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Liability re-pricing and operational efficiency to drive RoE

? IDFC First Bank (IDFCFB) has strengthened its balance sheet over the past few years as it consciously increased the mix of retail business. The bank reported 5x growth in retail deposits over the past three years and simultaneously improved CASA mix to 50%. Further, the retail loan book posted an impressive 31% CAGR over FY19-22.

? IDFCFB is well positioned to benefit from gradual run-down of its high-cost legacy borrowings over FY23-26E (INR224b at 8-9% cost) and replace them with deposits (at ~5.5% cost). ~77% of such bonds will be refinanced by FY25E. This will potentially add ~INR7.5-8.0b to NII (FY22 NII: INR97b) in due course.

? IDFCFB has made substantial investments in building the franchise, which has resulted in sub-optimal cost metrics. However, we expect the operating leverage to improve (C/I ratio at 66% by FY25 vs 75% in FY22) thereby aiding earnings.

? The bank is entering a phase of strong loan growth as the drag from wholesale book moderates. This will be aided by a strong growth in profitability due to replacement of high-cost borrowings, better cost trends and controlled credit costs (1.3-1.5%).

? We estimate return ratios to improve sharply with RoA/RoE reaching 1.3%/ 13.9% in FY25E, respectively. We initiate coverage with a ‘BUY’ rating and a TP of INR70 (premised on 1.5x Sep’24E BV). A key near term event would be the merger of IDFC Ltd and IDFCFIRST. IDFC owns 36.5% stake and both entities have accorded in-principle approval towards the merger (link1/link2).

Loan book retailization on track; estimate 21% loan CAGR over FY22-25

IDFCFB’s strategy since the time of the merger with Capital First has revolved around building a loan book with a primary focus on retail assets. The share of retail assets thus rose to 74% in 1QFY23 from 38% in FY19 – well ahead of the timelines the bank had set for itself at the time of the merger. Over the past three years, overall funded assets reported a modest 6% CAGR as the wholesale book declined 46% due to run-down of legacy infra book while retail and commercial loans posted 31% CAGR. Thus, the share of wholesale book/ legacy (infra) reduced dramatically to 26%/5% in FY22 from 62%/19% in FY19, respectively. We now estimate total loans to clock 21% CAGR over FY22-25E as the drag from wholesale book moderates.

Well-diversified retail asset base with balanced share of all segments

IDFCFB has scaled up its retail and commercial loan book at a robust pace of 31% CAGR over FY19-22. Within this, the share of different segments such as consumer loans, home loans, LAP, rural finance, wheels and commerical loans is fairly well balanced with mortgage (including LAP) accounting for 37% of total loan book. Credit card has a low share in the mix (2%) as it is a recently launched product and is in a scale-up phase.

Deposit franchise scaling up rapidly; CASA mix improves to 50%

The bank has progressed fairly well on the liabilites front and scaled up retail liabilities at an impressive 73% CAGR during FY19-22. Thus, the share of retail deposits has increased to 67% in 1QFY23 from 19% in FY19.Since the merger, IDFCFB has consistently expanded its footprint by opening 445 branches and 695 new ATMs. This has played a critical role in deposit mobilization and boosted CASA ratio to 50% in 1QFY23 from a mere 11% in FY19. Simultaneously, IDFCFB has also invested in digital platforms and capabilities. A strong brand, quality service levels, transparency and customer friendly products have enabled IDFCFB to maintain its strong deposit momentum

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