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Result Highlights

* Asset quality: Gross slippages (estimated) amounted to Rs 11.5bn, translating to an annualized slippage ratio of 2.9%
* Margin picture: NIM at 6.41% was up 28 bps QoQ, due to favourable change in loan mix, among other factors
* Asset growth: Advances grew 5.6%/24.4% QoQ/YoY driven sequentially by Commercial Finance and various segments of Retail loans.
* Opex control: Total opex rose 8.1%/28.5% QoQ/YoY, staff expenses rose 9.2% /32.6% QoQ/YoY and other expenses rose 7.7%/26.8% QoQ/YoY.
* Fee income: Fee income rose 5.7%/40% QoQ/YoY, where Retail fees comprised around 91% of total fees.

Our view – Credit cards and liabilities opex key monitorables

Management explained that the still elevated cost to income ratio for the bank is caused by elevated ratios for liabilities and credit cards businesses: Total opex, at Rs. 34.4 bn, is up 8% QoQ and 29% YoY. Cost to income ratio was 68.8%, down -760bps YoY and -280 bps QoQ. The cost to income ratio for the liabilities business is down from 198% in FY22 to 174% in FY23 whereas, the cost to income ratio for the credit cards business is down from 240% to 165%. One of the businesses that would move the needle would be the credit card business, whose cost to income ratio would decline below 100% in FY24. The cost to income ratio for the liabilities business would also come down

Sequentially, the loan mix evolved in favour of retail loans and commercial finance: Share of retail loans rose 134 bps QoQ to 68.6%. Within this, the share of rural finance rose 126 bps QoQ to 11.9%. The share of commercial finance rose 51 bps QoQ to 9.9%. This leads us to believe that yield on advances would have risen, ceteris paribus. Other positive aspects for margin included the bank is not incrementally investing in the RIDF book, which continues to run off. Furthermore, PSLC drag for FY23 was Rs 0.3bn compared with Rs 1.6bn for FY22. On the cost of deposits aspect, the blended SA rate for the bank is 5.37%, which was up about 10 bps QoQ. We are not privy to the rise in overall cost of deposits.

The estimated gross slippage ratio of 2.9% is broadly in line with what has been experienced earlier in the financial year: We note, from the Basel III Pillar 3 Disclosures, that the total NPA addition in FY23 was Rs 45.43bn. We, further, estimate, from the conference call transcripts, that the gross slippage / NPA addition for 9MFY23 was Rs 33.9bn. This implies that the gross slippage for 4QFY23 amounts to Rs 11.53bn, which translates to an annualised gross slippage / NPA addition ratio of 2.9% for 4QFY23.

We maintain ‘ADD’ rating on IDFCB with a revised price target of Rs 70: We value the bank at 1.7x FY24 P/BV for an FY24E/25E RoE profile of 11.0%/13.6%.

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