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Asset quality and opex evolution not comforting

Result Highlights (See “Our View” below for elaboration and insight)

? Asset quality: Gross slippages amounted to Rs 13.5bn, translating to an annualised slippage ratio of 3.1%

? Margin picture: NIM at 6.32% was down/up -1bp/49bps QoQ/YoY, where the negative impact in 2Q from the incremental CRR amounted to 2 bps

? Asset growth: Advances grew 6.8%/26.1% QoQ/YoY, driven sequentially by Consumer Finance and Rural Finance.

? Opex control: Total opex rose 5.8%/33.7% QoQ/YoY, staff expenses rose 3.2% /29.6% QoQ/YoY and other expenses rose 6.9%/35.6% QoQ/YoY.

? Fee income: Fee income rose 2.6%/45.6% QoQ/YoY, where Retail fees comprised around 93% of total fees

Our view – Asset quality and opex evolution not comforting

Gross slippages see material sequential rise, which is indicative of weaknesses in the underlying business model: Gross slippage ratio had stood at ~2.7% in 1Q, indicating a ~40 bps rise on sequential basis in 2Q. Further, an absolute level of 3.1% for gross slippage ratio in the current benign environment is unhealthy. Gross slippage ratio has, in fact, averaged 3.14% over the past 6 quarters. Provisions were Rs 5.28bn, up by 11% QoQ and 24.6% YoY, translating to annualised credit cost of 119 bps of funded assets. This level of credit cost, currently, is roughly 3x of better-placed banks. It may be noted that IDFCB has not disclosed its exposure to unsecured non-wholesale loans.

Net interest margin remains at industry-leading levels despite elevated cost of deposits, indicative of a high-yield asset mix: Management expects NIM to remain stable at current levels. The deposit repricing is largely complete and there may be a 10-15 bps rise in 2H. Cost of funds is expected to go up marginally in 3Q and then plateau in 4Q. Factors that would support NIM include repricing of investments, liquidity getting deployed and repricing of 1-year MCLR loans.

Cost to income ratio rose sequentially by 101 bps to a particularly elevated 71.9%: While IDFCB is among the last 2 universal bank licencees, it has been in operation as a bank since 2015. It has never been entirely clear as to why the cost ratios are so elevated even adjusting for the bank’s age or examining annual report disclosures.

We maintain a less-than-bullish ‘ADD’ rating on IDFCB with a revised price target of Rs 100: We value the bank at 1.9x FY25 P/BV for an FY24E/25E/26E RoE profile of 11.4%/12.9%/14.7%.

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