IDFC First Q3 Results Analysis

Introduction

IDFC First Bank reported a net profit of Rs.130 Crore in Q3 FY21, as provisions declined significantly. Rising Net Interest Margin & CASA Ratio, Improvement in Retail Loan Book % share are the key positives. However, there are 2 major challenges for the bank in coming quarters i.e. consistently falling capital adequacy ratio since last 2 quarters and substantial rise in Gross and Net NPAs.

Q3FY21 Results

• The bank’s interest earned has decreased by 4% year on year to Rs. 3,952 Crore. This is a clear indication that the bank has turned conservative on wholesale lending and is currently focusing more on retail lending.
• Their interest expenses have plunged by a mega 14% and 3% YoY and QoQ respectively. They are enjoying low costs of borrowing, a benefit of the low interest environment in the Indian economy. This has lead to a robust growth 14% YoY growth in Net Interest Income, which stands at 1,744 Crore.
• A semblance of normalcy is clearly visible as the bank earned Rs. 582 Crore in other income, which is up by 100% on a sequential basis and by 33% in comparison to last year. Other income includes commissions, fees and charges for the myriad of other services offered by the bank.
• IDFC First Bank’s operating expenses have jumped from Rs. 1,432 crore in Q3FY20 to Rs. 1,842 in Q3FY21 (i.e. 29%). This exhibits that the banks operations are back at their normal pace as they were pre-covid. Therefore, operating profit has declined by 4% QoQ to Rs. 773 Crore.
• Their total provisions and contingencies are at Rs. 595 Crore, down by a whopping 74% relative to last year. This has been a key factor in helping the bank get back in the game and report a Net Profit of Rs. 130 Crore. They had reported a loss of Rs. 1,693 Crore in Q3FY20.

BALANCE SHEET SUMMARY

• It is not surprising to note that IDFC Bank’s balance sheet size has narrowed by 3% from Rs. 1,60,684 crore in the previous year to Rs. 1,55,676 crore.
• The bank has reported muted growth in advances, which at present is Rs. 1,06,263 Crore – 6% up YoY AND 4% up QoQ. On the contrary, their total deposits have burgeoned by an impressive 23% to Rs. 84,294 Crore which is a positive sign.
• As a result, IDFC First Bank’s external dependence on the markets for funds has massively contracted by 39% on a yearly basis. At present their borrowings are Rs. 40,805 Crore.
• Their credit to deposit ratio stood at 1.46 in Q3FY20 and 1.35 in Q3FY21, has further reduced to 1.26 in Q3FY21. This is a sign the bank adapting to a conservative stance, rather than being aggressive.

• The above key Parameters indicate that IDFC First Bank is still less conservative than IndusInd Bank.

DEPOSIT MIX

• IDFC Banks total deposit s have increased stupendously by 23% from Rs. 68,697 crore in Q3FY20 to Rs. 84,294 in Q3FY21. This has happened as a consequence of phenomenal CASA growth of 150%. CASA is at Rs. 40,563 Crore from Rs. 16,204 Crore a year ago.
• The bank seems to be on a mission of becoming a focused retail oriented lending institution. They have been persistently been reducing term deposits. As of Q3FY21 term deposit are at Rs. 43,731 Crore and make up 48% of the deposit mix.

ADVANCES MIX

• Taking a bird’s eye view, we can observe that post merger (since Dec-18) their Advance Book has been stagnant and moved from Rs. 1,04,660 Crore to Rs. 1,10,469 Crore. However, in the same period their retail funded assets have accelerated form 35% in Dec-18 to 60% in Dec-20 and Wholesale Funded Assets have shrunk from 65% to 40%. 

• The above trend is easily discernable when we look at the current advances mix of Q3FY21, where Retail funded assets have have climbed up by 24% on a YoY basis. While, Wholesale Funded assets have decreased by 21% in the same tenure.
• A key individual responsible for this metamorphosis of this institution into a retail oriented bank is Mr. V. Vaidyanathan the MD and CEO of IDFC First Bank Ltd. He has walked the talked and thoroughly delivered on his vision.

  
KEY RATIOS

• IDFC First Bank’s Net Interest Margin has been on a robust upward trajectory. It has accelerated from 3.86% in Dec-19 to 4.65% in Dec-20. This puts the bank in an advantageous position.
• As seen earlier, the bank’s CASA is on the up and up. It promotes lower cost of borrowing for the bank, thereby reducing its reliance on external borrowings from the market.
• However, the bank’s capital adequacy ratio has been consistently falling since last 2 quarters and exhibits a genuine cause of concern. The RBI in its recent report said that the bad loan ratio of banks in India could rise by 6% to 13.5% under the baseline stress scenario. It can also double to 14.8% by September 2021, under a severe stress scenario. Hence, for IDFC First bank this number should range in the sweet spot above 20%. Low capital adequacy ratio in the coming quarters will pose as a big challenge to the bank.

ASSET QUALITY

• The Banks Gross NPA and Net NPA have been on a downward trajectory and at present stand at 1.33% and 0.33% respectively. Their provision coverage ratios are also healthy at 75.1%.
• However, if the bank does not consider the deferment as per the Honorable Supreme Court’s interim order, then the Gross NPA and Net NPA numbers shoot up to 4.18% and 2.04% which is quiet alarming. These figures are more than 2 times previous quarters set –proforma NPAs.
• If this situation comes to pass, it would percolate in the following manner – the bank would have to do higher provisioning which would lower operating income and net profits. This would lessen EPS and eventually push up PE ratio and the valuations will appear more expensive. This is not good. Investors should keep a close watch on these numbers and exercise caution.