IDFC Bank busy battling bad loans; reaching scale still a long journey

The bank had a slow start in mobilising retail franchisee

IDFC Bank has been in news quite often in the last six months, mostly in connection with the bank acquiring a non-banking finance company (NBFC). Latest reports suggest that the bank could be looking at Capital First from an acquisition perspective. Analysts say they would watch out for the bank’s board meeting on January 18.

“The past has seen the bank being open to acquisitions, given its attempt with the Shriram deal. We expect something on the similar lines this time as well, as the bank has indicated its inclination to grow inorganically,” says an analyst from a domestic brokerage.  

But, will an acquisition be a game changer for IDFC Bank? Perhaps yes. IDFC Bank has been listed on exchanges since November 6, 2015. The unnerving point is that despite the past two years being reasonably favourable for private banks, IDFC Bank hasn’t had much luck. 

After debuting at Rs 70 apiece two years ago, the euphoria didn’t last for long as IDFC Bank’s shares now trade at Rs 63 levels. In the initial period, the bank was busy battling its legacy, bad loans, and has hence had a slow start in terms of strengthening its liability franchisee and retail presence.

On a positive note, it has put up a decent show in reducing bad loan ratio from over six per cent in FY16 to 3.9 per cent in September 2017 (Q2). While in the process, there has been a reasonable capital sweat out, capital adequacy of 19.3 per cent in Q2 is yet noteworthy and cushions the bank to take on aggressive expansion calls, something which is the need of the hour.

This is because, despite two years of operations, the share of low-cost CASA (current account — saving account) deposits stands at just 8.2 per cent in Q2 down from 9.5 per cent in FY16. While in absolute terms, the bank has shored up its deposit base from Rs 4.6 billion in FY16 to Rs 32 billion in Q2, its funding mix is still largely dependent in bonds and short-term instruments. It’s net interest margin (NIMs) has been under pressure recently, and is vulnerable to fall further if bond yields remain unfavourable. The viable long-term solution is to expand its retail presence, mainly CASA.

Until it gets its house to order, investor confidence could remain low on IDFC Bank stock. Deutsche Bank, which has a ‘sell’ rating on IDFC Bank, points out its concerns on NIMs and cost structure as it hampers the return profile. “We expect return on equity to remain below 10 per cent till FY20,” it adds. Goldman Sachs, post Q2 results, has cut its target price by five per cent to Rs 59 apiece led by similar cut in its FY18 and FY19 earnings estimate for IDFC Bank.