IDFC First Bank progressing on its promises after performance lull

Reasonable improvement in deposit accretion and sharp increase in profitability are the key achievements in Sept quarter

After a prolonged period of underperformance operationally and at the bourses, things seem to be in the mend for IDFC First Bank. The September quarter (Q2) results throw up three developments to indicate the improvement – better mix of retail assets, sharp rise in deposits and an increase in profitability.
 
The share of wholesale loans fell from 87 per cent last year to 55 per cent in Q2, with exposure to this segment down by about Rs 10,000 crore. Also, the share of retail loans, which largely came from the merger with Capital First, rose to 45 per cent in Q2 from 10 per cent a year ago, prior to the merger. Therefore, while the loan book at Rs 1 trillion may have shrunk a bit as the bank rationalised its wholesale loans, retail loans grew by 7.7 per cent sequentially, and in line with the industry trend. This suggests that the composition of assets is moving in favour of retail loans.
 

A similar impact was felt on the liabilities side too, with the share of low-cost current account–savings account (CASA) deposits rising to 18.7 per cent in Q2 from about eight per cent last year. While the bank has a long way to go before it reaches the average 30 per cent mark that many private banks maintain, the Q2 numbers show that it is in the right direction. Likewise, the increase in the share of retail deposits (CASA plus retail term-deposits) to overall liabilities to 34 per cent in Q2, is also a positive.
 
With retail banking having begun to play an important role, profitability also improved sharply from 1.6 per cent a year ago to 3.4 per cent in Q2. At these levels, the net interest margin (NIM) of IDFC First Bank matches the average of the top private banks. Asset quality too was stable, but one needs to keep a tab on the Rs 5,400 crore exposure, including non-funded exposure (five per cent of gross loans), that the bank has to the telecom sector.
 
For now, Q2 being the first quarter in which the bank has posted a profit before tax, it does instil some confidence that the merger is yielding results. But whether or not the bank can touch the 13–15 per cent projected return on equity by FY24 needs to be seen.
 
Analysts at Prabhudas Lilladher say continued retailisation of loans, traction in liabilities, upward NIM trajectory and steady asset quality provide comfort in the medium- to long-term. Valuations at 1.1 times the FY21 estimated book, also the lowest among private banks, makes for an attractive bet.