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Cautious on high valuation and asset quality woes

IDFC First Bank, founded by the merger of erstwhile IDFC Bank and erstwhile Capital First on December 18, 2018. At present, the bank’s total number of branches stands at 601, with a total funded assets to the tune of around ~Rs.1,13,794cr.

* Net Interest Income (NII) reported a growth of 25.3% on a YoY basis, and reported Net Interest Margin (NIM) improved to 5.51% in Q1FY22, compared to 5.09% in Q4FY20.

* Bank is shifting its business from wholesale and infrastructure loan to retail lending and has been successful so far.

* Due to high slippages, asset quality stood elevated with GNPA/ NNPA at 4.61%/2.32% compared to 4.15%/1.86% during previous quarter. Provision Coverage Ratio (PCR) declined to 50.86%.

* With lower PCR and elevated NPA levels, we remain cautious on profitability in the coming quarters.

* We value the bank at 1.5x Adj BVPS of FY23E and downgrade our rating to Reduce with a target price of Rs.46.

Strong top-line; Bottom-line impacted by high opex and provisioning

In Q1FY22 Net Interest Income (NII) reported strong growth of 25.3% on a YoY basis and 3.0% sequentially aided by the expansion of margin. Interest income grew by 3.5%YoY while remained flat QoQ and interest expense reduced by 13.6%YoY and 1.5% sequentially. Net Interest Margin improved 65bps YoY and 42bps QoQ to 5.51 due to a decline in cost of funds due to lowering deposit rate and improving mix of retail loans. Fee and other income increased 75.1% YoY due to high treasury yield and sustained fee income. Bank also reported a high Pre-Provision profit of Rs.1001cr while registered a net loss of Rs.630cr due to large provisioning. Bank has made a provision of Rs.1878.6cr during the quarter including covid provision of Rs.350cr. Total covid provision of the bank stands at Rs.725cr as of Q1FY22.

Improvement in key business figures barring asset quality

Gross Funded Asset of the bank increased 9% YoY to Rs.1,13,794cr. Customer deposit increased 36% to Rs.84,893cr with CASA ratio improving to 50.9%. The bank is shifting its business from wholesale and infrastructure loans to retail lending and has been successful so far. As of Q1FY22, retail constitutes 68% of the total funded asset with retail book increasing 30% YoY to Rs.72,766cr. Bank has reduced its wholesale funded assets by 15% YoY. Infrastructure loan decreased 23% YoY to Rs,10,346cr. CASA deposit increased 98% YoY and resultantly CASA ratio improved to 50.86% from 33.74% in Q1FY21.

Elevated NPA levels due to high slippage

During the quarter asset quality took a hit as slippages for the quarter stood at Rs.2800cr. Of the total slippage, Rs.1800cr has come from the retail segment while a corporate book worth Rs.854cr which was part of SMA-2 slipped into NPA during the quarter. Bank carries Rs.154cr provision on this account. GNPA for the quarter stood at 4.61% against Q4FY21 GNPA of 4.15% while NNPA stood at 2.32% against 1.86%. Due to increased slippage, PCR declined to 51% from 55% in Q4FY21. GNPA level of Retail/Corporate (excluding infra)/Infra segment stood at 3.86%/2.91%/15.65% while NNPA of the respective segments stood at 1.82%/1.25%/9.84%. Lower PCR along with the elevated level of NPA is expected to force higher provisioning in the coming quarters.

Outlook & Valuation

Bank has shown improvement in key business figures including margins and lending mix which is positive for the long term. However, elevated NPA levels, especially on the infra segment along with low PCR, will lead to higher provisioning impacting the bank’s profitability. Though we are positive on the long term growth, we remain cautious on the near term outlook and hence , with the current high valuation, we downgrade our rating to Reduce with a target price of Rs.46 based on 1.5x FY23 Adj BVPS.

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