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Some of the most common complaints with banks these days are hidden costs like ATM charges, high-interest rates on credit cards, and a general lack of transparency. Big banks like HDFC Bank, ICICI Bank, and Kotak Mahindra Bank are no strangers 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 wants to be that bank.
IDFC First Bank is looking to differentiate itself from the rest of the industry by becoming the first one to offer unlimited free ATM transactions, zero additional charges on issuing cheque books, and lifetime free debit and credit cards. Moreover, their credit card interest rate is one of the lowest in the industry, starting at 9%. But all of this comes at a price. IDFC First faces a cost to income ratio of around 75% whereas competitors like HDFC Bank are at 40 to 50%. The bank is also expanding rapidly into new regions, adding to the operating cost.
IDFC First Bank was formed in 2018 due to a merger between IDFC Bank and Capital First, to finance India’s 50 million MSMEs and India’s emerging middle class with a differentiated model, using the latest technology. Both these companies had limited experience in building deposit books at the time. The current account savings account or CASA ratio was at only 12%. However, under the leadership of CEO V Vaidyanathan, the bank has seen unprecedented growth. It grew its deposit book almost 9 times and by March 2022, its CASA ratio stood at around 50%.
The Bank today has 4 major product segments for the retail segment. This includes Consumer and MSME loans, which include home loans, auto loans, and personal loans. Moreover, the retail segment also includes wealth management and cash management solutions, as well as the credit card division, in which the company has issued 7 lakhs cards, since its launch in January 2021.
So, what is our view on Company valuation?
The bank currently trades at a P/B of 1.2x vs 3.6x of HDFC Bank, 3.2x of ICICI, & 4.5x of Kotak Mahindra Bank.
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 delivering results by reducing the cost to income ratio. Some of the other issues like a few big bad loans inherited from IDFC and high coupon debt issued by IDFC will continue to keep the P&L depressed for the next few years.
The Bank will need additional external capital to fund this growth as it is making losses.
As for the risks to the analysis, the banking sector has almost no concept of intellectual property and thus any innovation 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 or improve its technology or else it will be easily left behind in this ever-intensifying race
So, would you invest in IDFC First Bank?
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