IDFC First Bank Limited

MANAGEMENT COMMENTARY

V. VAIDYANATHAN

• You’ve been a very patient investor with us
• You passed the test today
• We’ve come a long way
• We can now say the foundation is very big for the bank
• We are able to raise deposits very comfortably now.
• Deposits grew even after covid, even after dropping of rates
• Quality of customers, Quality or origination has improved

Lending Side:

• We already had a tried and tested model
  • That machine is holding well
  • The ability to disburse as well as quality of disbursements
• SMA0, SMA1, SMA2 all are not only at pre-covid levels, but is now better
  • Lowers SMAs = Lower flow into NPAs
• Asset Quality numbers are looking good
• We are very confident that credit loss for the year will be less than 1.5%. All of this has a basis.
• Asset Quality numbers are looking quite good.

Profitability:

• If you’ve noticed, over the last 3-years, loan book hasn’t grown much, 3-year CAGR, has grown by 6%
• But ex-treasury pre-provision operating profit, FY19 – the annualized of the 2nd half, post-merger, was 1105 crore.
• Now 3 years have gone by, we have spent a lot of money building various capabilities and all that, it has grown to ~2753 crore, at a CAGR of 36% – this gives us confidence in the business we are building.
• According to our internal modelling, by FY23, it should add by another 45%. By FY24, another 45%.
• This really augurs well for the bank

Provision:

• Despite 2nd wave, where there were no moratoriums, and we had to take all those provisions, our overall credit loss was only 2.5%.
• We are guiding this year for 1.5% and we will beat that very comfortably.
• This reduction in credit loss, you can imagine what it will do for our RoA and RoE.
• Significant event that has happened has the Pre-provision Op. profit was 986 crore – this gives me a lot of confidence
• The issue was not provisions, but the bank just didn’t have operating profits
• Q1FY22 – We had provisions but no profit
• But now for the bank to have an operating profit of 1000 crore, is a big thing
• Our bank will never post a loss again in our life , we will now continue to compound equity
• This translates to RoA

RoA:

• PAT trajectory QoQ is phenomenal
• This has reflected in RoA
• This story can progress up now
• A good number is probably 2%, but what is more important is the speed at which the RoA is improving
• Research reports saying we are not making good RoA are making a fundamental mistake, they are missing the point

We had guided that by Q4 of this year, RoE will be double digit RoE, but we will be there even before that. We change our guidance .

• Our exposure to NPA, legacy accounts, we have dealt one-after-one of them. I can say they are now out of the way
• It shouldn’t be surprising to you that our profitability is improving
• We are looking at a very good FY23
• We are internally feeling very, very confident

MR. SUDHANSHU – FINANCIAL RESULTS

• Credit Cards – more than 1 million cards issued
• CASA ratio is stable at 50.04%
• Average Casa Ratio grew at 10% on a QonQ basis
• Bank has excess liquidity
• Bank opened 10 branches in the current quarter
• Substantially granularized the CASA book
• 5550 crore legacy borrowings have been resolved
• The Decline in GNPA and NNPA was much sharper
• Gross Slippages were lower by 20% on a QonQ basis
• SMA positions have improved from the previous quarter
• PAT growth was driven by strong growth in operating income and lower credit costs
• Modified duration of trading book also reduced
• Trading loss was (44 crore) due to sharp increase in yields
• Provisions were lower by 17% on a QonQ basis
• CET Ratio = 14.01%

Q&A

Ishan Agarwal – Erevna Capital

(Erevna Capital – Mumbai based firm; Designated Partners: Anubhav Goel, Ronak Gala and Ishan Agarwal)

Q: Relating to NII Growth, NII growth QoQ stands at around 3%. This is the lowest QoQ growth since merger, and maybe the first time decline in NIMS QoQ. Is it because of the lag of passing on of funds from the ledning side or is it structural in nature?

• We have a lag in passing on but this quarter it should be fixed.
• It should be on an upward trajectory from Q2.

Q: Provisions at 308 crore in the Quarter. look very low. 0.9% of the average book. Are there any write-backs or one-offs in this quarter?

No

Q: You had given a guidance of 1.5% provisions. Will Provisions will be higher than 1.5% in the coming quarters for the year for the credit cost to be at 1.5% in the current year?

• We don’t change guidance just because we had a great quarter this one time.
• We don’t see any reason why credit loss in the subsequent quarters should go up materially
• We think we will we do better than 1.5%
• Right now it is 91bps for the quarter – I hope ypu agree it is very good for the kind of yield we get on the book
• 1-1.1% is our internal guidance and a fair base.

Q: Also, OPEX has seen a QoQ decline. What is the trajectory for the next 3 quarters?

• It should go up a little bit. This quarter it didn’t materially go up.
• You should expect normal QonQ growth to happen
• This time it was low.
• It should go up marginally every QonQ – because there will be more disbursals, more upfront payouts, collection expenses, but nothing material should shake it up.

Q: On the savings side, we are offering 6% on balances above 10 lakhs. How much has it impacted our blended cost of funds? What is the blended cost of funds on the savings account right now?

It would be around 5% blended savings cost on savings account

Vishal Shah – Athena Investment

(Mumbai-Based firm; Directors: Nilesh Bhagchand Borana and Shraddha Nilesh Borana.)

Q: Our Total Expense to Assets Ratio is at around 5-6%. In comparison, only Equitas Small Finance is higher than that. Even AU Small Finance is at 3.5%. The larger, private sector banks are at below 2%. Can you just help me understand this?

• Let me ask you a question, what is the vintage of these banks?
• So, if you take all the big 4 banks, they are operating for the past 25-30 years
• When you put up a branch or an ATM, it takes time to leverage.
• Our 640 branches they will have an average lifetime of 1.5-3 years. We are not 20 years.
• Everyone forgets we are a new bank. We have had a very short life here.
• As these branches really scale up, year on year, in the next 15 years, naturally the cost measure will measure up with every other bank. It has to. That is on the liability side.
• On the asset side, the established banks will probably have a large mortgage book. And the cost to assets on the mortgage book will be pretty low.
• Most of our assets are not exactly those low-rate, long-division mortgages, etc.
• Our products are of course giving us more yield, which you can see in the NIMs, but they are relatively high opex on the asset side
• Think of any product we have, 2-wheeler financing, or used cars or new cars, or LAP, you get the drift.
• As branches age, it should help
• On the liability side, branches have not yet scaled up.
• We are operating in the same country, same kind of people we are hiring, no reason why our cost structure should be different than any other private sector bank.
• Only on the liability side, only with the scaling up, that we will scale up, will we be like any other good bank.
• 2-2.5 crore spend on each branch is our annual run rate.
• On liability side, we will scale a little better than any other bank.
• On the asset side, the product suites we have are at a higher cost structure than the big banks of the country.
• Let me take a large bank of the country, they probably have a 5 lakh crore home loan book. They must have started 20-25 years ago.
• If you look at our Cost-to-Income ratio in our Home Loan book, it is around 90% or something. The prime home loan that we started just a year ago, the yields are just 7-7.5% or something.
• But today who are building it have to incur the costs. We have started.
• If we take car financing business, it is also a high cost structure. It is true our asset side is relatively higher cost. And liability we have comparatively just started.
• Our Credit card business is loss-making.
• Cost to income for credit cards is upwards of 120-150%.
• This also tends to put load on the cost-to-income ratio.
• The prime home loans we started about a year ago – NIMs are pretty low there – Today people who are building it have to face those costs
• I am not worried about this, as that’s how things are built.
• If I put pressure on this, then there’s no way we can grow.
• The businesses we are building, are built for the future. Our job as management is to get payback.
• Payback will happen when scale happens and cross-sell happens
• Our processes have just started to gather steam.
• We were a liability gathering machine till about a year ago. We have just started on this cross-sell
• We are certainly underperforming on the extent of cross-sell on the liability side.
• Once we set up the businesses and incur the expenses, our job is now to bring it to profitability.

Q: In the next 3-5 years, what should one expect on the Cost to Assets?

• You should come back to Cost-to-income, because Cost-to-assets depends on the line of business you are in.
• Cost to income we are at 75% right now. YoY it is coming down. It will still come down. We’ve done the math.
• If we bring down this ratio by 10%, our RoE will increase by ~5%.
• It will come down, it has to come down. Because income will go up.
• We can’t be at 75% per se. Definitely in the long run, we want to be in the mid 50s. Within 2 years, it should definitely come down, but might not come down materially.
• Our RoE has already touched 9%. If we just pay off the high-cost liabilities, that should give us about 750 crore, and then you reduce Cost-to-Income
• We should expect the bank to reach mid 60s in the next couple of years.

Q: I just wanted to inform you that the new app is phenomenal but Downtime of the app is very high. So, it would be great if you could look into it.

• We are aware of that. But thank you for informing us.
• It is a starting phase, but now it has stabilized. We have solved it.

Pritesh Bumb – DAM Capital

(Mumbai-based firm; MD And CEO: Dharmesh Mehta)

Q: A medium term question, How do you look at deposit rates as we are in the upcycle? So do you feel that we have to be ahead to raise rates in the industry? Is there any change in the mix to safeguard NIMs?

• No discussion going on in the bank, no plans right now.
• On the CD ratio, we are higher than other banks, but we are carrying high cost legacy borrowings, we have since merger – we have reduced these borrowings, but to that the funding requirement was lower to that extent
• if we include these long-term borrowings in the denominator, the CD ratio gets adjusted to 80%
• So once liabilities get paid off in the next 2-3 years, and we have deposits for replacement, automatically this ratio should correct in due course.

Q: Do we have room in our mix to raise NIMs? Do you see any mix-changes we can do to keep NIMs intact?

• The NIMs are quite healthy.
• It is at 5.9% in this quarter.
• We are seeing rate increase, etc. but we have not yet passed on the increase to customers – we will do this in Q2
• We feel we will maintain this.

Q: What are our Tech cost as a % of OPEX? As some of the banks are disclosing this

• We haven’t called out that number but we continue to invest in technology
• It’ll be a bit higher than other banks, but will plateau now
• Other banks, they will already have an app, already have a solution for current account management solution. For us, we have to build everything.
• We were just an NBFC who have now converted into a bank.
• Some portion of our expenses are just catch-up expenses to match capabilities.
• And others are performance enhancing expenses and we are incurring both.
• You see how quickly our story is building out in terms of Operating profit. Once we start normalizing these expenses, think about where this bank will head

Q: We can see Solid unsecured growth in all major banks. Do you think you will take a step back to see how it works out?

• We will watch closely and see what the data speaks to us.
• Our general assessment is unsecured is one dimension. When we lend a personal loan to a Wipro or an Infosys or a company, they paid back even in Covid. But if you give 2-wheeler loan, it would struggle in Covid.
• We have to see the ability to payback. It depends on how we evaluate the cash flow.

Aadar Shah – Phillip Capital

Q: Regarding Opex, you said as income grows…pace of income growth will surpass opex growth and that will contribute to RoE. Is that right?

• Both will play out
• If Retail books grows by 25% YoY, that is what we have guided for…and what will happen, we don’t have to do anything for that…when that happens, income goes up 25%, and that gives us leverage.
• Just to be clear, we are not doubtful about double digit RoE

Q: Regarding Cost of Funds, By 20th July, you have decreased the rate on personal accounts.

• In the delta sense, our business model has been made for this sort of situation
• Fundamentally, our yield is slightly better, our origin is different, NIM of 6% also we are happy with – all we have to do now is about scaling of the book
• We won’t even think twice if rates increase by 50 bps because our margins are so strong
• Wealth, Cash management, FASTag will scale up, so some bps here and that will not matter much to us, income will grow.
• Commercial Finance increased marginally on a sequential basis; we expect it to increase in subsequent quarters.
• Blended cost is now 5.2%. But don’t bother about it too much.
• If yields in the market rise for any reason, it doesn’t matter to us much, because operating leverage is yet there, we have so many buffers we are sitting on, this will be a round-off item.
• Asset Repricing will also happen which will take care of cost of funds expense increase

Q: Have you utilized Covid provision?

• We have utilized around 75 crore of Covid provisions for the corporate, retail chain loan that slipped into NPA in this quarter.
• Exposure to that account is now zero, it was 550 off crore. It was a legacy account so we couldn’t do much about it

Q: Infrastructure Portfolio at 6700 odd crore – are you confident of existing portfolio or are you planning to cut-down?

While we are getting revenues there and expect a resolution to happen in the coming year, we don’t see any incremental stress coming in.

Ashitosh Mishra – Individual Investor

Q: How much of our loans are linked to MCLR, etc and how much is fixed?

• 37% of the book is linked to external benchmarks
  • 60% – Repo
  • 40% – MCLR
• We have passed on repo increase in case of new loans
• Pricing benefit for existing book should reflect from this quarter – Q2

Q: We are in a Rising rate environment. How do you plan to manage?

• While we are not able to pass on the rate increases on existing book, we have passed on to the new book
• Our margins will be strong because of comfortable NIMs
• Average tenor would be around 8 months – but will differ from product to product
• On a blended basis, average tenor is around 2 years
• Cost of funds is 5.2%
• We will be able to replace the bonds as they mature, at. Cost of 5-5.5% – that much release will flow into the P&L as and when it happens.
• If you add this to current levels of ROA, this problem should go away
• This report that always is bearing on us, just can’t believe we can’t get to RoA – when they don’t see the source of this growth, the quality of the organization – they don’t realize it will show up down the line

Q: What is our Customer Acquisition Cost?

• We did not grow the liability base too much last year
• This year on wards, we need deposits to grow at 20-odd %, you may see more presence in marketing for subsequent times
• It doesn’t matter the number of customers – the thing to notice is the quality of the customer
• We don’t have zero balance products – the customer will bring in something 100%
• Because then we can make good use of infra for meaningful relationships

Closing Comments

• We are building a very high-quality bank and a strong customer franchisee
• Even if you are not an investor, Anybody and everybody should be our customer – we genuinely have great products and don’t charge for things we don’t believe should be charged for.
• When you look at our company 1 year from today, I am sure you won’t be disappointed.