IDFC Bank

Overview

IDFC Bank is an Indian Banking Company. It was founded in the year 2015. It received its
universal banking licence in July 2015 from the Reserve Bank of India. The headquarters of
the bank are in Mumbai, Maharashtra, India. The current CEO of the IDFC First Bank is Mr V.
Vaidhyanathan.

As of March 31 2019, the IDFC First Bank has built a national footprint through the operation
of 242 branches. Out of 242, 133 are Urban Bank Branches and 109 are the Rural Bank
Branches. It has 454 Corporate Business Correspondent (BC) branches, 141 ATMs and 102
asset-servicing branches spanning across cities in India. It also hosts 3 Central Processing
Centers and 1 Clearing Hub primarily in the urban areas.

The IDFC First bank aims to serve corporate and private customers in India. This also includes
the infrastructure sector that IDFC specialized in from its founding in 1997. The bank also
strives to provide services to people in rural areas and to the self-employed.

The bank was the first bank in the country to launch the Aadhar linked cashless merchant
solution. It also signed Mr.Amitabh Bacchan, the popular Bollywood actor as its brand
ambassador in March 2020. The IDFC Bank also entered into a strategic partnership with
MobiKwik. MobiKwik is a digital payment solution company. Together, they launched a
co-branded virtual Visa prepaid card for customers of MobiKwik.

IDFC First Bank is listed on the National Stock Exchange of India and the Bombay Stock
Exchange.

The bank management has the following core values at the heart of its operations: Honesty,
Balance, Collaboration and Drive.

MERGER

In January 2018, the formerly known IDFC Bank and Capital First went in for a merger. Their
merger entity was named as the IDFC First Bank in December 2018. The shareholders of
Erstwhile Capital First were to be issued 13.9 shares of the merged entity for every 1 share
of Erstwhile Capital First. The merger was announced for the betterment of both the
entities. It was aimed at strengthening the position of both.

SERVICES

IDFC First bank offers an array of services and products like Consumer banking, Home loans,
Loans against property, Personal loans, Consumer Durable loans, Vehicle loans, Business
loans, Micro-Enterprise loans, Private banking, Wealth Management, Investment banking,
Corporate Banking, Wholesale banking.

ACHIEVEMENTS/RECOGNITIONS
Over its years of operation, IDFC First Bank has received several accolades for its excellent
customer service and banking operations. Some of the laurels achieved by IDFC First Bank
are as follows:

● Frontiers Finnoviti Awards 2019

● Asian Private Banker’s Best Private Bank-Digital Innovation and Services 2019
● Sixth Payments and Cards Summit 2018
● NASSCOM DSCI Excellence Award 2018
● Indian Banking Summit and awards 2018
● IDC Digital Transformation Awards 2017
● IDFC Bank at TISS CLO Awards 2017
● Honnali Branch Launch Bharat Banking

IDFC First Bank is a private sector bank in India. It was formed in December 2018 after the
merger of IDFC Bank and Capital First Limited. The bank provides a range of financial
products and services to individuals, businesses, and corporates.

IDFC First Bank offers various banking services, including savings accounts, current accounts,
fixed deposits, and recurring deposits. It also provides loans such as personal loans, home
loans, business loans, and vehicle loans. In addition to traditional banking services, IDFC First
Bank has also introduced digital banking solutions to enhance customer convenience. As of
March 31, 2023, the bank has a wide network of 809 branches and 925 ATMs across India to
cater to its customers.

Highlights
Enterprise:

Positive:

● IDFC First Bank was formed after the merger of IDFC Bank and Capital First on Dec
18, 2018.
● IDFC Bank got a retail lending partner, Capital First, which was already having scale
and profitability, while Capital First got a partner with a banking license
● Currently, the bank is completely focused on tapping the retail segment, which is
reflected in continuously rising Retail Assets % in Total Assets
● As a part of the Asset Restructuring Strategy (from Wholesale to Retail Assets), the
bank is building Retail-oriented Asset Book even at the cost of a decline in overall
Asset Book Size, Retail Assets % Mix increased from 35% in Dec-18 (during the
Merger) to 80% as of Jun-23, led by Home Loan, LAP, Consumer Loan, Credit Card
business
● IDFC First Bank is currently undergoing the Brand Building process & tapping various
Business Opportunities in Banking & Financial Services (Credit Card, Wealth
Management)
● The bank has a branch network of 824 branches as of June 30, 2023, bank added 173
branches over last 1 year.
Industry:

Positives:

● Public sector banks losing market share to Private share banks

● Financialisation of Savings - As of FY23, 64% of India’s Household Savings are into
Physical assets and just 36% are into financial assets such as Stocks, mutual funds,
insurance, and Fixed Deposits. This ratio is expected to improve further on account of
the financial literacy of the population towards financial products.
● Key Drivers for Indian Banking Sector: Big Growth Opportunities available – Organic
& Inorganic, an added edge for Consolidation opportunities, Infrastructure spending,
Favourable Government Policy, Rising Disposable Income & increased Consumerism,
Easier access to credit
● HDFC-HDFC Bank Merger is poised to have a substantial impact on the Indian
banking industry
● Combined New HDFC bank ------> Broader Product Portfolio & Enhanced Market
presence ------> It will potentially intensify the competition within the sector
-------> This development may prompt other banks and financial institutions to
reassess their strategies and explore similar mergers or partnerships to maintain
competitiveness --------> Furthermore, the merger could initiate a trend of
consolidation in the banking industry, with larger entities assuming a dominant
position
o This consolidation may contribute to: Improved stability and resilience of the
Banking sector
o Fostering an environment conducive to sustainable growth and development

RBI’s Monetary Stance:

● Rate Hike Cycle to Augur Well for Banking Industry With the building up of Inflation,
RBI Hiked Policy Repo Rate in an Off-cycle Rate Hike in May 2022, in June 2022 MPC
Meet, in Aug, in Sept Meet and in Dec Meet as well and is expected to raise Repo
Rate further in last CY 2023 to curtail rising inflation. So, Early Pass on of Rate Hikes
to Borrowers by raising interest rates
● Delay in Passing on the Rate Hike Impact on Liability-side – Interest Rate on Savings
Ac Deposits & FDs
● Expansion in Net Interest Margin
● Thus, Rate Hike Cycle is the Strong Earnings Season for the Banks on Tailwinds
through Core NII Growth
● Credit Growth Catching up Fast in line with Economic Recovery: Bank Credit grew by
15% in FY23 vs 9.6% in FY22 vs 5.6% in FY21
o Retail loans have emerged as the primary driver of bank credit in FY22 and
have now the largest share (28.4%) in outstanding credit of All SCBs,
displacing industrial loans (26.7%)
 o Outlook for bank credit growth is expected to remain positive due to
Economic Expansion, Rise in government and private capital expenditure,
Rising commodity prices, Retail Credit Push – Key Growth Lever for IDFC First
Bank
● Aggregate Deposit Growth slightly improved to 9.6% in FY23 from 8.9% in FY22 vs
11.40% in FY21, due to improved interest rates, and a flight to Capital Markets/
Digital Asset classes in the expectation of higher returns
● Digitalization – Next Growth Impetus for Indian Banking - Robust Growth in Digital
transactions in FY22 with strong expansion in Retail Payments in FY22

Key Positive Developments:

● Sectors benefitting from the PLI scheme are expected to see an increase in Capex in
FY23
● Good prospects of Rabi output augur well for rural demand
● Conflict in Ukraine opened up New Opportunities for India notably in Agri Sector
● Free Trade Agreements with Australia & UAE to create a number of growth
opportunities
● Reordering of global supply chains presents a unique opportunity to India, a
proposition that holds tremendous potential
● Improving Asset Quality and Capital Positioning
o The asset quality of banks - Gross NPAs and Net NPAs of the banks have
improved from the pre-pandemic levels. Also, the fresh slippages have
broadly been brought under control. Banks have also enhanced their
provisions including provisions for restructured accounts.
o The gross non-performing asset (GNPA) ratio of scheduled commercial banks
(SCBs) declined to a 10-year low of 3.9% as of March 2023 from 5.0% as of
Sept-22. GNPA of SCBs is expected to fall further to 3.6% by March 2024, the
Reserve Bank of India (RBI) said in the latest Jun-23 Financial Stability
Report. One of the reasons for the fall in gross NPA in 2022-23 was large
write-offs by banks.
o While net non-performing assets (NNPA) dropped to an 11-year low of 1% as
of Mar-23 from 1.3% in Sep-22.
o Macro stress tests for credit risk reveal that SCBs would be able to comply
with the minimum capital requirements even under severe stress scenarios.
o Asset quality of Indian banks started deteriorating in the early part of the last
decade and peaked in March 2018 with gross NPA hitting 11.5% of gross
advances. Since then, the asset quality of banks has been improving.
o The improvement in the asset quality is broad-based and the preliminary
assessment of the health of the banking sector is encouraging, Mr. M
Rajeshwar Rao, deputy governor of the Reserve Bank of India (RBI) said.
● Mr. Rao also cautioned that the Banking industry has to exhibit prudence and
ascertain whether the current levels of asset quality being exhibited are on account
of improvement in fundamentals of business, deleveraging, and efficiency gains or on
account of support extended by authorities through various measures.
 ● Banks have also shored up their capital base to deal with any untoward situation that
may arise going forward. Most of the banks have comfortable capital positions,
which would position them well to support economic recovery. Thus, Banks are
well-placed to support the economy with a rise in credit demand.

Negatives:

Key Risks for Banking Sector:

● Geopolitical Tensions & subsequent Sanctions -----> Supply Chain Risk ----->
Commodity Inflation – Crude Oil, Agricultural Commodities, Energy Products, Metals
------> Cascading Impact on Global Economy ------> Poses Risk for Overall Banking
Sector

Governance:

Positive:

● Mr. Vaidyanathan, who was Chairman of Capital First before the merger, was
appointed as Managing Director and CEO. Mr. V. Vaidyanathan has the capacity to
deliver with his vast experience in the financial industry.
● The visionary leadership of Mr. V. Vaidyanathan is driving the bank on a pure
Retail-oriented theme, on a focused strategic path
● Stable Promoter Holding - IDFC Financial Holding Company's stake is stable at 39.93%
as of June 30, 2023
● DII holds 7.71% while FII holds 20.85% as of the end of the Jun-23 quarter.
● The Boards of IDFC First Bank Ltd and IDFC Limited approved their merger with each
other. The share exchange ratio for the amalgamation of IDFC Limited with IDFC First
Bank shall be 155 equity shares of face value of Rs 10 of IDFC First Bank for every 100
equity shares of face value of Rs.10 of IDFC Limited.
● The merger will lead to simplification of the corporate structure of IDFC FHCL, IDFC
Limited and IDFC First Bank by consolidating them into a single entity and will help
streamline the regulatory compliances of the aforesaid entities. The merger will help
create an institution with diversified public and institutional shareholders, like other
large private-sector banks, with no promoter holding

Financials:

Positive:

● Banks’ 3-Year Revenue Growth is 12% CAGR.

 ● Banks’ 3-Year Net Profit Growth is 42% CAGR.
● Strong Core Operating Performance across Net Interest Income (NII),
Pre-provisioning Operating Profit (PPOP) and Net Profit:
o Net Interest Income at Rs.3,745 Cr in Q1 FY24 vs Rs.2,751 Cr in Q1 FY23, a
growth of 36% YoY and 4% QoQ
o Pre-provisioning Operating profit at Rs.1,427 Crores in Q1 FY24 vs Rs.987
Crores in Q1 FY23, a growth of 45% YoY and 6% QoQ, driven by continued
strong business growth
o Profit After Tax at Rs.765 Cr in Q1 FY24 vs Rs.474 Crores in Q1 FY23 quarter, a
growth of 61% YoY and declined by 5% QoQ from Rs.803 Cr in Q4 FY23
quarter
● Total Deposits at Rs.1,54,427 Cr as of Jun 30, 2023, vs Rs.1,13,349 Cr as of June 30,
2022, reporting a growth of 36% YoY and 7% QoQ. CASA deposits grew 27% YoY but
flat QoQ. Term Deposits reported a whopping 46% growth YoY and 14% QoQ, due to
deposit mobilization from CASA to TD amid rising FD rates.
● Total Advances at Rs.1,67,374 Cr as of Jun 30, 2023, vs Rs.1,32,555 Cr as of June 30,
2022, a growth of 25% YoY and 7% QoQ
● Liquidity Coverage Ratio at 125% in Q4 FY23.
● Strong uptick in Return Ratios
o The Banks Return on Assets is at 1.26% in Q1FY24 vs 1.23% in Q4 FY23 vs
1.11% in Q3 FY23 vs 1.07% in Q2 FY23 vs 0.97% in Q1 FY23.
o Return on Equity is at 11.78% in Q1FY24 vs 12.30% in Q4 FY23 vs 10.72% in
Dec 2022 quarter 10.13% in the Sept 2022 quarter vs 8.96% in June 2022
quarter.
o Management's vision is to Generate ROE @ 16-18% and bank's business
model is designed to generate 2% ROA
● Asset Quality of the Bank has been improving QoQ over the last few quarters driven
by bank's stringent Underwriting Process
o Gross NPA improved drastically to 2.17% in the Jun-23 quarter from 2.51% in
the Mar-23 quarter vs 2.96% in Dec 2022 quarter 3.18% in Sept 2022 quarter
vs 3.36% in the June-22 quarter.
o Net NPA at 0.70% from 0.86% in Mar-23 quarter vs 1.03% in Dec 2022 quarter
vs 1.03% in Sept 2022 vs 1.30% in June-22 quarter. Bank's strong and
disciplined underwriting capabilities have helped it maintain NPA in the
corridor of 2% and 1%.
o The Provision Coverage Ratio improved to 83.1% in Q1FY24 80.3% in Q4 FY23
vs 76.60% in Q3 FY23 vs 76.49% in Q2 FY23 vs 73.13% in Q1 FY23.
o In Q4-FY23, the Bank had trading gains of Rs.216 Cr, and the Bank utilized
Rs.79 Cr of the same to increase the PCR QoQ ---> from 80.3% to 83.1%
● IDFC First Bank is having the highest NIM in the overall Banking Industry, standing at
6.33% in Q1FY24
● Capital Adequacy Ratio is getting strong gradually and stood at 16.82% in Q4 FY23 vs
16.10% in Q3 FY23 vs 15.35% in Q2 FY23 vs 15.77% in Q1 FY23.

Negative:
 ● Moderation in Net Interest Margin QoQ due to deposit mobilization from low-yield
CASA to higher-yield Term deposits, NIM declined to 6.33% in Q1FY24 from 6.41% in
Q4FY23. NIM for FY23 was 6.05%
● Decline in CASA Ratio to 46.5% in Jun-23 from 49.8% in Mar-23 vs 50% in Dec 2022
from 51.28% in Sept 2022 quarter. The fall in the CASA ratio is led by shift in deposits
from CASA deposits to Term Deposits amid rising FD interest rates.
● Operating expenses growth continues at a sharp clip as the bank remains in
investment mode. In Q1FY24, Operating expenses grew 37% YoY and 6% QoQ.
Operating expenses are majorly towards new branch addition for building retail
liability franchises and credit card franchises. Over the last 1 year, the bank added
total 173 new branches, from 651 in Jun-22 to 824 in Jun-23.
● So, in line with higher opex, the cost-to-income ratio still remained at a higher range
vs other peer private banks (40-50%). Though Bank has reduced Cost to Income ratio
in 4 years from 95.1% (Pre-merger) to 71.94% as of Jun-23. Over the span of last 2
years also, C/I ratio improved significantly from 77.2% in Jun-21 to 71.94% as of
Jun-23. Bank said its Cost to income is expected to come down to <50% with scaling
up of business, where economies of scale will play a key role, post the inflection
point of the new branches set up.

Valuation:

Positive:

● Current PE stood at 21.2x (After the turnaround in EPS from negative to positive
territory and EPS is gaining momentum due to profitability inching new highs every
quarter). 1/3-Year Median is 21/21.8.
● Current PB: 2.18 vs 1/3-year Historical Median PB range is at 1.61x/1.48x, thus the
stock is trading at a premium compared to its average historical valuations.
● The stock has delivered outperformance over last 1 year, reporting a growth of 97%
YoY vs Sensex (11%). So, the recent rally in the stock price has weighed on its PB
ratio.
● Fair Valuation: Peer Comparison: IDFC First Bank is not getting Premium Valuation by
the market like HDFC, ICICI & Kotak Banks mainly on account of comparatively lower
Institutional Holding due to the bank’s Stressed Asset Pool & NPA concerns of Infra
book