is the big question.
Can someone shed light on what is expected to happen if the bank is unable to find creditworthy borrowers for the money? Would that impact the expected ROE, assuming provisions are stable? Is it correct that BV would also keep decreasing as the liabilities keep adding up?
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It is my belief that the company will use the funds in two ways
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It will continue to do what it has been doing in the past so many quarters: pre provisioning. This saves taxes and reduces the pressure to give bad loans.
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Deposit the money back with RBI this is what other banks have been doing. Risk-averse banks are unwilling to give out money into the economy despite the behest of RBI.
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I checked the website they are not opening new accounts, at least in some pincodes I checked. Yes, oversupply is going to be an issue. I donāt expect VV to be reckless on the retail loanbook, hence there wonāt be growth for the whole year. Thatās why I am bearish on the stock.
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Book value will normally only decrease if there are losses reported either due to operational costs or provisions, if they have excess liabilities that are getting a lower rate of return that should not normally result in losses so book value should be unaffected. Also just to add I donāt think they will have any excess liquidity in the next six months to one year based on the strategy they are following. IDFCB has been redeeming high cost deposits and replacing them with lower cost CASA and other deposits and this strategy is unlikely to change this year. So similar to the asset side of the balance sheet where the loan book has remained unchanged in size over the last year the same thing has happened on the liabilities side where CASA and retail deposits have replaced wholesale and commercial papers. This should continue for the next one year if they donāt grow their asset book much. For example in 2010 or 2011 IDFC had issued tax free bonds that are paying out in excess of 8% interest. These bonds are for a period of 10 years and will be maturing over the next 18 months. So IDFCB will replace them with deposits easily 200 to 300 basis points lower and as the amount is almost 10,000cr and quite substantial I am expecting a significant improvement in NIMs during this period.
The above ofcourse assumes that Vaidya is not going to grow his book too much over the next year. However I differ on this point, VV is not a guy that will let an opportunity slip through his fingers IMO. Smaller banks and NBFCāS including Bajaj Finance have pulled back from the market in the last few months. Folks with excellent credit scores are also not being offered loans mainly because of asset quality concerns but also because NBFCās want to hold on to whatever liquidity they have. As a result the space that IDFCB was competing in, high quality consumer and business loans, is there for the taking if someone wants to seize the opportunity. A recent article in ET now pointed out this week that people are preferring to buy everything on EMI as they too want to hold onto liquidity! Rates are as high as 12-15% even for folks with a very high credit score and no default history. Will IDFCB not take advantage of this? As a shareholder I hope he does. If CAPF hadnāt merged with IDFCB they would have been facing the same liquidity issues, but now being a bank that can borrow from the RBI at around 4% in the short term and meet all their requirements! I am pretty sure the Shriram Group is today regretting not going ahead with their merger with IDFCB as then they wouldnāt be having all the problems they are today in their two NBFC arms.
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Provisioning is done out of the banks capital not their deposit liabilities.
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IDFCFIRST will face an issue of higher OPEX, with rental branches growing at full speed, and reduced business. Applies for Other players too.
Lending rates have risen, due to higher risk environment. Most lenders will focus towards consolidating their books. Should VV decide otherwise, Iād be wary. Already, they are embrolied with plenty of provisioning each quarter from the wholesale book. Investors donāt have the stomach to see plaque on the retail book.
Although, some sureshot good lending, like u mentioned, would keep the wheels running. NIMs will increase too, but could be balanced by increased Opex.
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Yes but for opex to remain high you are assuming the aggressive branch roll out strategy remains the same. In the last 18 months since the merger IDFCB has increased branches by 125% from around 200 to 530+ today. Branches take around a year to 18 months to mature to a point where they are not making losses and start adding to operating profits. As a result IDFCB has one of the highest Cost /Income ratios in the industry and that is a significant drag on PPOP. However if after Covid they consolidate their existing network and donāt grow it too much then you should witness a dramatic fall in C/I and margins improving as more branches become profitable. I suspect that might happen as digital has really picked up in this Covid period and quite a few banks are rethinking their branch strategies. I think Vaidya had mentioned that branches were important to generate new accounts and liabilities but with their new e-kyc product is that true today as well? Maybe they can just use their existing CAPF collection centers (which are very small) to collect payments without continuing their aggressive branch strategy.
As a side note, I used to primarily use my kotak savings account earlier. Mostly due to laziness and the small rate differential between Kotak and IDFCB I never bothered opening an account. However when Kotak slashed their savings account rate to 4% I had enough financial incentive (300 basis points!) to move and I also had an opportunity to do due diligence on their new e-kyc product. I am in a metro and opened my account within a few minutes with no issues at all. No human interaction required and just scan copies of a few docs. Transferred all balances within a few days and now getting 7%.Wonder how a product like this will change their thinking and strategy.
This is the article I was referring to above https://www.livemint.com/companies/people/digitization-push-has-gathered-pace-after-the-pandemic-11591895852284.html
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I was just going through the financials and I found something that blew my mind. Idfc had interest income of around 3600 crore in 2016. Now Iām 2020 their interest income has already increased to 16000 crore. Just for referenceā¦ kotak mahindra did 16000 crore interest income in 2016 and they i currently doing 33000 crore which is just double idfc and look at the market cap difference!!! Idfc bank donāt need to expand or grow much further for a rerating. All they have to do is show good management , clean up their books, continue increasing casa and retail loans and they are surely, surely headed for a re rating since that is exactly what they are doing right now. All they have to do is double their interest over the next decade and maintain their current good Management methods that they are following and the way things are going I can bet they ll do that. I donāt know why but this blew my mind lol. I know itās nothing fancyā¦ itās just their interest income but it says a lot that they already have the sales and now they just need to clean their books to move forward.
Disclosure: idfc bank makes up about 10 percent of my portfolio and I also will be adding via sip based on results every quarter. So maybe I am very biased. However, if someone can point me to some bad news regards idfc that Iāve not seen that would be really helpful since in investing wearing blinders can really get you in trouble.
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The major caveat however is obviously they need to start making profit out of all thay interest income they are collecting. However, by cleaning their book and continuing what they are currently doing the profits will come. It may take a year or two but suddenly theyāll report huge profits and it will run. Needs to be closely monitored obviously so hence why il be reading every quarter result as closely as possible. A little luck along the way (vodafone) will help too of course 
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Disc: IDFC First is the largest holding I have, close to 16% of Direct Stock Portfolio. Iāve bought at all prices between 42 and 18.
The couple of headwinds Iāll add about are:
- A large appeal of IDFCFās liability franchise (I do have a savings account in IDFCFB) is the 7% interest in savings account. In this current falling interest rate, lowering GDP growth environment, iām not sure until when can they maintain the 7% interest rate. [To give an idea of how high 7% is, my SBI home loan interest is 7.4% now! This means that i can take an EMI moratorium; park the extra cash in IDFCFB savings account and only lose 0.4% interest compounded over a year!]. If and when they lower their savings account interest, would CASA flee away from this fledgling bank? I hope not, but this is a real risk.
- Their assets franchise 's key clientele is the small entrepreneur, the self employed, and so forth. I know that VV has seen several black swanish events in his Capital First days (GST, DeMo), but IMO the covid crisis is like nothing weāve seen in 12 years. These IDFCFB retail loan holders are possibly in no positions to take more loans, or possibly even pay back the old ones. if the retail NPAs start rising in a meaningful way, this would create a fresh set of problems for IDFCF which might take them an even longer time to get over.
IMO the stock could go below 20 again and i will look to add below 20.
PS: I have already outlined my investment thesis in a previous post in this thread: IDFC First Bank Limited but wanted to call out the special covid-times potential headwinds as well.
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Excerpts of IDFC FIRST Bankās views from the panel discussion organized by Mint on 11th June 2020
V.V. discussing on NPA in current situation and on moratorium.
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I liked one statement from this video a lot and paraphrasing:
The MSME retail growth story is a secular growth story which will last 20-30 years.
Indiaās per capita GDP is 30 times lower than USAās. There is absolutely no reason for anyone to assume that we wonāt catch up in the next 5 decades.
USAās household debt as a percent of GDP is 75%. Indiaās is 10%. We have 4 times their population.
This shows us that the household debt market can easily grow by a staggering 960 ~= 1000 times! The opportunity is all there, now itās up to the great institutions to take advantage of it. Of course all growth will happen slowly over long durations of time (50 years). The question is, is this company good enough to last 50 years? I hope so.
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Very interesting though old (2.5 years old) story about how v vaidyanathan progressed through his career from citi to icici to capital first:
Very fascinating that even Warburg Pincus essentially invested in Vaidyanathan.
Apologies if this has been posted earlier, didnāt come across it.
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Warburg Pincus is continuing to back Vaidyanathan even after ten years of close experience with him. And now IDFC has also put their bank in his hands. Last one year he has moved fast as per his plan. My investment was based on preceding as well as my reading of the situation likely to unfold. I think the lingering doubts should go away and debate on vaidyanathan should take some rest. If challenges arise in economy, it will affect all. However we should remember that the competent fare better than others during adversity.
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To woo existing clients from Yes and Kotak (both of which were giving 6%), IDFCFB gave 7%. Now, as every bank starts reducing the savings a/c interest rates, IDFCFB can reduce it as well. All they have to ensure is they are slightly better than their competitors.
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I think the 7% has a psychological aspect to it as well. I personally vastly (disproportionately) prefer 7% to 6.5% even though the difference is very low. In fact IDFCF also utilizes this psychological aspect to ask people to deposit 1 lakh into savings account (below which you only get 6.5%). I think CASA behavior is difficult to predict (happy to change my views if someone could share any data-driven market research) and hence is one possible risk.
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present kotak mah bank savings rate
| A. Domestic (W.e.f. May 25, 2020) | 4%* p.a. on balance above Rs. 1 lakh, 3.50% p.a. on balance up to Rs. 1 lakh |
|---|---|
| B. Basic Savings Bank Deposit Account/Small Account (W.e.f. May 25, 2020) | 4%* p.a. on balance above Rs. 1 lakh, 3.50% p.a. on balance up to Rs. 1 lakh |
idfc is getting good casa as they are giving 7 %. the same thing was previously done by kotak to attract savings accounts.
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It depends on how well CASA is used for lending. IDFC First seems to be confident of finding good uses to its CASA even at 7 per cent by augmenting lending through their existing erstwhile capitalās network. Default rates in micro and retail lending are not comparable with corporate lending. Spread too seems to be good.The borrowers at the bottom or near bottom of the pyramid tend to default less.
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Iāve been looking for some data to support this thesis of retail and near bottom borrowers having consistently lower default rates. I know itās been true in India for the past 10-15 years, but if true it should hold good globally and historically. Nothing differentiating Indian retail borrowers from other countries. Since the entire investment thesis revolves around this principle, it would be good if we can understand how widespread and systemic this trend is.
Would anyone have data to better understand this?