Company Name – IDFC First Bank Ltd (IDFC First Bank)
Current Share Price – INR 31.6 (June 29, 2022)
Market Cap – INR 19,683 cr
[Updated for Q4FY22/FY22 results]
1. What is interesting about the stock?
Remember this scene from the iconic movie Baazigar. Here Shah Rukh Khan’s character gives up the pole position for the villain to impress him and get to meet him. At the end of the race, he says the iconic dialogue to Kajol’s character:
Kabhi Kabhi Kuch Jeetne Ke Liye Kuch Harna Bhi Padta Hai, Aur Haarkar Jeetne Wale ko Baazigar Kehte Hain.
What are the most common complaints with modern banks in general in India?
High hidden charges & penalties
Lack of transparency
High credit card interest rate
ATM usage charges (for other bank ATMs)
Every big bank including market leaders HDFC Bank, ICICI Bank, and Kotak Mahindra Bank is no stranger to this behavior. So, is there a bank out there that is willing to give the customers solutions to what they are complaining about?
IDFC First Bank is one of the few players in the country that is looking to address the above-mentioned issues and differentiate itself from the rest of the industry. They are among the first in the industry to offer
Unlimited free ATM transactions from all ATMs in India
No penalty on breaking fixed deposits for senior citizens and kids
No additional charges on issuing checkbooks
Lifetime free debit and credit cards
Monthly interest credit to savings accounts
Credit Card interest as low as 9% p.a.
But all of this largesse and magnanimity also come with a price. The price is an inflated cost-to-income ratio of as high as 76% (Q4FY22) while the rest of the banking industry including leaders like HDFC bank and ICICI are at 40-50%.
Not only this but the bank is plagued with large NPAs, legacy high-cost borrowings, and the burden of expanding very fast into new regions.
So, will IDFC First Bank be able to emerge as the “The Baazigar of the Indian Banking Industry”? Only time will tell.
Infrastructure Development Finance Company (IDFC), the infrastructure lending giant, divested its infrastructure finance assets and liabilities to a new entity - IDFC Bank. The bank was launched through this demerger from IDFC Limited in November 2015.
In 2018, IDFC Bank merged with a leading NBFC, Capital First, to form the IDFC First Bank. Capital First was formed in 2012 by V Vaidyanathan and went on to become one of the country’s top lenders providing debt financing to small entrepreneurs, MSMEs (Micro, Small, and Medium Enterprises), and Indian consumers. The company’s goal was to finance India’s 50 million MSMEs and India’s emerging middle class, with a differentiated model, based on new technologies.
But the challenge at the time of the merger was that both these entities were experts in wholesale (IDFC) and retail (Capital First) lending and had limited experience in building deposit books. At the time of the merger, the CASA was at only ~12% but under the leadership of the new CEO/MD Vaidyanathan, it grew its deposit book almost 5x from INR 13,214 cr in March 2019 to INR 68,035 cr in March 2022 with a CASA at ~50%.
The bank today has a funded loan book of INR 1.32 lakh cr as of March 31, 2022. It has 63% retail assets in the funded book. The funded loan book breakup was:
Source: Q4FY22 Investor PPT
The Bank today has 4 major product segments for the retail segment which are:
Consumer & MSME Loans - Home loan, Loan Against Property (LAP), Auto loan, Personal loan, Micro Enterprise loan
Credit Cards: Over 7 lakh cards issued since the start of the division in Jan 2021.
Cash Management Solutions
The Banking sector looks to have a long growth runway driven by several industry drivers such as:
Rising income and young demographic profile
Rapid growth in the Fintech space is expected to grow to USD 83 trillion by 2025 according to IBEF.
Rising mobile internet and online payment usage.
Digital lending space is expected to more than double FY20 levels in FY23.
Rising credit in the housing finance space.
Growing penetration in all financial segments like Insurance, investments, SME lending, etc.
The major direct competitors of IDFC First Bank:
Kotak Mahindra Bank
Willing to break set norms in the industry - The Bank’s biggest strength is its willingness to sacrifice tried and tested revenue sources for greater customer satisfaction and brand building.
Through Capital First, the Bank has extensive experience in the SME lending sector, one of the fastest-growing segments of the banking industry.
The Company leadership is well-led by the MD/CEO V Vaidyanathan who has extensive experience working across various banking and financial segments in ICICI Bank, ICICI Prudential Life, and Capital First.
2. Key Historical Financials
The company has grown its revenue at a CAGR of 15% in the last 5 years with PAT de-growing at 34%. Given these numbers, it is clear that the company is aiming to establish its market presence at the expense of short-term profits.
Other Key Operating Metrics for the Bank in FY22 are:
Net Interest Margin - 6.0%
GNPA - 3.7%
NNPA - 1.5%
Cost to Income Ratio - 76.2%
The NIM is a healthy 6.0%, which is near the industry standard. The company still has a very high cost-to-income ratio mainly due to the additional burden of opening new branches very fast, legacy high-interest rate borrowings, and high provisioning for the elevated levels of NPAs. This ultimately also puts pressure on the RoA and RoE figures for the bank.
Profitability fell in FY22 as FY21 was boosted by a one-off large provision release on account of the sale of investments in two large financial institutions.
3. What is my view on Company valuation?
IDFC First Bank has seen a fall in its share price of ~50% in the last 5 years vs the NIFTY Bank Index which has risen ~45% in the same period. It is also behind the NIFTY50 Index which has risen ~65% in the same period.
This shows that the bank has significantly underperformed the banking industry benchmarks and the general market.
The bank currently trades at a P/B of 1.1x vs 3.0x of HDFC Bank, 3.1x of ICICI, 3.8x of Kotak Mahindra Bank, and 1.3x of SBI.
Historical RoE for IDFC First Bank has been low for the past 3 years, mainly due to big losses in FY19 & FY20 coming from the legacy of a few big bad loans inherited from IDFC and high coupon debt issued by IDFC. Their expansionary activities where they have prioritized the growth of the bank at the expense of profits have also put pressure on profits over the years which have further depressed earnings and thus are reflected in the PB valuation. The Bank needs to improve its Operating Cost to Income ratio as it is much higher than the competition - partly by improving efficiency and partly by increasing the book size.
Based on the improving numbers of the past 3 years and the promise shown by the accelerating digital operations of the Bank, I expect IDFC First Bank to maintain a 10-15% revenue CAGR for the next two years. Bank will need additional external capital to fund this growth.
At its current valuation, the bank can appear to be a bargain vs the rest of the industry but it has a difficult road to deliver results (reducing the Operating Cost to Income ratio) in the next few years. Asset quality is expected to improve with an increase in the proportion of new book and flushing out of issues from the legacy book.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Given all the leeway the bank is giving to its customers and the branding and promotion exercises, the bank has a very high cost-to-income ratio of over 76% vs direct rivals like HDFC Bank & ICICI bank which have it at 40-45%. This is a major risk where the company appears to be not as efficient in its earnings vs its rivals
The banking sector has almost no concept of intellectual property or patents and thus any innovation or working trend can be easily copied and provided by other players as well. Thus, even services that may differentiate IDFC First Bank from the rest of the market currently, may not stay the differentiating factor for long.
The competition in the financial services space is very high with all kinds of competitors from other banks like HDFC Bank, NBFCs like Bajaj Finance, and even new age competitors like Navi Technologies and Paytm all targeting the Indian Financial Services market. The bank will have to maintain technological momentum or else it will be easily left behind in this ever-intensifying race
About the Author
I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past. Currently, I am working as head of Research at Smart Sync Services where we are working on simplifying and expanding financial and investment knowledge to make the investment world as accessible for everyday investors as much as possible.
I graduated from the Master of Finance Program at Cambridge University in 2016 after completing my Bachelor of Engineering program at Jadavpur University, Kolkata in 2011.
I am an insignificant public investor & have an avid interest in following emerging trends both in technology and other fast-evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.