Seems that results are better than Market expectations, otherwise no management shall have first concall with bad numbers. This is first full quarter with reduced interest rates on saving accounts. This is going to be crowded considering 1st call, high retail holding & being weekend.
In case any investor joining the call, pl take up following questions related to Vodaphone’s debt & reverse merger.
What is the maturity date for Vodaphone’s loan ?
What’s management’s outlook on recovery of this loan, why we have reduced the provisions inspite of the fact that Vodaphone’s outlook is not stable yet ?
Remarks: I am having viewpoint that Management didn’t wanted to go back in loss hence reversed Vodaphone’s provisions to accommodate Covid related provisions. This helped them to raise fresh equity at attractive price. My views could be biased.
In their quarterly earning call for Q3’FY21, IDFC’s management was quite confident about dismantling the HoldCo structure & unleashing shareholders value. What’s Bank’s take on this?
Remarks: Enclosing transcript of the call & youtube link for easy reference.
Request key members of the forum to attend & share the update. @sahil_vi : we look forward another detailed update from you.
Unfortunately, i shall not be able to attend due to another commitment
Realized early on that retail lending is good for our size (16k cr net worth). Retail customer really cares about their credit rating Cant hide behind a company with limited liability.
SA rate is 4.8%. Was 5.8% in Q4FY22. 40,000 cr SA and 6,000 cr CA.
Corporate banking belongs to someone who has very low cost of funds. ICICI and Axis. Very low cost of funds. Will lend in proportion to our net worth. Need reasonable risk reward. Priced appropriate with our cost of funds. Pretty strong in terms of technology. Cash management. Trade facilities. Get Fee income from forex, transaction banking fees. We want to maintain the corporate loan book around 35k-37k. If we are unable to keep it there it just means we are unable to find opportunities.
Slippages for Q was 2800cr. This included 850cr mumbai toll road account. Some payments happening. Expect recovery in due court. On retail 1800cr slippage. Recoveries of 600cr. Net slippage is 1.5% in retail.
Write-offs was around 1400cr in Retail segment. Restructured 1.8% on retail. Was 0.9% in previous Q. Guidance for this year is credit loss including writeoffs in Q1 we are targeting 2.5%. Quite comfortable given our yields. Capital first had 2.7% credit losses. Next FY we are guiding 2%.
On retail side, Incremental economics are earning us 14-4.8 = 9% NIMs. On whole NIMs will keep increasing
Retail segment Segments contributing to slippages: Wheels segment (Vehicles), JLG (microfinance book in rural areas).
Our provisioning is formula based. At 90 days we have X, at 120 we take Y etc. Due to lockdown, some part of the book slides 1 bucket forward. Just because a customer moved to 90 day bucket, and we take 33% provision, doesnt mean customer wont pay us. 1400cr by itself looks like a large number. But customers who go into that NPA bucket continue to pay and will pay. Even write-offs are a formula for us. Depending on ticket size there is a formula. Important thing to note is during covid situation, customers are delayed, but they will continue to pay.
Going forward CASA will start growing again. We have too much cash right now. Will grow enough to feed growth aspirations
Expenses are front loaded due to branches. As branches become profitable, CIR will come down to 55%.
2W financing etc does come with its own variable costs. All costs bunch together when we run a bank. Same cost structure tends to get leveraged on larger base as we grow the loan book. Head Office etc are fixed cost. So when they are leveraged on larger AUM it leads to operating leverage. Significant efforts on digitization. Removing all useless processes.
On certain segment of businesses we have good 10 yr track record, scale etc. We have a good experience there. Consumer financing, 2W, LAP, afford home loans. These biz we have a pattern of 10 years by our side. Had yields to support the 2.7% credit losses. As we became bank, subtle change in strategy. We have started playing more in the safer segments. Prime home loans at 6.9%. Doesnt have much credit losses. Blended credit loss will come down to 2%. We have done our analysis, seen check bounce data. Enough data points to say headed to <2% credit loss.
1-1.5% of the written off pool keeps coming back every month.
(Provision + write-off)/AUM is the credit loss which we guide for 2.5% for FY22.
Headroom: 25% YoY growth for a long time is not a problem at all. Formalization of the economy is a good driver. People who don’t take credit at all are now taking credit because they are coming of age.
ICICI bank is 5 lakh cr loan book still growing at 20%. SBI is still growing.
Our growth guidance of 25% is not contingent on economic growth (being > or < 7%). Because our loan book of 70k cr is not much. Want to generate 18-20% ROE from retail lending.
Big growth area will be home loans. Before we were bank we were good at affordable housing. Low NPA even before we were a bank. But now that we have entered prime home loan market, finding fantastic response. Home loan fastest growth. SME/business loans, LAP will be 2nd fastest growing. Rural loans will also grow fast. Rural will be good area for us. Credit card book will also grow ahead of the rest. In long run home loan can be 40% (mortgages) will be 40% of the loan book. Long tenure loan. Mortgage just tends to grow linearly. Although margins are low in home loan, there is also operating costs and credit costs which are lower in home loans. Look at HDFC’s 17% cost to income.
When CapF was born, we used to lend to risky people at 24%. That is where we learned our trade. As cost of funds kept coming down, it allowed us to play in safer segments. About 25% of our book was new to credit in 2018. In Jan-Jun 2019 17% of book was new to credit. In Jan21-Jun21: 10% of customers are new to credit. As cost of funds go down, we are taking lower risks by lending to fewer customers who are new to credit. Number of customers with bureau score with score > 700 was 61% in Jun19. In Jun21, 83% of customer have > 700 credit score.
My take: The concall gives a very good granular look at what the bank is doing and the direction it is headed in. The incremental NIMs generated are around 9% and credit costs of 2% should be supportable in the longer run. For FY22, credit cost guidance of 2.5% (3000 cr). 1800cr provision already taken in Q1. Implies roughly 400cr provision each Q from here on out, unless there are more covid waves. Provisions and write offs are formula based. No discretion used.
Weren’t their entire business model revolved around bringing new people(lower middle class) into the banking system? They released a promotion video where Vaidyanathan was talking to a taxi driver regarding the hardships of getting credit for similar strata of people in society.
But now they are saying that only 10% of book is new to credit, does this not change the initial investment thesis?
Move to safer lending(housing loan and higher credit rating) will definitely improve lending book quality and restrict possible NPA in the short term, but is it not changing the whole thesis in the long term if they stick to it?
Main question for me after listening to the concall is how realistic is a credit cost of 2.5% for the year? I think last year it was 3-3.5% and if they can keep it to 2.5% this year then it seems like they have just upfronted a lot of the credit costs in Q1. Their Q1 PPOP was 1,000cr and assuming a recovery in the remaining 3 quarters they could easily end up with a PPOP of 4,500cr for FY22. Now their estimate of credit costs or provisions is 2.5% or 3,000cr for FY22 so does that mean a PBT of 1,500cr is possible in FY22? Let’s see how accurate their guidance turns out to be and if they achieve it barring any surprises from Vodafone etc.
The biggest positive from the results has been the liability side traction. SA has proven to be sticky despite more competitive rates. That is sure to augur well for the bank in the long run. However, the asset side completely bombed due to Covid. Annualised slippage ratio close to 10%; which is 4x of the top tier banks; much higher than Bajaj Finance and even some of the other NBFCs. Given the PCR is still low, and the company primarily does retail lending; the credit cost guidance is surprising. I would be surprised if they managed to keep it in that range.
One thing I couldnt understand is that if the incremental loan is being given to a customer with Credit score of 700+ (83% of book with bureau score > 700) and more than half of the retail book is secured; then how is the incremental NIM 9%? Why would a prime borrower be borrowing at 14% interest rates on a secured loan in this environment? Any help would be appreciated.
FY22 loan book of ~122k cr isn’t huge growth from the current 113k cr and 117k cr for FY21. I guess the strategy is to cautiously grow the loan book in this phase while increasing the profits through lower provisions and NIM expansion. Should at least contribute to the RoE. Pleasantly surprising to hear the confidence about the economic impact of the 2nd and possible 3rd wave.
Think he mentioned 122k cr as the average loan book for the year, to reach that average they will probably need to have a loan book above 130k cr by March 2022.
Can someone please help me with the exact amount of Vodafone loan exposure for IDFC First? Gross and net both? I think Voda is one of the known risks on their BS, so the share pull back down to 50 is not surprising but if the known risks are already factored in heavily, then I was thinking of adding more.
Inputs will be highly appreciated.
Okay so I found a post on Twitter (below image) which shows IDFCF has around 3,240 exposure to VI, anyone knows how much is provided for?
IDFC First Bank tanked 7 per cent to hit an intra-day low of Rs 29.7 apiece on the BSE. The Bank had marked “one large telecom account” as stressed and had created 50 per cent provision against the total outstanding of Rs 3,244 crore in the quarter ended December 31, 2019. The Bank continues to carry the same provision for the account as of June 30, 2020.
Quote from a interview in Feb 20
This is the third or fourth time that IDFC First Bank profitability has been hit by provisions. This time you have provided almost 50% of the exposure for telecom company Vodafone-Idea. How did you arrive at that 50% number and how bad is the situation in some of your stressed accounts?
IDFC FB is a much sought-after counter & commands a huge retail interest on two counts 1- relatively honest / clean mgmt and VV brand name
2- opportunity to buy into a nice new bank story with 5-10 year view
few questions to ponder over
why is the provision coverage for VI so low ? hardly 15% isnt giving the comfort feel - and seems like exposure has the potential to paint the PnL red for the next 2-3 quarters ( if not more)
VV spent better part of the past 2 years in cleaning up the BS( infra exposure reduction, CASA raising, CD reduction etc.
Im slowly coming to the conclusion that even VV probably had underestimated the lurking landmines that Rajiv Lall had dug for him when he handed over the reins in 2018. Still not able to understand how can a bank the size of IDFCB have the kind of a single entity exposure to VI!
Getting tired of VV repeatedly pointing us to the same tired metrics of CASA/ NIM/ loan book transformation etc… and then reporting massive losses QoQ. Ill admit that i have underestimated the time it would take to steer the bank from the mess from Rajiv’s days
3200 cr is too big amount to ignore in time of rising NPA…
V Vaidyanathan is expert in narrative building and comes with good future hope with every quarter results…
If they have to write off 3200 cr in future which it seems so, investor have to wait for considerable time to see significant profit…
Also if there is third wave of significant impact, retail unsecured loans may backfire and there is less chance of reduction in NPAs…
I admire V Vaidyanathan and there is no fault in his strategy but seems time is not in favour of him right now…
Can’t blame VV for the crapy past of IDFC first bank. I think VV himself underestimated how bad the loan book of Erstwhile IDFC Bank.
But he would have written off entire VI loan last quarter as did by IndusInd bank. He will be again be roasted for the massive NPA for next quarter. Poor Chap …hope he will have strength for the next concall …
Invested and will remain invested as I entered at very low price.
I was just trying to understand the loss IDFC First bank may have to face in case VI defaults on dues. As per my understanding, out of 1.8 Lakh (odd) cr. debt, government has exposure of around 1.5 Lakh cr. (AGR and Spectrum dues apart from others) and rest with banks and other lenders.
I expect government to be supportive in case insolvency proceedings are intimated against VI. My doubt is around the hair cut private sector will be expected to bear in case VI goes under.
Apart from the above, going by recent experience of Yes Bank, do we really expect private sector to bear any major loss in case of bankruptcy (equity investors are surely most vulnerable). Also, incase, government takes over VI, do we really expect VI to default on dues (from lenders). Additionally, VI has around 27 cr subscribers plus a good numbers of employees will be at risk.
This is my opinion, will be good to know what others think.
If I remember correctly, VV used term “Too big to fail” in an interview. If VI fails, Government need to bear major loss. As a bank IDFCF will bear losses but as a citizen of India who need to survive with duopoly will have major impact…
I believe, Majority of things are uncertain, Once time passes things will get clear till then will remain invested.
