Diversification, deposit growth put IDFC First ahead of Bandhan Bank

Both the banks have relied on inorganic options for growth and diversification

Bandhan Bank and IDFC First Bank marked their fifth year of operations in 2020. The interesting similarity between the two is that both took to scale through inorganic routes. Bandhan’s acquisition of Gruh Finance in 2018 brought in a housing finance portfolio and the IDFC Bank’s merger with Capital First (now called IDFC First Bank) gave it the much-needed retail facelift and also ushered organisational changes.

In five years, for the analyst community with 83 per cent polled on Bloomberg positive on Bandhan Bank, it ranks miles ahead of IDFC First Bank in terms of market acceptance and valuations. But if judged on balance sheet strength, IDFC First Bank fares better (see table).

IDFC First Bank’s advantage is its highly diversified book, particularly on the retail front comprising home loans, consumer loans, vehicle loans, apart from micro-, small- and medium-enterprises (MSME) loans. The bank’s ability to sell-down or write off its wholesale assets at the cost of suffering losses (till Q2 FY20) has helped it achieve a retail-oriented (56 per cent of assets) book. However, with Rs 46,377 crore of wholesale loans in the book, Edelweiss says asset quality concerns will dominate if the core business momentum gains in the near future.

 

For Bandhan, while Gruh’s acquisition lifted the housing portfolio to account for 25 per cent of loans, dependence on microfinance loans hasn’t reduced (65 per cent of book), and the share of retail loans is a mere one per cent. The bank’s diversification exercise is yet to bear fruits.

As for profitability, with net interest margin (NIM) at eight per cent Bandhan Bank seems lucrative for now, though margins have steadily reduced over years. Equirus Securities expects NIM to contract to 7.1 per cent in FY23 amid a shift to relatively low-yield products. In case of IDFC First Bank, NIM has expanded from less than two per cent in FY19 to 4.57 per cent in Q2'FY21, largely owing to a retail-centric book. With continued focus on these loans, NIMs may remain steady.

Even on parameters like current account – savings account (CASA) ratios and deposit growth, IDFC First Bank has outpaced Bandhan, bridging the gap seen about a year ago. It’s a laggard though, in terms of its return profile which is just about turning positive. Analysts at ICICI Securities expect the bank to clock 2.7 per cent return on equity in FY21. “With a prudent approach on the provisioning front, moving away from risky sectors and improving funding profile, we believe return ratios are set to improve meaningfully (for IDFC First Bank)”, they note. Meanwhile that of Bandhan is estimated at 22.8 per cent.

How soon IDFC First Bank runs down its wholesale loans will be critical to win the Street’s confidence.