RESEARCH BY: RITVIK GOYAL
The most important thing while analysing any company is the quality of Management so let’s start with the MD and CEO of this bank MR. V VAIDYANATHAN. He has a great experience of working in the banks and to be more specific in the retail loan portion of the bank. He has working experience of more than 20 years in the banking sector. He worked with CITI BANK for 10 years (1990-2000) ICICI bank for another 10 years (2000-2010). He always wanted to set up a bank with his own stake thus he acquired a loss-making NBFC and started giving out small loans with that & he made so many profits that his share of capital first rose from 100rs to 900rs. Later, for further growth, he was looking for a banking license and ended up merging capital first with IDFC bank and finally got its banking license.
BRIEF HISTORY OF CAPITAL FIRST
Capital First was founded in the year 2012 and was focused on lending small entrepreneurs and consumers. The company grew from 94 crores to 29,625 crores in 8.5 years, acquired 9 million customers, enjoyed a 5-year CAGR loan growth of 29%, and a five-year CAGR of 56% in profits, leading to a net profit of 327 crores for the year ended on March 31, 2018.
Now the question arises that how things are looking out currently at the merged bank and what are its plans for the upcoming future?
Well the bank started with the problem of the legacy loans i.e. loans lent by the IDFC Bank before the merger and they were highly corporate loans and the new management post-merger is trying at its best to bring down the portion of the corporate loans and to increase the loan book with more of retail-oriented loans.
The management decided not to grow the loan book further till it brings down the portion of the corporate loan and increases the portion of the retail loan. The result was that the management didn’t grow the loan books till 2 years and to increase the internal strongness of the bank such that it doesn’t face major NPA issues due to a higher portion of the corporate loan. The result of efforts of 2 years can be seen below.
As we can clearly see from the above that management completely changed the portion of the retail and corporate loan in 2 years and coming further management is confident that they can maintain this kind of stability.
The bank is not only focusing on growing its retail asset i.e. loan book but they are also focusing on growing its retail deposits base. When a bank has a large number of depositors then it reduced the dependency on particular deposits for example if a bank has more of wholesale depositors with huge funds parked in and if any of them shifts to a different bank then it affects the deposit base very much but if it has more of retail deposits then if some customers shift to another one also it doesn’t have a significant impact as they deposit small amounts.
Bank requires funds for lending the loan and there are two options for that, one is to take the loan itself and lend at higher rates and another one is to depend on its deposits. There is a ratio called as CASA ratio. It represents deposits of the Current Account and Saving Account. The bank is very much focused on increasing its CASA as they are a low-cost fund so the bank can earn a higher margin if it borrows at a lower rate. The increase in CASA in 2 years is very huge as we can see below that CASA increased from 11.4% to 48.3% which is a significant improvement. They have reduced the dependency on top 20 depositors from 42% to 9.7%. From the above figures, we can say that bank is completely focused on becoming a retail-oriented bank and if we see a similar model like Bajaj Finance is also one of the retail-oriented NBFC, HDFC bank also focused on its retail portion in its initial years.
TALKING ABOUT ITS NET INTEREST MARGIN(NIM):
NIM is the margin difference between the interest income generated by the bank and the interest paid to their depositors. As we can clearly see that the bank has been sharply improving its interest margin from 2.89% post-merger to 4.57% and the management is quite confident of taking the margin from 5% to 5.5%. If we compare it with other banks like Bandhan Bank NIM of 6.8%. Other banks like HDFC bank, have a NIM of 3.67% and Kotak bank has a NIM of 3.96% (Not Directly Comparable). So looking at these we can clearly say that bank is operating at a very good interest margin.
NON-PERFORMING ASSETS (NPA):
The bank is managing its NPA numbers quite well as we can see they are consistently decreasing their NPA’s in their retail loans. If we talk about NPA from the overall loan book perspective than they have a number near 2.63% of gross and 1.25% of net NPA. The proforma numbers have seen a huge jump of 155 basis points but the management is quite confident that they will be near to their long-term averages within the next 2-3 quarters as their collection efficiency is also increasing and it had reached nearly 98-99%. So overall structure looks quite manageable for the bank and since they are carrying many of these from their legacy loans thus the numbers will improve in upcoming quarters and management is quite confident of bringing them down
Talking about the provision coverage bank has made adequate provisions regarding their proforma numbers too and the management is quite conservative they make adequate provisions early if they doubt something such that it doesn’t affect later. They had made some provisions on doubtful asset earlier which are not yet declared as NPA so if they pay the bank then we may see write-back of provisions which can be good.
The bank had turned out profitable from Q4FY20 and since there its profitability numbers are increasing despite of not growing the size of the loan book. Losses posted earlier were in the account of high provisions made of their major stressed accounts which were from their legacy loans. So overall numbers from the past 4 quarters are increasing and when the management will start growing their size of loan book then these will increase to a great extent and bank can post very good profits in the coming years. The management had decided to keep the loan book constant till and change the portion of their retail and wholesale assets which they did in a decent way. For the upcoming quarters, they shall post higher profits as they have increased retail portion significantly as per the strategy of the management, now they shall start growing the size of their loan book which will bring in more profitability.
A GLANCE AT LIABILITY PORTION OF BALANCE SHEET:
As the bank is focused on increasing its deposit base it is also reducing the borrowings as these are considered as higher cost of funds as we can see from the figures above it has significantly increased its deposits base and brought down the borrowings. So, from this only we can say that management is trying to focus on deposits for lending instead of borrowing which is good for the long term as well for margins.
As we can see that they are highly focused on expansion and are continuously increasing their BRANCH and ATM network, they are also focusing on giving a high-tech banking experience to their users. They have recently developed applications with enhanced UI UX which will increase the quality of user experience.
ENTERING CREDIT CARD MARKET:
As we know that credit card market is underpenetrated in India and this move by IDFC FIRST of charging dynamic interest rate between 9% to 36% whereas the industry is charging near 40% interest rate for the past 30 years. This move by Idfc first can be a complete game-changer for the whole credit card market in India as this will attract many customers and will further help them grow the retail loan book, as well as more value unlocking, will happen as this market will grow for Idfc first. All we must look about is the quality of fresh loans they lend if they manage it well then, the bank can grow at a much faster rate and will be significantly profitable in the upcoming years. No doubt that people will try to get their credit cards as they will be getting various kinds of rewards and people in the Indian market loves free gifts and rewards, these things will increase customer loyalty, in the long run, the bank can benefit a lot from this.
The stock is currently trading at a Price to book value (P/B) of 2.37 times. It has a book value of 28.67 per share. Recently they are going to raise Rs 3000cr which is expected to increase the book value of the company and we have seen a decent rally in the share too. Looking upon P/B of other retail-oriented banks and nbfcBandhan bank is commanding a P/B of 3.71 times. Other entities like HDFC bank is commanding a P/B of 4.7 times, Bajaj Finance is commanding a P/B of 10 times( although they are not comparable directly as they are very large in size). So, looking at this front Idfc First Bank can command a higher P/B in upcoming quarters and years and their retail segment becomes more profitable for them.
The price-to-earning ratio of the bank is 87 which seems high but valuing using P/E seems a bit irrelevant at this point as they have turned out to be profitable in recent quarters only and they had made higher provisions earlier due to which the net profits are not that high. In the upcoming quarters as the bank will post decent profits the P/E will automatically come down.
Overall, the bank doesn’t seem to be overvalued right now, some correction can be seen in the near term after this rally but that would be a good opportunity to accumulate it. Looking at the longer horizon it looks quite attractive as the bank can grow at a very higher rate and can command very good valuations in the market.
Overall, the bank seems to be quite attractive in terms of future growth and strategy adopted by the management. They are completely focused on building a retail-oriented bank which is a good part as the risk of blowing up the balance sheet by large loans is not there in such a business model. The business model is not in a trial mode, but it is a tested strategy done at Capital first by Mr. Vaidyanathan and he will follow the same with IDFC FIRST BANK. The assets and deposits growth in the retail part is great and the management is quite confident that they can grow the retail loan assets at 25% CAGR. The management is conservative in the targets as we have seen earlier also that Mr. Vaidyanathan achieves his target much earlier than the given time frame so the bank can also grow at 30%-35% for some years, we have to look upon is how they disburse fresh loans and what will be the asset quality in upcoming years. They are also raising funds of 3000cr as they are seeing strong growth opportunities in the coming future and management wants to be well prepared to grab the opportunity. How they will manage their credit card market is also another thing to look upon as they are offering very attractive features to the customers.
RITVIK GOYAL (RITVIKGOYAL77@GMAIL.COM)