March 16, 2023
analysis123 analysis123
IDFC FIRST BANK, Recent capital raise to sustain growth momentum
Call & Research Report by Motilal Oswal
Sector: Bank – Private
CMP Rs. 55, Target Rs. 70 (27% upside potential)
Target Period: 12 Months
Traction intact in liability franchise; estimate FY25 RoA at 1.3%
● IDFC First Bank (IDFCFB) is focusing on growing its loan book through retail and commercial loans, which form 77% of funded assets and saw a 31% CAGR over Dec’20-Dec’22. Since the drag from the wholesale book is moderating, we expect the bank to embark on a strong growth trajectory. We estimate a 25% CAGR in loans over FY23-25.
● The bank has reported 5x growth in retail deposits over the past three years and simultaneously improved the CASA mix to 50%. During 9MFY23, traction in CASA and retail deposits remained healthy despite increased competition, thus demonstrating its ability to garner deposits to fund business growth.
● IDFCFB is well positioned to benefit from a gradual run-down of its high-cost legacy borrowings over FY23-26E (INR224b at 8-9% cost) and replacing them with deposits (at ~5.6% cost). This is likely to support NII growth which coupled with improving operating leverage should aid overall earnings.
● Post the recent preferential allotment of ~INR22b by its parent, their stake has increased to 40% from 36.4%. The book value has thus increased by 2-4% for FY23/24, while the Tier 1 ratio improved by ~130bp to 14.8%.
● We believe that the recent capital raise should help IDFCFB fund growth for at least one year, as the bank is growing its funded assets at a healthy pace of 25%. We estimate RoA/RoE to reach 1.3%/14.0% by FY25. Maintain BUY with an unchanged TP of INR70 (1.5x Sep’24E BV).
Momentum in loan book continues; estimate 25% loan CAGR over FY23-25
IDFCFB is focusing on building a granular loan book by mainly growing retail assets. Over FY19-22, total funded assets saw a modest 6% CAGR, while retail and commercial loans posted a strong 31% CAGR. The mix of retail and commercial assets rose to 77% in 3QFY23 from 38% in FY19 (72% in FY22). We further note that growth has started to pick up for the past few quarters, with funded assets growing by a healthy 25%, led by robust growth of 37% in retail and commercial loans. We expect the momentum to remain intact and estimate a 25% CAGR in loans over FY23-25.
Deposit franchise holding well despite competition; CASA mix healthy at 50%
The bank has progressed well in building a granular liability franchise, with a 73% CAGR in retail liabilities over FY19-22. Thus, the share of retail deposits increased to 77% of customer deposits in 3QFY23 from 32% in FY19 (73% in FY22). The CASA ratio too increased to 50% in 3QFY23 and showed significant resilience even during 9MFY23. IDFCFB was among the few banks to post a healthy growth in CASA deposits in 3QFY23, while most other banks reported either flat growth or a decline in CASA deposits due to rising competition. As a result, we believe that the bank’s ability to garner deposits, its digital capabilities and its customer-friendly products will help it maintain strong deposit growth.
Asset quality – legacy issues behind; exposure to stressed groups manageable
The legacy issues related to asset quality are largely behind as the retail book has been reasonably tested during Covid, while stress in the wholesale book has been recognized and well provided for (99% PCR in the corporate segment). The bank’s asset quality is likely to remain healthy with incremental focus on building a granular retail portfolio where it has superior underwriting expertise. The GNPA/NNPA ratios in retail assets came back to their long-term range of 1.87%/0.7% as on 3QFY23. SMA 1 and 2 were under control at 1%, while the restructured book moderated to 0.9% in 3QFY23. Further, the bank’s exposure to the large corporate group stands at 0.06% (fund based) and 0.51% (non-fund based) of funded assets. It also has INR3.5b exposure to the stressed telecom, which appears manageable.
Operating metrics on track; 3QFY23 RoA improved to 1.1%
IDFCFB has been reporting strong performance for the past few quarters, driven by higher NII, healthy retail deposit growth and higher fee income. Business growth remained robust at 26% YoY in 3Q, driven by a strong 37% YoY growth in retail loans. Growth in deposits was encouraging at 8% QoQ in 3Q, with CASA deposits up 5% QoQ and the CASA ratio at 50%. Over 9MFY23, the bank has reported a PAT of INR16.3 vs a loss of INR2.0b in 9MFY22. Margins expanded to 6.36% in 3QFY23. Asset quality has also witnessed a consistent improvement with tight control over credit costs. The bank reported RoA/RoE of 1.11%/10.72% in 3QFY23, and weestimate RoA/RoE to improve to 1.3%/14.0% by FY25.
Preferential allotment of INR22b increases Tier-1/BV by 10%/4%
IDFCFB’s board on 4th Feb’23 approved a preferential issue of ~INR22b to IDFC Financial Holding Company Limited, a wholly-owned subsidiary of IDFC Limited, at a price of INR58.18. Post this issue, the shareholding of IDFC Financial Holding Company Limited in IDFCFB has increased to 40% from 36.4% at present. The preferential issue has resulted in a marginal 2-4% increase in the book value in FY23/24. Further, the Tier 1 capital of the bank has increased by ~134bp to 14.83% from 13.49% in 3QFY23. We believe that the recent capital raise should help IDFCB fund incremental growth for at least one year, as the bank is growing its funded assets at a healthy 25% and consumed 134bp of capital in the past one year.
Valuation and view
IDFCFB is entering a phase of strong loan growth as the drag from the wholesale book moderates. We estimate a 25% CAGR in loans during FY23-25. The bank has scaled up retail deposits (77% of customer deposits) at a robust 73% CAGR over FY19-22, with a strong CASA mix at 50%. It has invested well in digital capabilities, branch and product expansion and has presence across retail products. Cost ratios are elevated but will moderate as scale benefits come into effect, while the retirement of high-cost borrowings aids NII growth. We estimate a 37% CAGR in PPoP over FY23-25, while controlled credit costs will drive a 36% CAGR in PAT over the similar period. We estimate RoA/RoE to reach 1.3%/14.0% by FY25. Maintain BUY with an unchanged TP of INR70 (premised on 1.5x Sep’24E BV).
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