IDFC First Bank Limited

shardhr · July 16, 2020, 5:28pm

Thanks @sahil_vi for ur perspective. U are ryt that everyone’s valuation is a perspective and dat got reflected in our views here

I guess with the bank performing exceptionally in first yr I adjust my valuations somewhat more optimistically.

@Puch : - The BV shown currently net of adjustments is 14,500 crs. On a conservative growth basis if this grows 10% y-o-y taking into account the current uncertainty and thr prudent lending, this will be arnd 23,500 cr. in 5 yrs. And again taking thr estimated ROE of 13% led me to earnings in range of 2000-3000 crs. Bt yes,as discussed, my estimates were quite conservative to begin with.

@ankit95 : - Regarding use of P\B, a rule of thumb that I suggest is this - divide the Bank\NBFCs ROE by 10, it shd be the ideal P\B at which the Bank should be valued at. Of course, sometimes crazy markets lend higher valuation but better to be conservative.
The growth prospects, esp for Banks\NBFCs are laden with more risk. So watch out for that as well. E.g - In the current scenario and preceding slowdown, probly the best of banks had slowed down lending

Puch · July 16, 2020, 5:37pm

Book value at end of March quarter was 15300cr, they raised 2000cr additional capital last quarter so book value becomes 17300cr and 1600cr provision for Vodafone gets you to 19000cr.

iamket · July 17, 2020, 6:08am

Please clarify this. I am not very clear. Can you cite an example?

shardhr · July 17, 2020, 4:36pm

Suppose book Value is 100. If ROE is 10% nd ur cost of capital\discount rate is 10%, then it means that the bank is able to earn only its Cost of Captial. Such a bank vl trade at its book value i.e. P\B = 1. For a Bank earning ROE greater than 10, it deserves a valuation of more than its book value. This proportion, as a rule of thumb is ROE/10 i.e. a Bank earning ROE of 20% shd ideally trade at P\B of 2. Now, some qualitative factors can increase this multiple, but then that overpaying for quality is subjective.

bovera · July 18, 2020, 12:36am

Just looked at ROE and P/BV of a few private banks:

Bank	ROE	BV	P/B
HDFC	16.5	321	3.4
Kotak	13.67	339	3.9
ICICI	3.78	176	2.0
IndusInd	13.08	384	1.3
Bandhan	18.96	69	5.1

(Source: https://www.screener.in)
Every bank commands higher P/BV except Indus Ind.

shardhr · July 18, 2020, 7:33am

The above pic vl partially clarify ur answer regarding why the P\BV is higher for the mentioned banks. We can discuss further valuation over separate thread or over PM.

Bt my POV is, a thumb-of-rule P\B valuation of bank shd be based on ROE as above ± some overpaying for qualitative aspects. In today’s market unfortunately, the qualitative overpaying aspect is taken too far.

Hence my investment style of looking for statistical cheap bargains steers me away from the cases mentioned above and the 2 undervalued financials I find in this market are - Shriram City Union and IDFC First Bank!!!

Rushil · July 18, 2020, 10:03am

I see no way that the bank doesn’t have a book value erosion of atleast 5% of the loan book due to covid.

I think I am being conservative here. So any valuation taking book value as 17000 crore and then extrapolating the profits is likely fictional.

Why 5%? Well they have a pretty poor book and the pandemic is raging on. This bank could very well be worth 0 in the next 6 months if things go wrong.
Not because the bank is inherently so bad but because of the pandemic and the coming bankruptcies.

Puch · July 20, 2020, 5:10am

Initiating Coverage __ IDFC FIRST Bank Ltd __ Basic Retail banking to drive growth_ Simple Banking.pdf (357.7 KB)

Prasad_H · July 20, 2020, 7:26am

sahil_vi · July 21, 2020, 11:31am

Thanks for sharing. For me the largest takeaway was the yield from retail operations. It is fairly high. I don’t know how they found this yield I have not found this retail yield number in IDFCF documents until now (if someone has found it please do share). At 16% the retail yield is high enough that IDFCF can potentially even afford to increase savings account interest rate and still maintain a very high NIM by the virtue of increasing retailization of the loan book.

I’m also quite interested in understanding how IDFCF is able to offer retail loans at 16% yield while HDFC offers it at 11%. Why do customers even go with IDFCF if IDFC is offering personal loans at 11% pa?

dpksivas · July 23, 2020, 6:11pm

not sure how retail loans can fetch 16%… if it is consumer loans with manufacturers for 5% higher - that may be logical, but not all retail loans can be at 16%. also, AU small bank also providing 7% p.a for deposits… it is pure competetion in the market now for retail deposits.

Puch · July 24, 2020, 5:06am

HDFC offers personal loans only to salaried individuals, self employed folks with good credit history are not eligible.

Puch · July 24, 2020, 5:11am

I recently bought a phone on Amazon on Zero cost EMI, the manufacturer covers the in interest cost of the EMI, the loan was financed by IDFC Bank and the rate was 15%. IDFC Bank is also having a tie up with Flipkart buy now pay later etc. 15-16% sort of rates seem high to us on this board but in the larger scheme of things where most Credit Card companies charge 40% interest, MFIs at 24-26%, NBFCs at 20-25% its not actually that exorbitant.

VikasKasturi · July 24, 2020, 9:03am

Here is my limited understanding of the finance industry.

An ocean is not homogeneous and there are several strata in it and different marine ecosystems have adapted to the strata in which they exist. Likewise, the finance industry comprises of different marine life - the public sector banks, the private sector banks, the NBFCs, the small finance banks, even the moneylenders etc. They all operate in different strata and niches.

HDFC Bank has a cost of capital of 5% (approx) while say Manappuram has cost of capital of close to 10%. So HDFC Bank can easily wipe out Manappuram by offering gold loans at say 9.5%, right? Yet, it has not been able to do that. Why? Because HDFC Bank can very efficiently and profitably lend larger sums of money whereas Manappuram can very efficiently and profitably lend smaller sums of money. And both coexist. If they tried to do what the other is doing, they would lose efficiency or profitability or both.

Coming to IDFC First Bank. It’s cost of capital is much higher than say ICICI Bank, HDFC Bank etc. By offering 7% on its savings bank account, it is actually able to raise capital and bring down its overall cost of capital (~8 to 9%). And it is lending to a segment, where the bigger banks find it difficult to lend efficiently somewhere in the range of 12 to 15%.

So what are these segments? According to the company these are the MSMEs. It could be a small gym, small grocery store, men’s salon etc. These could be small ticket size but large volume kind of transactions. As a parallel, you may want to read this article to know on how Gruh Finance developed an algorithm to lend profitably to even undocumented dhobis and one of the qualitative lending criteria they used was the reputation and reliability of the dhobi! A large PSB with a lower cost of funds would find it hard to do what a Gruh can do.

Regarding IDFC First Bank lending to individuals for purchases of say TVs, mobile phones - please see this article on how Bajaj Finance makes an IRR of 25% via subvention.

Since IDFC First Bank, does not have concalls and detailed research reports on the company’s credit evaluation, lending, recovery practices, sources of operating leverage etc, we have to rely on the management and some limited channel checks.

Malkd · July 24, 2020, 12:54pm

According to the share holding pattern Insurance companies increase their stake from a meager 0.27% to 8 percent last quarter. That is just absolutely insane. Couple that with its resilience today in a falling market just a couple days before it’s result(and knowing how companies work in our indian stock market regarding early rises before good results etc) and I won’t be surprised if it gets its push to past 30 next week. I’m still sceptical about banks in general over the next few months since there are way too many headwinds but I can see some good news ahead

ramdhawad · July 28, 2020, 12:05pm

Exclusive: Niyo Solutions acquires Goalwise in cash and stock deal

Niyo is a popular startup backed by the likes of Tencent. They aim at young millennials to offer 0 Markup on forex for travelers, 0 markup on mutual fund investments and 7% interest on savings through their tie up with IDFC First bank. They call it a 007 strategy.

rshankv · July 28, 2020, 3:55pm

Results are positive
Earnings
The Profit after Tax for Q1 FY21 is reported at Rs. 94 crore as compared to Loss of Rs. 617 crore for Q1 FY20.
Q1 FY21 Net Interest Income (NII) grew 38% Y-o-Y to Rs. 1,626 crore, up from Rs. 1,174 crore in Q1 FY20. Despite the COVID-19 pandemic and lockdown impact, the Q-o-Q NII grew by 4%.
Net Interest Margin (quarterly annualized) rose to 4.53% in Q1 FY21 from 3.01% in Q1 FY20.
Fee and Other Income (without trading gains) decreased 54% to Rs. 148 Crore in Q1 FY21 as compared to Rs. 321 crore in Q1-FY20 due to lower loan originations and reduced banking activity on account of COVID-19 pandemic and related lockdown throughout the country. The trading gain for Q1-FY21 was at Rs. 337 crore.
Total Income (net of Interest Expense) grew by 42% at Rs. 2,111 crore for Q1-FY21 as compared to Rs. 1,485 crore for Q1-FY20.
Pre-Provisioning Profit (PPOP) increased by 181% to Rs. 892 crore in Q1 FY21 as compared to Rs. 318 crore in Q1 FY20.
Without the trading gain, Core PPOP, which is the Core Pre-Provisioning Operating Profit (Total Income net of Treasury gains and operating expenditure) increased by 69% on YOY basis from Rs. 328 crore in Q1-FY20 to Rs. 555 crore in Q1-FY21.
The provision for Q1-FY21 was at Rs. 764 crore as compared to Rs. 1,281 crore for Q1 FY20 and as compared to Rs. 679 crore in Q4 FY20. In the first phase of moratorium, the Bank took COVID-19 related provision of Rs. 225 crore through the profit and loss account in the quarter ending on March 31, 2020. During Q1-FY21 the Bank has created additional
COVID-19 related provision of Rs. 375 crore to further strengthen the balance sheet.
Liabilities – Strong and Steady growth
CASA Deposits posted strong growth, rising 145% YoY to Rs. 23,491 crore as on June 30,2020 as compared to Rs. 9,594 crore as on June 30, 2019.
CASA Ratio improved to 33.74% as on June 30, 2020 as compared to 14.57% as on June30, 2019.
Core Deposits (Retail CASA and Retail Term Deposits) increased 139% to Rs. 39,872 crore as on June 30, 2020 from 16,672 crore in June 30, 2019. This signifies the sticky and sustainable nature of the growing deposit balance.
The Fixed Deposits of the Bank has been assigned the highest rating “FAAA/Stable” by CRISIL.
The Bank has reduced its dependence on the wholesale and market borrowings which have been suitably replaced by the growth of core Retail Deposits. The borrowing through Certificate of Deposits (CD) of the Bank has reduced by 64% on YOY basis to Rs. 7,212 crore as on June 30, 2020 from Rs. 20,058 crore as of June 30, 2019.
As of June 30, 2020, the Bank has 503 branches and 417 ATMs across the country.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/fe55e61b-33d0-4e44-aa74-80a124eae938.pdf

Rushil · July 28, 2020, 4:18pm

Huge moratorium book still left. These results unfortunately mean nothing since any amount from moratorium can turn NPA.
Very bad situation with 28 percent under moratorium.
Goes to show the stellar book that HDFC and Kotak have with both having less than 10 percent moratorium.

We will get to know the picture only once moratorium lifts now.

Indirectly Invested.

sahil_vi · July 28, 2020, 4:29pm

Let us also try and understand that idfc first bank management has acted in a more conservative way by placing a significant part of the loan book (the agri related I think) under moratorium in a suo moto fashion.

I don’t have any experience with hdfc and Kotak first hand but from what I could gather doing some scuttlebutt they have been trying to push customers to not take moratorium or make it difficult for customers to avail moratorium (asking them to come to bank to continue to avail moratorium). While this might be better in the short term, only time will tell the long term effect of such decisions. Lastly I would suggest it might be better to avoid speculation and see how the future turns out in q1-21 or q4-20 by when the impact of the moratorium should be quite clear.

Malkd · July 28, 2020, 4:48pm

The way idfc are handling this situation for a so called struggling bank… I’m sure they’ll handle the upcoming problems too. These results are stellar and they prove that the management are walking the talk even more. You have to remember that idfc was a bank in trouble and also look at its cheap price. It’s not hdfc or kotak yet but the way it’s going it very well could be in a few years
Disc: was fully invested in idfc first bank but trimmed my position by half expecting a lot of pain. I stand corrected and will be getting my full position again tmrw. If these results don’t scream re rating then nothing will for a while. Hoping the market is down tmrw so I can buy my stake early and cheap