I think cost to income ratio is operating-expenses/operating-income. I checked HDFCB latest figures and it seems to include all other income to arrive at 37% (someone correct me if I’m wrong). Whereas in the case of IDFCFB if we exclude trading gain in the operating-income it is 77% (2032/2634) but if we include it is 67% (2032/3034), calculated from the above slide.
We are yet to see operating leverage play out for the bank. I think new branch opening has stopped or significantly slowed down. If they don’t start expanding aggressively again we should see improvements in cost-to-income sooner rather than later. Maybe good to check with management about future expansion plans during concall?
CEO had guided for similar level of Cost-to-Income for rest of this financial year during the AGM as operating leverage will take time to play out. They have slowed down branch expansions but still intend to have between 800-900 branches by 2024-25. They now have 600 branches.
Sharing my notes from interactions with people in the ecosystem. The conversation was specific to IDFC First in Tamil Nadu and the two wheeler loans segment. But the general trend could possibly be extrapolated.
There is increased aggressiveness from IDFC First to penetrate deeper into newer locations and increase the scale of business. For context, during January 2021 (peak festive sales in TN) IDFC First did 3500+ vehicles in that month across brands in TN. They mentioned that now they are hitting those numbers on a regular basis during normal months. And that they are looking to 2x these numbers by January 2022 next year.
Was curious to find that the 2W loans division is split up across IDFC First Bank (covers towns like Chennai, Coimbatore, Salem, Madurai, Trichy, Dharmapuri, etc.) and IDFC First Bharat, a wholly owned subsidiary of IDFC First Bank (focussed on rural towns like Namakkal, Tirupattur, etc). Interesting to note that the two teams are quite distinct with different reporting, norms and credit quality criteria and focussed on different towns within TN.
The entire case login and disbursal process has been digitised and they’ve done away with the field verification process to improve the loan disbursal time. Some of the financiers (SCUF, local financiers - to my knowledge) still do field verification before disbursing loans which adds time for processing the loan. The more agile financiers are able to approve loans within 45 minutes to 1 hour and are disbursing the amount the next day.
Their strategy until now has been to focus on 2W which doesn’t have a captive financier. They have decent penetration with RE, Honda, Yamaha (which has closed down Bussan). And are now working to crack the brands with their own captive financiers - Bajaj, Hero, TVS.
There has been hiring activity across as they scale into new towns. Penetrating deeper into the mass segment brands would require better scale and continuation of the good schemes rolled out now with low processing fees and better dealer payouts and therefore crowding out the space occupied by the third, fourth or fifth largest player.
The basic break even point would be to do 11 cases in a month per showroom for a single manpower. The manpower cost tends to be fixed at 10k and doesn’t scale beyond the 500 incentive per case post 11 cases in a month, irrespective of whether the manpower processes 5 cases in the showroom or 80 cases in the showroom (which they’re already hitting in a few Honda showrooms - a positive sign).
The schemes have been pretty good so far at competitive RoIs, 85-90% LTVs, low processing fees (~ Rs. 800 for IDFC First, vs ~4k for BFL and ~2k for L&T) which by itself adds a 3-4% charge on a customer for a typical disbursal of 70-80k for a single bike and good dealer payouts which are important to gain market share at a micro level among financiers within the dealership itself and tilt the decision for the dealer in how to distribute his finance retails.
There hasn’t been too much aggressiveness in going after every type of customer profile based on feedback from the dealers and they seem to be going after the typical customer base of a BFL or L&T Finance - one or two levels below the highest level credit quality customers.
Thanks for sharing ground reality and perspective. What is the general trend in 2W sales in that region. Is there any details about electric vehicle financing from IDFC first. I start seeing few electrical vehicles in salem & namakkal region.
Thanks for the ground level information. The only worry is this kind of aggression should not lead to higher npa down the line, Hope they are cautious and selective in distributing the loans.
Shades of citibank car financing in early 2000s where they gave loans for cars without much underwriting. Got hammered with defaults and stopped big time
That’s the biggest worry I have with this (idfcfb) bank. Sometimes I feel they are too aggressive in distributing loans. Hope they will be back on track and with balanced approach soon. The housing loan will surely act as damping factor absorbing some of the NPAs shocks from lesser credit worry retail individuals.
In Q1, 2w loan segment was a big cause of NPA for IDFC First- though the segment was problematic at industry level (Kotak, HDFC and others banks reported similar concern). However, VV himself clarified that a bad quarter would not result in doing away with a segment if they feel that it adds more value in long term. Waiting to see Q2 if there is any other exception impacting the profits when other banks are hitting sixers during the quarter
IDFC first bank will get additional equity after the reverse merger.
Advantage: This can be used for growing their loan book.
Disadvantage: ROE will be affected in the short term.
IDFC First Bank will not get additional equity. This 36.6% of IDFC Ltd already exists in the existing equity part of the IDFC first bank. The best value locking is that IDFC Ltd should be merged without any discount and cash received from AMC sales post tax should be transferred to IDFCFirstBank. This is a win-win situation, book value will increase, they will have growth capital, IDFC Ltd will get 1.41 shares of the bank for every 1 share. This is the great value addition for everyone.
IDFC Ltd shareholders are not going to give 5,000cr of cash to IDFCB for free, they will need to be issued addition shares for any amount recieved from the sale of the AMC.
This NAV(Net asset value) based approach will contribute only 50% weightage to the final merger valuation, another 50% weightage will be coming from the current market price to arrive at a final merger swap ratio.
Mentioned multiple merger scenarios in below post along with potential swap ratio.
Not necessary, there is no hard or fast rule that you need to take 50% of either. End of the day the two boards will need to decide a swap ratio that seems fair and which shareholders of both companies will approve. There is no shortage of suitors for IDFC so unless IDFCB suggests a reasonable figure they might end up losing out.
Board Meeting held on October 30, 2021 - Consideration of Unaudited Standalone and Consolidated Financial Results of IDFC FIRST Bank Limited (“Bank”) for the quarter and half-year ended September 30, 2021
