IDFC First, India’s Youngest Private Sector Bank, Makes A Dash For Growth With Fresh Funding
IDFC First Bank Ltd., one of India’s two youngest private sector banks which came into being amid a multi-year bad loan clean-up, is hoping to leave asset quality concerns behind and make a dash for growth as the Indian economy revives.
The lender approved a plan to raise Rs 3,000 crore on Feb.18 via private placement, a follow-on public offer, a qualified institutional placement or a combination thereof. This is the second time in a year the bank is raising capital. In June 2020, IDFC First raised Rs 2,000 crore by issuing preference shares to entities including its promoters Warburg Pincus and IDFC Financial Holdings Ltd.
The latest round of fundraising will help the bank grow its loan book at a steady rate of 25% year-on-year for the next few years, V Vaidyanathan, chief executive officer of the bank told BloombergQuint.
Our stated agenda is to grow the book at 25% every year for the foreseeable future. Considering that we are targeting the retail and small business segment, it is entirely possible to achieve this growth rate.V Vaidyanathan, MD and CEO, IDFC First Bank
Retail, Retail, Retail
IDFC Bank, which started operations in October 2015, had a bumpy ride in the first few years. The legacy of IDFC’s infrastructure lending past was a weight and attempts to grow retail loans and deposits organically were proving to be a struggle.
After a failed merger attempt with the Shriram Group, IDFC Bank merged with Vaidyanathan-promoted Capital First, giving the lender its current avatar of IDFC First Bank.
From the start, Vaidyanathan said the bank would focus largely on retail lending, a business where he spent most of his career while at ICICI Bank.
As of December 2020, retail loans made up 60% of IDFC First’s book, up from 49% in December 2019. The bank’s total loan assets as of Dec. 31 stood at Rs 1.1 lakh crore.
Mortgage financing and consumer loans dominate the bank’s retail loan portfolio, constituting 72% of total retail assets. The consumer loans segment includes two-wheeler loans, used cars financing, gold loans and consumer durables loans, Vaidyanathan said.
“Mortgages will be the bedrock of our growth story. But we would also grow our gold loans, two-wheeler loans, small business financing and rural loans to achieve the 25% yearly growth target,” Vaidyanathan said.
But these are businesses that all large private banks are looking to grow. IDFC First’s relatively higher cost of funds will mean that its asset strategy would need to include riskier lending, said an analyst.
“Considering the higher cost of funds for the bank, it would effectively have to take higher risks in the retail lending portfolio to maintain healthy margins. But the question will be on the quality of underwriting on this book,” said Dhananjay Sinha, director and head- institutional research, Systematix Group. The higher risk may directly result in a higher credit cost for the bank, but the current fundraising plan should address this, he added.
IDFC First Bank has 48.31% of its deposits in the form of current account and savings accounts. However, it has maintained a relatively high-interest rate of savings deposits at 7% till recently. In February 2021, the bank lowered its savings account deposit rate to 6% for deposits up to Rs 1 crore.
In addition, it has high-cost legacy borrowings.
We have about Rs 35,000 crore worth high cost legacy borrowings on our liabilities, where the average cost is 8.5% and that is trending downward. Considering the growth in our retail deposit base, there is a great opportunity for us to repay the high cost liabilities in the next three to four years and improve our cost base.V Vaidyanathan, MD and CEO, IDFC First Bank
The bank’s current blended cost of funds stands at around 6.8%, he said.
Should the repricing of infrastructure bonds go smoothly, the bank will benefit, said Asutosh Mishra of Ashika Institutional Research. “We feel that with the repricing of the infrastructure bonds on the bank’s liabilities profile, its cost of funds is likely to improve significantly. This would have a positive impact on the margins,” Mishra said.
Bad Loans Not Yet A Problem Of The Past
While IDFC First Bank appears eager to grow, asset quality concerns are not yet a thing of the past. The Covid-19 crisis has pushed up bad loans at the lender to nearly double of its long-term average.
IDFC First Bank’s proforma gross non-performing asset ratio stood at 4.18% in the third quarter, as compared with 1.87% in the September quarter. The proforma bad loans include those accounts which should have been classified as NPAs if the Supreme Court had not barred lenders from doing so after August 31.
The proforma gross NPA ratio for the retail portfolio rose to 3.88% in December, as compared with 0.79% as of September 30, the bank’s investor presentation shows.
According to an analyst who spoke on conditions of anonymity, the weakness would largely be coming from the legacy book which the bank had inherited from Capital First Ltd, after the merger.
Vaidyanathan acknowledges the rise in stress but believes it is not out of line with the rest of the industry. A Macquarie report from December notes that the retail bad loan ratio for the banking industry stood at around 2% as of March 2020, which could rise to 4% this year.
“Our long term average rate for retail gross NPA has been around 2.27%. This would mean that the current NPA rate is about 161 basis points higher than our what we usually see. We feel this is okay, considering the scale of the pandemic,” Vaidyanathan said.
Further, IDFC First Bank’s total restructured loans stood at 0.8% of total assets or Rs 884 crore at the end of the third quarter. Considering the restructuring proposals which are pending execution, this amount could increase to 1.8-2% of total assets, or Rs 2,000-2,200 crore, the bank said in its investor presentation.
Looking at factors such as the collection rate of 98%, the vintage of these loans and the resolution rate of the bank, the elevated NPA rates would come down to the long-term average in the next 2-3 quarters, Vaidyanathan said.
In the July-September quarter, the bank made Rs 1,400 crore in additional provisions to protect its balance sheet from the impact of Covid-19. Again in the December quarter, it set aside Rs 390 crore as additional provisions. Total provision coverage ratio for the bank stood at 75% at the end of the third quarter.
Despite the recent spike in bad loans, the IDFC First Bank stock has outperformed other mid-sized lenders since the start of this calendar year, largely owing to the strong financial performance displayed by the lender, said Mishra of Ashika Institutional Research.
The underwriting of loans at IDFC First is based on cash flow-based projections, rather than just the quality of the security, which is something other large retail lenders like HDFC Bank have used successfully, he said.
With adequate funding, IDFC First will hope to clean-up the existing balancesheet and lend into India’s economic recovery.
According to Vaidyanathan, of the Rs 71 lakh crore in commercial credit in India, Rs 52 lakh crore are loans to entities with ticket size of Rs 50 crore and more. “If ticket size is Rs 50 crore, these are obviously relatively larger corporates. The small borrowers have clearly not been financed, and that is an area the banking system must grow” he said.