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IDFC Bank Limited is a banking company. The Bank’s segments include treasury, corporate/wholesale banking, retail banking and unallocated.

Sector – Banks

Company Background And Business Mode

IDFC First Bank Ltd. was recently founded by the merger of IDFC Bank, a scheduled commercial bank and Capital First Ltd., a systematically important Non-Banking Financial Services company. The merger was first announced on 13th January, 2018 and formally consummated on 18th December, 2018. As part of IDFC Bank’s strategy to retailise its loan book the bank was looking for a merger with a retail finance institution with adequate scale, profitability and specialized skills. The merger rationale from the point of view of Capital First was to access low and sustainable cost of funds and hence was interested in a banking platform.

Important Statistics

  • M.Cap (Cr)  19,915
  • 52 Week H/L 54.55/32.7
  • NSE Code IDFCFIRSTB
  • BSE Code 539437
  • Investment Argument

    IDFC Bank possessed strong systems and processes, efficient treasury management system, strong presence in corporate and infrastructure financing, payment systems and over 34L customers. On the other hand, Capital First possessed a strong retail franchise in niche segments with strong credit skills, consistently delivered increasing profitability and ROE, high asset quality and a customer base of over 7mn and 4mn live customers. The merged entity, IDFC First Bank, will possess a strong loan asset base of more than Z104,000Cr, of which 34% is in the retail segment, diversified asset profile, strong platform to grow retail deposits and CASA and a large retail customer base of more than 70L live customers including 30L rural customers.

    The strategy going forward as envisaged by the management is as follows:

  • Asset Strategy — The strategy on growth of assets, diversification of assets and gross yield expansion is as follows:
    1) Growth of Assets — The Bank plans to grow the retail asset book from Z36,236Cr to over Z100,000Cr in the next 5-6 years, reduce the loans to infrastructure segment as they mature and continue to grow the non-infra corporate loan book.
    2) Diversification of Assets — Currently, retail book contributes to 35% of the total funded assets. The Bank plans to increase the retail book composition to more than 70% in the next 5-6 years.
    3) Gross Yield Expansion — As a result of increasing retail book in the loan book pie, the gross yield of the bank’s loan book is planned to increase from 9.2% to ,-,42% in the next 5-6 years.
  • Liability strategy— The strategy on growth of CASA, diversification of liability and branch expansion is as follows:
    1) CASA growth — The key focus of the bank would be to increase the CASA ratio from 10.3% currently to —30% within the next 5-6 years, as well as to set a trajectory to reach a CASA ratio of 40-50% there on.
    2) Diversification of Liability — As a percentage of the total borrowing, the retail term deposits and CASA is proposed to increase from 10.5% currently to >50% in the next 5-6 years and set a trajectory to reach 75% thereafter.
    3) Branch Expansion — In order to grow retail deposits and CASA, the bank plans to set up 600-700 more branches in the next 5-6 years from the current branch count of 206.
  • Profitability strategy – The strategy on Net Interest Margin, Cost to Income Ratio and RoA and RoE is as follows:
    1) Net Interest Margin – The Bank has envisaged to expand NIM to about 5.5% in the next 5-6 years.
    2) Cost to Income Ratio – The Bank plans to improve C:I ratio to ~50-55% over the next 5-6 years, down from ~79% currently
    3) RoA and RoE – The bank aims to reach a RoA in the range of 1.4% to 1.6% and RoE of 13-

    15% over the next 5-6 years.

    Valuations

    At CMP of 41.65, IDFC First Bank is trading at P/B of 0.87 on FY19E basis as per Bloomberg consensus estimates. Given the aggressive strategies laid out by the management as envisaged above to transform the bank and attractive valuations, we are POSITIVE on IDFC First Bank
  • Market Cap: 21,517 Cr.
  • Current Price: 45.00
  • 52 weeks High / Low 54.55 / 32.70
  • Book Value: 31.91
  • Stock P/E: 23.51
  • Dividend Yield: 1.19 %
  • ROCE: 7.23 %
  • ROE: 5.75 %
  • Sales Growth (3Yrs): %
  • Listed on BSE and NSE
  • Company Website
  • Face Value: 10.00
Pros:
Company has been maintaining a healthy dividend payout of 24.29%
Cons:
Company has low interest coverage ratio.
Promoter’s stake has decreased
Company has a low return on equity of 6.54% for last 3 years.
Contingent liabilities of Rs.215615.57 Cr.

Peer Comparison Sector: Banks // Industry: Banks – Private Sector

S.No. Name CMP Rs. P/E Mar Cap Rs.Cr. Div Yld % NP Qtr Rs.Cr. Qtr Profit Var % Sales Qtr Rs.Cr. Qtr Sales Var % ROCE %
1. HDFC Bank 2139.65 29.12 582087.37 0.58 5585.85 20.32 25890.26 25.80 7.32
2. Kotak Mah. Bank 1301.55 36.12 248340.17 0.05 1844.01 20.70 7744.58 21.18 7.93
3. Yes Bank 173.25 9.09 40070.22 1.55 1001.85 -6.97 7958.94 56.97 7.42
4. IndusInd Bank 1511.00 23.38 91055.65 0.49 985.03 5.21 5763.47 34.45 7.97
5. ICICI Bank 350.05 66.05 225520.12 0.43 1604.91 -2.75 16280.40 19.14 4.98
6. Bandhan Bank 464.20 32.80 55374.90 0.22 331.27 10.40 1649.55 40.00 10.59
7. Federal Bank 83.45 16.44 16558.65 1.19 333.63 28.31 2954.41 18.12 6.05
8. IDFC First Bank 45.00 23.51 21516.85 1.19 -1538.01 626.40 3664.08 60.44 7.23

 

Credit Ratings

Author

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