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Treading well on long term transition path…

IDFC First posted decent results with healthy business traction and stable asset quality. The bank is well on course to achieve its long term objectives of improving retail mix, improving NIMs and granularity on liability side. Net interest income (NIM) was up 15.3% YoY to | 1960 crore despite | 55 crore worth interest on interest reversals. Net interest margins (NIM) were up 4 bps QoQ to 5.09%. The bank has reduced savings interest rate to 4% for deposits below | 1 lakh and peak rates of 5%, which should keep funding cost benign and, thus, aid margins.

Other income was up 74% YoY mainly due to trading gains. Operating expense were up 11% QoQ to | 2156 crore. This rise can be attributed to increased business activity. Cost-to-income ratio (calculated) was up from 75.1% to 76.9% QoQ. Provisions during the quarter remained elevated at | 602 crore, up 25% QoQ. This was mainly due to additional provisions of | 375 crore for Covid-19 risks. This additional provisioning was done from release of | 324 crore worth provisions on its telecom exposure. The bank had tax write-back of | 84 crore during the quarter. As a result, PAT came in at | 127 crore.

Asset quality was stable as GNPA was at 4.15% vs. 4.18% proforma level in the previous quarter. GNPA in the retail segment increased 13 bps from 3.88% to 4.01% sequentially. Total restructured book is now at 0.9% of funded assets vs. 0.8% QoQ. Collection efficiency for early buckets had reached pre-Covid levels but the impact of the second wave of the pandemic needs to be monitored. Though PCR improved to 56.2% from 52.3% QoQ it is still on the lower side. Also, with the pandemic forcing lockdowns again, we may see elevated provisions, going ahead, in order to deal with incremental stress and strengthening of the balance sheet.

Credit growth trajectory for the bank improved QoQ as funded assets were up 6% QoQ, 9.5% YoY to | 117127 crore against flattish growth 0.7% in the previous quarter. Growth in loans was driven by retail assets, which were up 26% YoY to | 71987 crore. They now form 61% of the total book. ECLGS portfolio is at | 1687 crore. Wholesale book was down 14% YoY to | 33920 crore, in line with the management’s strategy. On the liabilities side, total deposits increased 36% YoY to | 88688 crore wherein retail deposit showed strong growth of 88% YoY to | 49610 crore. Wholesale deposits declined 20% YoY to | 24795 crore. CASA deposits saw strong growth of 122% YoY. As a result, CASA ratio jumped to 51.7% vs. 48.1% QoQ, 31.7% YoY.

Valuation & Outlook

In terms of business, the bank seems to be on be on track in its long-term objectives of shifting the loan mix in retail favour and higher retailisation of liability franchisee. The second wave of the pandemic could keep credit cost elevated in the next two to three quarters. Asset quality in the near term and opex structure in the medium term would be key monitorables. We value the bank at ~1.65x FY23E ABV and revise target price to | 65 (| 52 earlier). We maintain our BUY recommendation

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