1

Desvelado Advisory

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Desvelado Advisory

CMP: Rs 76.15

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

We have valued the shares using the DCF-based framework. For our DCF, we use the company’s beta of 0.44, a risk-free rate of 6.97%, an equity risk premium of 12.84% and a terminal growth rate of 4%. We expect IDFC FIRST Bank to grow Sales/PAT by 10%/17.9% annually over FY25-FY29. We use DCF as we want to capture the long-term potential of the current market.

A strong focus on increasing deposits, particularly through Current Account Savings Accounts (CASA), will help reduce the cost of funds and improve net interest margins (NIM). The bank's goal of achieving a CASA ratio of around 46.5% is a positive indicator for future profitability.

Also the focus of bank on expanding its retail lending portfolio, which is anticipated to be a significant driver of growth. With the Indian credit market projected to grow substantially, capturing a larger share of retail loans, including personal loans, home loans, and auto loans, will enhance revenue streams and would help to achieve .

We initiate with a Buy rating and a 12-month target price of Rs 85 implying +13.94% upside.

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3

Desvelado Advisory

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

Valuation: Our 12-m TP of Rs.85 implies 13.94% upside

Exhibit 1: IDFC FIRST Bank is currently trading at a

Premium to its peers

Exhibit 2: IDFC FIRST Bank is trading close to its own historical PE

CMP: Rs 76.15

4

Desvelado Advisory

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

Investment Thesis

• Guidance 2.0 – 

​

Banks deposits have grown at 37% CAGR over the last 5 years, largely driven by retail deposits which have grown at 63% CAGR. This has helped reducing dependence on legacy borrowings and thus improving borrowings mix. The bank is confident of maintaining its high growth deposit mobilization with a target of 25% CAGR between FY24 to FY29. With the company's robust track record and the implementation of a healthy, sustainable, and risk-controlled target for Loans & Advances growth of approximately 20%, achieving this goal seems highly attainable. Bank  have maintained their advances growth estimates at 22% CAGR over FY24-26E. Banks SMA 1 & SMA 2 portfolio as % of Retail, Rural, and SME Loan Book continue to remain below 1% along with collection efficiency of 99.6% which builds the confidence <2% GNPA going ahead.

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• RoA to retain rising trajectory; model 30% PAT CAGR over FY24–26E-

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IDFCFB shall continue delivering industry-leading deposits and loans growth (off low market share of 1–1.2%), leveraging the under-penetrated retail segment and expanding distribution/customers/product segments. Estimation is of a broadly stable NIM with a rise in deposits costs to be offset by redemption of high-cost borrowings. In-line with management’s view, expectation is of  stable cost to income and rise in credit costs in H1FY25 but improved H2FY25, led by improving scale and redemption of high-cost legacy borrowings. Overall, RoA will rise to 1.1%/1.3% by FY25E/26E and RoE rising to 11%/13% in the same period. The bank is expected to deliver amongst the highest PAT CAGR of 30% over FY24–26E. Also the bank should be able to deliver loan, deposit and PAT CAGR for FY24–26E at 2x industry levels.

��

CMP: Rs 76.15

5

Desvelado Advisory

About the company

• IDFC FIRST Bank was founded by the merger of Erstwhile IDFC Bank and Erstwhile Capital First on December 18, 2018. is a new age Universal Bank in India built on the foundations of Ethical Banking, Digital Banking, and Social Good Banking. 

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• As part of technology led banking, the Bank has built a modern technology stack and has built an advanced mobile app with 250+ features.

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• As part of the Social Banking theme, the Bank’s business model is naturally geared to social banking. It has developed unique capabilities for financing bottom of pyramid customers with consistently high asset quality.

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• The Bank has financed over 40 million customers including 0.3 million SMEs, 0.9 million livelihood (cattle loans), 16 million lifestyle improvement loans (for laptops, washing machine, etc.), 1 million sanitation loans (toilets, water fittings), 6.5 million mobility loans (2-wheelers and cars), and home financing (over 100,000 homes), and 15 million loans to 4.3 million women-entrepreneurs. It also offers other retail and rural loans such as Kisan Credit Cards, harvest financing, gold loans etc.

​

• It is an Universal Bank, and offers end to end Corporate Banking, Trade Finance, Treasury products, SME Banking, Wealth Management, NRI banking,  etc.

It deals in various segments like retail banking (60%), treasury (26.9%), corporate/wholesale banking (11.5%) and others (1.7%) which include selling & distribution of third party products.

​

• It has around 809 branches,249 assets service centers 925 ATMs, and 606 rural business correspondent centers across the country​ This extensive network indicates a broad presence in 25 states & 3 UTs and suggests that urban and semi-urban regions, where most branches are likely located, contribute significantly to its business. 

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• It has a market share of around 1.2% in Bank Advances, 0.98% in Bank Deposits,1.8% in credit card transactions, 0.81% in debit card transactions, 1.38% in mobile banking transactions, 1.98% share in Net Interest income, 1.19% in internet banking.

​

• Also the Bank showed 24% YOY increase in loans & advances, 47% YOY increase in customer deposits with a capital adequacy ratio of 16.82%, ROA of 1.13% and ROE of 10.95%.

� �

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

6

Desvelado Advisory

Company Overview

• IDFC FIRST Bank was founded by the merger of Erstwhile IDFC Bank and Erstwhile Capital First on December 18, 2018

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Erstwhile IDFC BANK Ltd.

IDFC Limited was a leading and reputed infrastructure financing Domestic Finance Institution. The institution diversified into Asset Management, Institutional Broking and Investment Banking. It applied for and acquired a Commercial Banking License from RBI. IDFC Bank laid the foundation for a strong banking framework and created necessary systems, risk management, infrastructure, IT architecture and processes for future growth. It created efficient cash management system and treasury and for managing trading. 

�Erstwhile CAPITAL FIRST Ltd.

The NBFC had businesses of financing such segments within consumer and micro-entrepreneurs that not financed by existing banks, by using alternative and advanced technology led models. Capital First was a successful NBFC, growing its loan book and net profits at a 5 year CAGR of 29% and 56% respectively, with stable asset quality of Gross NPA of <2% and Net NPA of <1% for nearly a decade.  Inspite of being a successful consumer and MSME financing entity since 2012 with a strong track record of growth, profits and asset quality,the company was looking out for a banking license to convert to a bank as a part of the original strategy of Mr. Vaidyanathan.

�An aspiration for accelerated and sustained growth paved the way for the merger of erstwhile IDFC Bank Ltd and erstwhile Capital First Ltd on December 18, 2018

�Issues: Because IDFC Bank was created from an infrastructure DFI, the merged entity had certain issues. 

As of December 31, 2018,

a) The Bank had low CASA at 8.68% 

b) The Bank had low NIM at 1.9% (H1 FY 19) and low PPOP (Pre-Provisioning Operating Profits) of 0.32% (H1 FY 19) 

c) Only 8.04% (Rs. 10,400 crores) was retail Deposits and the rest was institutional deposits & borrowings. 

d) The Bank had large exposure in infrastructure and corporate Loans 

�Issues Addressed: Between FY 19-FY 24, the bank has addressed all the issues relating to infrastructure and corporate loans. Infrastructure exposure has reduced from Rs. 21,459 crore to Rs. 2,830 crore, CASA has grown to 47.25%, and profitability has increased to 2,957 crores in FY24

�

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

7

Desvelado Advisory

Achievements of 5 Years since merger

Growing Deposits

Resolved Legacy Loans

Repaid Legacy Liabilities

Diversified Loan Book

Diversifies the Deposit base

Developed PSL origination capabilities

Built essential Infrastructure

Launched New Products

Implemented contemporary Technology�

Built Ethical Banking Culture

Bank grew Retail deposits by 5-year CAGR of 67%. Total Customer deposits grew by 5 years CAGR of 36% since merger. 

�

Bank has successfully resolved or accounted for all legacy stress infrastructure financing portfolio

�

Bank has already repaid high-cost legacy borrowings of ~Rs. 29,000 crore and replaced with low-cost deposits

�

Retail, Rural and SME financing portfolio as a % to total loans and advances has grown from 35% at merger to 83% as on Mar-24

�

Similarly, Retail Deposits as % of total customer deposits increased from 27% at merger to 78% 

�

Bank is growing its PSL book organically in a sustainable manner. PTC & RIDF subscription has gone down by 75% from Rs. 7,923 crore at merger to Rs. 2,015 crore

�

Bank has invested in the essential infrastructure and has expanded its branch network to 944 branches and 1,164 ATMs across the country 

�

The Bank has launched and scaled up several products across all segments, like retail, commercial and wholesale banking, rural products as well as fee-based products

�

Bank is investing in modern tech and has built latest technology stack that enables great UI/UX, resulting in excellent customer experience

�

The Bank believes income earned unethically is not worth earning. Accordingly, it designs all products with no complicated jargon, and keeps customer interest in mind.

�

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

8

Desvelado Advisory

Wide Product Suite of IDFC FIRST Bank

Source: Annual Report FY23

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

9

Desvelado Advisory

Major Segments or Products

• Retail banking:

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• It is the highest revenue generating segment with a contribution of around 59.95% among all the segments. It constitutes lending to individuals / business banking customers through the branch network and other delivery channels subject to the orientation, nature of product, granularity of the exposure and the quantum thereof. 

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• Revenues of the retail banking segment are derived from interest earned on retail loans, inter segment revenue and fees from services rendered, fees on client FX & derivative

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• Expenses of this segment primarily comprise interest expense on deposits and funds borrowed from inter segments, commission paid to retail assets sales agents, infrastructure and premises expenses for operating the branch network and other delivery channels, personnel costs, other direct overheads and allocated and support groups. This also includes digital banking products acquired by Digital Banking Units (DBUs). As of March 31, 2024, IDFC FIRST Bank’s market share is 1.20% of total bank credit which improved from 1.13% last year

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• Treasury:

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• This contributes to around 26.93% revenue of the bank.

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• The treasury segment primarily consists of Bank’s investment portfolio, money market borrowing and lending, investment operations and foreign exchange and derivative portfolio of the Bank. 

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• Revenue of treasury segment consist of interest income on investment portfolio, inter segment revenue, gains or losses from trading operations, trades and capital market deals. 
• The principal expenses consists of interest expenses from external sources and on funds borrowed from inter segments, premises expenses, personnel cost, direct and allocated overheads.

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�                                   

�

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

10

• Corporate/ Wholesale Banking:
• This contributes 11.47% of the total revenue generated by bank. The wholesale banking segment provides loans, non-fund facilities, loan syndication and transaction services to corporate relationship not included under Retail Banking.   

• Revenues of the wholesale banking segment consists of interest earned on loans to customers, inter segment revenue, interest / fees earned on transaction services, earnings from trade services, fees on client FX & derivative and other non-fund facilities.

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• The principal expenses of the segment consists of interest expense on funds borrowed from internal segments, premises expenses, personnel costs, other direct overheads and allocated expenses of delivery channels, and support groups.   

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• Others/ Unallocated:

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• This is  very less focused segment and small contributor to the revenue of the bank of around 1.65%.

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• This segment includes revenue from distribution of third party products or all items which are reckoned at an enterprise level are classified under this segment. This includes assets and liabilities which are not directly attributable to any segment.

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• Revenue and expense of this segment includes income and expenditure which are not directly attributable to any of the above segments. Revenue includes interest on income tax refund and expense of this segment mainly includes employee cost, establishment & technology expense which is not directly attributable to any segment. 

Exhibit 3: Shift in trend from treasury & corporate/ wholesale banking with 42% & 30% revenue in FY 19 to turning out retail banking as highest revenue contributor with 60% in FY24

Desvelado Advisory

Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

11

Desvelado Advisory

Digital Initiatives (Significant Traction on Electronic Platforms):

�

Highly Successful Launch of Wealth Management Business:

�

• The Bank has created strong capabilities and wholistic customer propositions in Wealth Management and has grown the Wealth Management AUM from scratch to Rs. 15,762 crore in the last 5 years after merger. In FY24, the Wealth Management AUM grew by 66% YOY.

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• It includes PMS, AIF Investments, Bonds & Structured Products, Pre Listed & Pre IPO Equity Funds, Estate & Trust Planning services, Loan against securities & IPO, Offshore & Immigration Linked Investments.

�

Exhibit 4: Wealth Management Business shows 10x growth in just 4 years

10x Growth

Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

12

Desvelado Advisory

Cost Structure:

�

• Expenditure on Interest around Rs. 10 Cr in which major part is of interest on deposits, others and then interest on borrowings from RBI/ Inter bank borrowings). It shows an increase of around 355 compared to last year.

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• Operating expenses are around Rs. 12 cr. It shows an increase of around 25% compared to last year.

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• Voluntary CSR Expenditure Rs.50cr over last 3 years

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Geographic Presence in India

�

Source: Annual Report FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

13

Desvelado Advisory

Narrative in Charts

Exhibit 5: Retail Banking contributing highest, 59% in Bank’s total revenue in FY24

Exhibit 6: Decline in lending in Non Priority sector from 82% in FY19 to 68% in FY23

Exhibit 7: Housing, Vehicle Loan & Service has largest share in Priority sector loan breakup

Exhibit 8: Agriculture & Allied Activities has largest share in Bank’s non priority sector lending

Exhibit 9: Consumer loan, loan against property & home loan has highest share in Retail Banking Segment overall revenue

Exhibit 10: Retail Banking has largest share in asset breakup (%) segment wise.

Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

14

Desvelado Advisory

Source: Investor Presentation Q4 FY24

Exhibit 11: Deposits: Strong Growth with CAGR (5Y): 37% in Total Customer Deposits

Exhibit 12: CASA Deposits: Bank has demonstrated capability to grow CASA Deposits with CAGR (5Y):64%

• The Bank has built strong capabilities to consistently grow its Deposit Franchisee. 

Some of the key factors responsible:

• IDFC first bank is seen as an ‘Institution' 
• High focus on customer service  
• Customer friendly and attractive product propositions & strong digital capabilities

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(INR cr)

(Pre merger)

(Post merger)

5-Year CAGR: 64%

(Pre merger)

(Post merger)

• The bank has reduced interest rates on savings account to only 3% for balances upto Rs. 1 lac. 
• The CASA deposit growth continues to be strong, growth of 32% YOY as of March 31, 2024, driven by the granular retail CASA. 
• Deposits of 31st March 2024 includes Rs. 2,812 crore (March-23 Rs. 2,131 crore) of Current Account Deposits received for short term from a large Government Banking client, excluding this CASA deposits grew 32% YoY.

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(INR cr)

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

15

Desvelado Advisory

Exhibit 13: Healthy CASA Ratio at 47.2%

Exhibit 14: Transformation of the liability portfolio by incrementally replacing the institutional borrowings & deposits by granular retail deposits

Source: Investor Presentation Q4 FY24

• CASA Ratio stable at 47.2% as of March 31, 2024.

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• Average Daily Balance CASA Deposits for the bank grew by 28% YoY during the year. 

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• Excluding the one-time short-term flow from a government banking client, CASA ratio as on March 31, 2024, would be 46.5%. Excluding the same for March-23 the CASA ratio was 49.0%.

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Liability Mix (INR cr)

• Retail Deposits were only 8% of the total deposits & borrowings as of December 31, 2018.

• The Bank incrementally mobilized Rs. 140,943 crore of retail deposits in the last 5 years and reduced dependency on institutional deposits & borrowings. 

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• As a result, Retail Deposits as % of total deposits and borrowings now improved to 60% as of March 31, 2024

�

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

16

Desvelado Advisory

Diversification of Deposits

• It is a strategic priority of the Bank to diversify the liability in favour of retail deposits to stabilize and improve the sustainability of the balance sheet.

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• The Bank has transformed the liability profile in 5 years from wholesale to retail, in order to diversify the deposit base. 

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• Strong growth of 46% YoY in retail deposits has significantly reduced dependency of the Bank on the wholesale deposits.

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Legacy High Cost Borrowings

• Bank continues to successfully run down the legacy high cost long term borrowings.

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• Because bank has DFI background, the legacy borrowings are costing the bank 8.90%. The bank plans to replace this with low cost deposits.

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• To simulate, if the bank had replaced all high cost legacy borrowings with cost of funds, the RoI for FY 24 would be higher by ~95 bps

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Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

17

Desvelado Advisory

Diversified Loan Book (Across 25 Business Lines)

Car Loan                                                3%

CV/CE Financing                                  3%

Gold Loan                                             1%

Consumer durable Loans                    3%

Small Business & professional loan  4%

Education loan                                     1%

Digital consumer Durable Loan          1%

Credit Card                                            3%

Other Retail                                           1%

Micro Credit & MSME                           5%

Large Corporate                                 1%

Other Corporate                                 1%

Infrastructure Financing                     1%

�

Home Loan         11%

�Loan against property          12%

�Business 

Banking               4%

�KCC                     2% 

�

Exhibit 15: Incremental Credit Deposit Ratio

Exhibit 16: High Retail Asset Quality (GNPA of 2% & NNPA of 1% across cycles

(Incremental CD Ratio)

• Credit-Deposit ratio has improved consistently from 137% to 98.4% since merger and will improve as the Bank continues to grow deposits.

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• At the time of merger the bank had high Credit to Deposit ratio (CD ratio) because it was largely funded with bonds & borrowings. Bonds and borrowings are equally stable money as deposits, as they are repayable only on maturity dates. 

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• The bank has been continuously raising more deposits than loans disbursed on an incremental basis which is continuously reducing the CD ratio. 

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• In Retail, Rural & SME Finance portfolio, GNPA and NNPA have come down to 1.38% and 0.44% respectively.

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• Also asset quality was maintained even during IL&FS (Infrastructure Leasing & Financial Services Limited.),  Crisis, Covid 19 etc. 

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Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

18

Desvelado Advisory

Exhibit 17: SMI-1 & SMI-2 portfolio as % of total Retail, Rural & SME Loan Book

�

Exhibit 18: Net Stressed Assets reduced to only 0.56% of total assets:

Exhibit 19: Provision Coverage Ratio increased to 86.6% for the Bank

�

Exhibit 20: Infrastructure project financing book brought down from 21,459 cr to 4,664 cr

�

• SMA 1 is the overdue portfolio in Bucket 31-60 days, and SMA 2 is the overdue portfolio in 61-90 days. 

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• SMA 1 (31-60 days overdue) and SMA 2 (61-90 days overdue), put together are around 0.85% of the Book in Retail, Rural & SME segment. 

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• The SMA is broadly stable & based on low SMA, which is expected to give a a lower level of NPA formation in future. 

• Provision Coverage Ratio (excluding technical write-offs) improved to 68.8% as on March 31, 2024 from 66.9% as on December 31, 2023; and compared to 66.4% as on March 31, 2023.

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• Provision Coverage Ratio after excluding infrastructure finance book was at 73.4% as on March 31, 2024 

• Infrastructure “Project Financing”, like financing road or power plant projects are subject to project execution risks, and the bank has no appetite for such risk. 

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• Hence, it brought down infrastructure Financing book from 21,459 crore as of March 31, 2019, to 4,664 crore as of March 31, 2023, and bank will continue to run it down further.

• The Bank has reduced the net stressed assets, both in absolute value and as % of the total assets. This indicates lower NPA levels going forward. 

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• The restructured pool of the Bank has reduced by 36% since March 31, 2023. 

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•  Standard restructured Book is 0.31% of the total funded assets as of March 31, 2024.

Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

19

)

Desvelado Advisory

Risk Management in Wholesale Financing

Exhibit 21: Bank has reduced its corporate (non-infra) book from 29% in Mar 19 to 15% in Mar 24

�

Exhibit 22: Bank has reduced its infrastructure financing portfolio from 19% to 1.4% in 5 years

�

Exhibit 23: Exposure to Top 20 single borrowers reduced from 16% to 6% in 5 years

�

Exhibit 24: Exposure to Top 5 industries reduced from 41% in Mar 19 to 19% in

Mar 24

�

Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

)

CMP: Rs 76.15

20

Desvelado Advisory

Exhibit 25: Bank has reduced Cost to Income Ratio from 95.1 to 72.9% in 5 year, despite investments

�

• During the last three years the bank had to make significant investments in building liabilities and credit card franchise 

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• Despite this, the cost income ratio has come down from 95.1% to 72.9% because of the strong incremental unit economics at the bank which is allowing the bank to make the investments to build the Bank. 

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• Cost to income ratio for Q4 FY24 was at 73.2% as compared to 73.7% for Q3 FY24. 

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• Cost to income will further come down with scale

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Exhibit 26: Cost to Income improving with scale

�

Retail, Rural & SME

Liabilities

Wholesale banking

Credit Cards

Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

21

Desvelado Advisory

Profitability & Capital

​

�

�

�

Source: Investor Presentation Q4 FY24

Exhibit 27: 30% YoY growth in Net Interest Income (in Rs. Cr) during FY24 against balance sheet growth of 23%

Exhibit 28: 31% YoY growth in Core Operating profit (excluding trading gains) (In Rs. Cr) during FY24

5 Year CAGR of 28%

5 Year CAGR of 40%

Exhibit 29: Operating profit as % of Total Assets improved

Exhibit 30: Bank has turned profitable on sustained basis based on strong operating profits & low credit costs

• Net Interest Margin (NIM) on AUM for FY24 was 6.36% as compared to 6.05% in FY23; for Q4-FY24 NIM stood at 6.35%.

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• Cost of Funds for Q4-FY24 was 6.43%, marginally improved from 6.44% in Q3-FY24

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• Cost of Deposits for Q4-FY24 was at 6.27% as compared to 6.20% for Q3-FY24

• Loan book has grown at a 5-Year CAGR of 13% while the operating profit has grown at the 5-Year CAGR of 40%, this represents strong incremental unit economics

• The bank has improved the core pre-provisioning operating profit despite investment in growing the bank. This was made possible as the retail lending business is profitable with more than 20% incremental ROE

• The Bank posted 6 quarters of losses consecutively in FY19 and FY20 due to provision on legacy infrastructure portfolio and large corporate loans as well as goodwill write-off on merger.

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• As the foundations pillars were built and businesses scaled up driving retail deposits and asset growth, the Bank started posting sustainable levels of profitability starting from FY23 and continued the same in FY24.

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

22

Desvelado Advisory

Guidance 1.0 vs Performance of Guidance 1.0

• The Guidance 1.0 was given by the bank in Dec at the time of merger of IDFC and Capital First.

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• The table below highlights the condition of bank at time of merger and targets achieved in the past 5 years.

�

Source: Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

23

Desvelado Advisory

Guidance 2.0 (Next 5 Year Plan: FY24-FY29)

• The Bank has met or most likely to meet most targets as provided under Guidance 1.0. 

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• The bank shows strong business model that is incrementally very profitable. Basis this model, bank could do necessary investments and expenses, and yet improve profitability during FY 19-24. Bank have far greater visibility while providing Guidance 2.0 as compared to visibility of at time of Guidance 1.0 

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• The plan is of building a world class bank with highest levels of corporate governance, a consistent balance sheet growth of ~20%, with strong asset quality of GNPA < 1.5% and net NPA of < 0.4%, with ROE of 17-18%, with contemporary technology, unique business model, and high levels of Customer Centricity. 

Source: Investor Presentation Q3 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

24

Desvelado Advisory

Management Analysis

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

25

Desvelado Advisory

• Also the annual report shows a increase of 3% in remuneration of MD & CEO, 14% increase in remuneration of CFO and 18% increase in remuneration of Head: Legal & Company Secretary.

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• Average percentage increase inclusive of Key Managerial Personnel for the last financial year is 9.81% 

​

• Average percentage increase for all employees other than the Key Managerial Personnel for the last financial year is 9.76%. 

​

• The average increase in the remuneration of employees compared to the increase in remuneration of Managerial Personnel is in line with the market benchmark study.

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

26

Desvelado Advisory

Key Performance Indicator

Credit Deposit Ratio (%)

Gross NPA (%)

• IDFC banks shows decline in CD ratio because bank is now focusing to rely on deposits only for lending purpose and avoiding borrowings. 

​

• Also, Yes Bank and Bandhan Bank have higher CD ratios (85.50% and 89.60% respectively), suggesting a more aggressive approach in utilizing deposits for lending activities.

​

• IDBI Bank and Federal Bank have moderate CD ratios (67.93% and 82.92% respectively), showing a balanced approach to deposit utilization for lending.

�

•  IDFC First Bank, IDBI Bank, Yes Bank, Federal Bank, and Bandhan Bank have all shown improvements in Gross NPA percentages over the years.

​

• Asset Quality: Lower Gross NPA percentages generally indicate healthier asset quality, which is crucial for financial stability and investor confidence.

​

• IDFC FIRST Bank & Yes Bank has the lowest NPA Levels which is a positive indicator showing high asset quality.

��

Source: Annual Report & Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

27

Desvelado Advisory

Cost to Income (%)

Net Interest Margin (%)

• IDFC First Bank and Yes Bank demonstrate significant improvements in Cost to Income ratio, indicating enhanced operational efficiency.

​

• IDBI Bank maintains a stable Cost to Income ratio over the years.

​

• Federal Bank and Bandhan Bank show fluctuations in their Cost to Income ratios, suggesting varying levels of efficiency in managing operational expenses.

​

• IDFC First Bank and Bandhan Bank: Both banks demonstrate relatively higher NIMs, suggesting efficient management of interest income and stronger profitability from interest-earning assets.

​

• IDBI Bank: Shows improvement in NIM over the years, indicating enhanced efficiency in interest income generation.

​

• Yes Bank and Federal Bank: Both banks show lower NIMs compared to others, but Yes Bank has shown improvement over the years.

​

Source: Annual Report & Investor Presentation Q4 FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

28

Desvelado Advisory

Strengths & Challenges

Strengths

​

• Strong Capitalisation Profile:

​

• As of March 31, 2024, IDFC FIRST Bank’s CET I ratio was 13.36% and CRAR was 16.11%, slightly down from March 31, 2023, due to increased risk weights on certain loans.
• Despite raising ₹3,000 crore in Q3 FY2024 and ₹2,200 crore in FY2023, the capital ratios were impacted by 80 bps and 100 bps, respectively.
• The bank also raised ₹5,000 crore during FY2021 and FY2022 to support growth and manage higher operating expenses and credit costs during the pandemic.

​

• Healthy Growth in Deposits:

​

• The deposit base grew by ~38.7% to ₹2.01 lakh crore in FY2024.
• Retail CASA and term deposits accounted for 78% of total customer deposits as of March 31, 2024, up from 76% in 2023.
• CASA levels declined to 47.2% from 49.8% in 2023, yet remained above the private sector average.
• High-cost legacy long-term borrowings decreased from 8.8% of total borrowings and deposits in 2023 to 4.7% in 2024, expected to reduce further, lowering the overall cost of funds.

​

• Earnings Profile Improvement:

​

• A focus on retail and a favorable asset mix increased net interest margins and fee income.
• Higher operating expenses due to retail segment growth, branch network expansion, and technology investments have kept profitability lower than the private sector average but on an improving trajectory.
• RoA was 1.10% in FY2024, slightly down from 1.13% in FY2023.
• Branch maturation and increased cross-selling are expected to support future profitability.

​

• Granularisation of Loan Book:

​

• Gross advances grew by 28% YoY to ₹1.97 lakh crore as of March 31, 2024.
• Retail, rural, and SME banking accounted for ~84% of total gross advances, up from ~81% in 2023.
• Corporate (non-infrastructure) loans grew by 16% YoY, while the share of infrastructure loans declined.
• The changing loan profile has supported profitability, with a focus on maintaining asset quality and profitability in these segments.

​

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

29

Desvelado Advisory

Challenges:

​

​

• Monitorable Impact of Macroeconomic Factors:

​

• -The gross fresh slippage rate declined to 3.5% of standard advances in FY2024 from 3.9% in FY2023 but remained higher than the banking sector average due to IDFC FIRST’s segment and product mix.
• Despite this, the bank maintained high collection efficiency (over 99.5%), excluding pre-payments and collection arrears, resulting in a lower net slippage rate of 1.87% in FY2024.
• The granular nature of slippages contributed to better recoveries and upgrades.
• The bank maintained a high provision cover, and both gross non-performing advances (GNPAs) and net non-performing advances (NNPAs) improved in FY2024.
• The standard restructured book was 0.3% of funded assets, and SMA-1 and SMA-2 loans (retail, rural, and SME) were 0.9% as of March 31, 2024, providing some comfort regarding future asset quality.
• Sustaining these collection and NPA levels amid high interest rates and geopolitical issues remains a key monitorable for asset quality.

​

• Higher Cost of Funds Compared to Private Sector Average:

​

• IDFC FIRST’s strong deposit growth in recent years has helped replace higher-cost legacy borrowings, reducing the overall cost of interest-bearing funds.
• This has narrowed the gap between the bank’s cost of funds and the private sector average in FY2024.
• Continued replacement of legacy borrowings with lower-cost deposits will further support efforts to reduce this cost differential.
• As the share of legacy borrowings declines, future cost reduction will depend on the bank’s ability to mobilize deposits at competitive rates, especially given its strong growth targets.

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

30

Desvelado Advisory

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

• Economic Growth:

​

• India is projected to become a $7 trillion economy by 2030, with a significant portion of this growth driven by consumption.

​

• Approximately 66% of India's economy is consumption-based, which presents a substantial opportunity for banks to expand their lending portfolios, particularly in retail and small business segments .

​

• Credit Market Expansion:

​

• The Indian credit market is expected to grow from around 2 trillion to 6 trillion over the next decade.

​

• This growth is anticipated to be fueled by increased demand for credit from retail consumers, micro, small, and medium enterprises (MSMEs), and rural sectors. The shift towards digital lending and financial inclusion initiatives further supports this expansion

​

Industry Analysis

2 Trillion

CAGR 20.09%

6 Trillion

FY24

FY30E

Exhibit 31: 20.09% growth in Indian credit market from 2 trillion to 6 trillion.

CMP: Rs 76.15

31

Key Trends & Challenges:

​

• Technological Advancements:
• AI and Fintech: Indian Banks are increasingly leveraging AI & fintech solutions to enhance customer service & streamline operations.
• Digital lending: The digital lending in India is projected to surpass $720 billion by 2030.

​

• Regulatory Environment:
• RBI Initiatives: The RBI has been proactive in promoting financial inclusion & ensuring stability of banking

​

• Non-Performing Assets (NPAs):

NPA Ratio: The gross non performing loan ratio for scheduled commercial banks in India was around 6% in 2023, with efforts ongoing to reduce this further.

​

Future Outlook:

​

• Focus on Financial Inclusion:

The Indian government and regulatory bodies are emphasizing financial inclusion, aiming to provide banking services to underserved populations. This focus creates opportunities for banks to expand their customer base and offer tailored products to meet the needs of rural and low-income customers.

​

• Digital Transformation:

The trend towards digital banking is expected to continue, with increasing adoption of digital payment methods & fintech solutions.

​

• Credit Growth:

Credit growth is expected to remain strong, driven by economic recovery & increased lending to SMEs.

​

​

​

$172 Bn

CAGR 26%

$ 720 Bn

FY24

FY30E

Exhibit 32: 26% growth in Digital consumer lending market in 6 years

Source: Research Forecast, Mordor Intelligence

Desvelado Advisory

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

32

Desvelado Advisory

Important Catalysts

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

• Expansion of Retail Lending:

The bank is focusing on expanding its retail lending portfolio, which is anticipated to be a significant driver of growth. With the Indian credit market projected to grow substantially, capturing a larger share of retail loans, including personal loans, home loans, and auto loans, will enhance revenue streams.

​

• Micro, Small, and Medium Enterprises (MSMEs) Financing:

Targeting the MSME sector presents a substantial opportunity for growth.

As the government emphasizes support for small businesses, IDFC First Bank can leverage this trend by offering tailored financial products and services to this segment, thereby increasing its loan book and revenue

​

• Digital Transformation:

The bank's investment in digital banking and technology is a critical catalyst for growth.

By enhancing customer experience through digital channels, streamlining operations, and reducing costs, IDFC First Bank can attract more customers and increase transaction volumes, leading to higher revenues.

​

• Improvement in Deposit Mobilization:

A strong focus on increasing deposits, particularly through Current Account Savings Accounts (CASA), will help reduce the cost of funds and improve net interest margins (NIM).

The bank's goal of achieving a CASA ratio of around 46.5% is a positive indicator for future profitability.

​

• Financial Inclusion Initiatives:

The bank's commitment to financial inclusion, particularly in rural and underserved areas, can drive growth by expanding its customer base.

Offering products tailored to the needs of these segments can lead to increased lending and revenue generation.

​

​

​

• This would lead to loan growth of around 22-23%, deposit growth of 28%-30%. Also, Bank believe that the next five to ten years will be critical for the bank's development, and they are focused on executing their strategic plans to capitalize on the growth opportunities in the Indian economy  and also follow and achieve their Guidance 2.0 plan long with continued focus on catalysts

CMP: Rs 76.15

33

Desvelado Advisory

Peer Analysis

Revenue

• IDFC FIRST Bank, Federal Bank with CAGR (5Y): 15%, and Bandhan Bank with CAGR (5Y): 23% stand out as better performers due to their consistent and significant revenue growth.  Also, IDFC FIRST  Bank shows notable jumps in revenue, particularly from Mar-19 to Mar-20 and Mar-23 to Mar-24 with a sales growth CAGR (5Y): 20%

​

• IDBI Bank with CAGR (5Y): 4% is at a moderate level, showing signs of recovery and stabilization. 

​

• Yes Bank with CAGR (5Y): -1% is at the lowest level due to its revenue volatility and instability, despite recent improvements.

EPS

• Federal Bank has consistently shown positive EPS growth over the years (5.03 in Mar-17 to 14.95 in Mar-23). This indicates strong and stable profitability.

​

• IDFC FIRST Bank would be classified at a moderate level. Despite experiencing negative EPS in some years, it has shown recovery and positive growth in recent years, indicating a stabilizing financial performance. Also, Bandhan Bank and Yes Bank are at the same level.

​

• IDBI Bank consistently had the lowest EPS performance among the banks listed, with significant negative EPS in earlier years and only modest recovery in recent years.

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

34

Desvelado Advisory

Net Interest Margin (%)

• IDFC FIRST Bank and Bandhan Bank stand out as better performers due to their significant improvement and high NIM, respectively. 

​

• IDBI Bank and Federal Bank are at a moderate level, showing steady and stable performance. 

​

• Yes Bank is at the lowest level due to its fluctuations and instability in maintaining a consistent NIM.

Credit Deposit Ratio (%)

• IDFC FIRST Bank started with a high CD ratio of 123 in Mar-17, peaking at 132 in Mar-20, and then declining to 105 in Mar-23.The high initial ratio indicates higher credit risk, and the declining trend suggests efforts to improve liquidity and manage risk.

​

• Federal Bank stands out as the better-performing bank with a stable and consistent CD ratio, indicating effective management of liquidity and credit risk. Bandhan Bank and Yes Bank are at a moderate level due to their aggressive growth and subsequent stabilization efforts. 

​

• IDBI Bank's consistently low CD ratio places it at the lowest level, indicating it may be too conservative or facing difficulties in expanding its lending activities.

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

35

Desvelado Advisory

Financial Statements

Balance Sheet

P&L Statement

Source: Annual Report FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

36

Desvelado Advisory

Cashflow Statement

Financial Ratios

Source: Annual Report FY24

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

37

Desvelado Advisory

Financial Analysis

P & L Analysis

• The bank demonstrated substantial revenue growth of 550.56% in 2022; 328.65% in 2023 driven by increased interest income and other income sources. However, rising operating costs by 33% YoY, particularly related to employee expenses and branch expansions, have impacted net margins with a decline of -11.27% in 2024.

​

• Operating cash flow with continuous decline of -30% 2022 & -92% in 2023. The recovery in operating cash flow in 2024 by 173.64% suggests better management of operational liquidity and an improvement in cash generation from core business activities.

​

• The volatility in EPS from -77% decline in 2022 to 1249% increase in 2023 and again a decline of -16% in 2024 underscores the challenges in maintaining consistent profitability.

​

• Bank's focus on expansion and capital investments while no dividend payments aligns with a growth-oriented strategy aimed at enhancing shareholder value over the long term. The bank's decision to retain all its earnings and reinvest them into growth initiatives appears to be paying off, as evidenced by the significant increases of 1782.58% in 2023 & 18.39% in 2024 in Gross PAT and 32.35% increase  in 2023 & 33.43% increase in 2024 in sales growth. 

​

• The substantial increase in CapEx by 146.76% in 2023 & 32.42% in 2024  indicates a proactive approach to expand operations and enhance service offerings, which is crucial for sustaining long-term competitiveness. Despite lower operating cash flows in 2022 & 2023, the bank's financial health seems improving, supported by increasing profitability and strategic investment decisions.

​

Balance Sheet Analysis

• Positive trajectory for bank with growth in revenue majorly in 2023 by 328.65%, improvement in operating cash flow with 223.97% in 2024 followed by continuous increase in reserves by 29% in 2024. Also bank is having no long term debt and relying on retained earnings to further invest in expansion of branches and growth of bank which lead to increase in CWIP by 177.22% in 2023. The rising trend in CWIP as a percentage of Gross Block of  12.90% in 2022 & 285.49% in 2023 indicates that the bank has been actively investing in new projects or capital expenditures.

​

• Increase in NOA of 29% in 2024 underscores the bank's effective deployment of assets to enhance operational capabilities and revenue streams & growth in NOL with 20% in 2023 reflects the bank's ability to manage and leverage its liabilities to support its expanding operations. The increasing Accrual Ratio from 10% in 2022 to 25% in 2023 reflects a robust pace of asset accumulation, which also points on future income generation and operational resilience. 

​

��

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15

38

Desvelado Advisory

• While the bank has shown robust growth in assets, liabilities, and net worth of around 23% in 2024, the rapid increase of contingent liabilities with 908.60% in 2022 & 68.54% in 2023  raises concerns. The disproportionate increase in contingent liabilities compared to net worth suggests increased exposure to potential future obligations and liquidity risks. It's crucial for the bank to enhance risk management practices, strengthen capital reserves, and closely monitor these liabilities to ensure sustainable financial stability in the future.

​

•  Positive positioning of bank with continuous decline of 36.63% in 2022 & 4.56% in 2023 & 25.10% in 2024 in GNPA & decline of 15% in 2022, 14% in 2023 & 40% in 2024 in NNPA and decline of around 15% in 2024 in Net stressed assets/ total assets ratio indicating improved asset quality, lower risks, better capital adequacy & lower provisioning needs.

​

• Strong growth in deposits continuously with 19% in 2022 & 36% in 2023, even during time of covid and after reducing interest rates of saving account deposits from 7% to 4%. Reason for continuous growth is the brand image of bank and building of fantastic products, transparent & clean way of charging fee. Also, the future focus of bank is still to raise deposits to set their ETB (existing to bank customers) & to use these deposits to repay their legacy liabilities uptil FY 25-26 and then the pressure of increasing deposit on bank would be reduced & also these deposits would be used to fund growth of the bank.

​

• Increase in Provision Coverage Ratio from 63.57% in 2021 to 80.29% in 2023 & decline in Cost to income ratio from 78% in 2021 to 72% in 2023 collectively suggest that IDFC First Bank is on a path towards stronger financial health, better risk management, and improved operational effectiveness. Continued focus on maintaining high provision coverage and optimizing operational costs will be essential for sustaining growth and profitability in the future.

​

• Bank has demonstrated robust growth in its capital base, particularly in CET 1 and total capital with average growth rate of 28% in 2022 & 2023, which supports its ability to manage risks effectively and comply with regulatory requirements. The stable to slightly improving capital adequacy ratios from 13.77% in 2021 to 16.82% in 2023 over the years indicate prudent capital management and readiness to support continued business growth while maintaining financial stability. These factors collectively contribute to a positive outlook on the bank's capital adequacy and financial health.

​

• The bank's growth in advances and deposits market share reflects improved market penetration and customer acquisition efforts. But compared to the banking industry of Rs.21267757 cr of bank deposits, the bank's share is very small which shows a significant opportunity for growth. Also loan (personal credit, rural finance & small business credit) is Rs. 86 trillion ($1.1 T) and creates  a lot of scope for bank  to increase its share. Also, the bank started its credit card business in late 2018 and is showing a good % of growth YoY with 109.43% in 2022, 30.63% in 2023 & 25.52% in 2024. In summary, within a time span of 5 years bank is able to make its place in the market and should show continued focus on innovation, digital transformation, and customer-centric strategies as it will be crucial for maintaining and enhancing its market leadership across these segments.

​

NIFTY: xxx

RECOMENDATION: BUY

9th July 2024

IDFC FIRST BANK

( N S E : I D F C F I R S T B )

CMP: Rs 76.15