Analysis of Q3FY24 Results

IDFC First Bank, poster boy of the Indian Private Banking space managed to carve out a space of its own in a short amount of time and it came out with its 3rd quarter results. Without wasting time let's figure out how it fared in different pertinent parameters.

Deposits: Total deposit base is Rs.1,76,431 crore. YOY growth 29%, QoQ Growth 8%, and CASA is around 46.8%(Q2 it was 46.4%). Considering the tight liquidity in the market it is indeed a commendable performance and it has also reduced the interest rates in saving accounts to only 3% up to 1 lakh. Now, considering the fact a dogfight is going to ensue in the coming days regarding deposits let's see how they keep up with the scenario. Also, 79% of the deposits account for Retail, which ensures a high stickiness quotient and less volatility in the margin profile.

Advances: As of Dec 31, 2023, the loan book stands at Rs.1,89,475 Crore. Mortgage Book stands around 28% of the book, Vehicles account for 10%, and Consumer loans 14%. Now, a salient feature to be taken into account is that they have brought down the infra exposure to a mere 1.58% of the loan book. They have diligently curtailed the exposure towards chunky infra loans and focused more on granular retail loans, which provide far better MArgin and lesser credit cost. Their focus on cash flow-based lending and extensive credit underwriting model is also paying dividends.

Credit Deposit Ratio: Recently RBI has flagged this issue regarding a leading private sector bank. Now, for IDFC bank it is around 101.4%, and incremental for 9Month of FY24 is around 79.89%, need to keep in mind that since their inception they have been doing their best to pare down their dependence on bonds and borrowings.

NIM: As of Q3FY24 it is around 6.42% compared to 6.13% in Q2FY23 and 6.32% in Q3FY23. Considering the fact that margin compression is plaguing the banking sector, it is indeed a welcome change. It indicates that it has managed to keep a tab on its deposit base and is able to price its advances in a competitive way. 33% growth in NII is evidence of that.

Other Income: 93% of the fee income is from the high margin retail segment which is also sticky in nature.

Cost to Income Ratio: At the time of the merger C/I ratio was around 93% and since then it has been brought down to a fairly manageable 73%. Need to keep in mind that the bank is ramping up infra in order to garner deposits, add branches, and hire human capital, spending on IT systems and Opex is going through the roof and it is getting reflected in the elevated C/I ratio.

Profitability and Asset Quality: GNPA is 2.68%, NNPA 0.68% and PCR is 84.68%

Commendable considering their exposure to retail assets. HIgh collection efficiency and lower credit cost bear testament to underwriting skillsets and robust risk management.

ROA, ROE & Capital Adequacy: ROA of 1.16%, ROE of 10.67%, and Capital Adequacy of 16.73%. Most probably there won't be any pressing need to dilute their shareholding as they have already raised money from the market. Growth capital is already there. Considering lower credit costs one could assume that the entire profit would be ploughed back into the business to take it up a couple of notches higher.

As Warren Buffett has said in multiple times banking is all about management and Mr.Vaidyanathan has done an amazing job of steering a bank through troubled waters, especially during the pandemic era and a world riddled with geopolitical uncertainty.

Q4 is the strongest quarter for the Banking sector. We need to watch how it manages its funding costs and whether it faces any kind of margin compression or not. As of today, they are trading nearly 2.4 times of book value. In order to keep up with the tearing share price rally, earnings must also stay put. Otherwise a rerating might be warranted. However, IDFC has been ticking the right boxes for the time being.