IDFC First Bank's retail aspiration is swallowing capital

Proforma NPA in Q3 stood at 4.18 per cent and retail NPA at 3.88 per cent is highest among top 7 banks

Among many things, it’s the retailisation strategy that has worked in favour of IDFC First Bank since 2018, when it was merged with Capital First and V Vaidhyanathan took over from Rajiv Lall to head the bank. From 13 per cent share of retail loans ahead of the merger, the share of these loan jumped to 60 per cent in December 2020 quarter (Q3). The bank’s decision to write off unviable corporate loans and adequately provide for them where necessary, at the cost of incurring heavy losses since the merger, has immensely lifted its balance sheet.

Its only lately that the Street is acknowledging this metamorphosis and in the past six months, IDFC First Bank’s stock has more than doubled to join the list of outperforming bank stocks. Therefore, the decision to raise Rs 3,000 of equity against the backdrop of strong market acceptance isn’t much of a surprise.

Even as this could be the second fund raise in FY21, the stock has appreciated 17 per cent  since the bank announced its capital raise plan last week, shrugging away concerns of any potential value dilution in the process. Analysts at Credit Suisse have recently upgraded the stock from ‘underperform’ to neutral and note that with funding cost to stay low, the bank’s return on assets is set to increase to one per cent in FY23 from 0.3 in FY21.

However, amid the euphoria, there are some aspects which investors should be cautious.

The capital consumption has been quite elevated since FY19 and coincides with the bank’s clean-up and retailisation efforts. Therefore, its important that after the proposed fund raise, the bank augments its capital position by deploying its net profit. To that extent, while the fund raise is touted as growth capital, there is stress accumulating in books and the Street will monitor if the coffers are dipped into for asset quality management.

At 4.18 per cent proforma gross non-performing assets (NPA), that is without factoring for Supreme Court’s standstill on asset recognition, this is the highest stress that bank has been through so far. Proforma gross NPA for retail loans at 3.88 per cent is also unsettling. These are never seen before levels for the bank, and even during the stressful quarters post demonetisation Capital First’s gross NPA was contained at less than three per cent. Analysts at Edelweiss note that their prognosis of systemic asset quality remains bleak. “Watch out for IDFC First Bank’s asset quality; the next few quarters will be crucial,” they add.

For now, the bank has guided for a nomalisation of stress in the next three quarters. Meeting the guidance will be critical for the stock to sustain the re-rating momentum.