IDFC First Bank Limited

Clearly, Their current ROEs don’t support the growth they are witnessing in their RWA. Clearly they’ll have to raise soon.

What can they do to delay the raise?

1. Increase the mix of low RWA assets in the disbursement and AUM mix. This can be achieved through an increase HL share etc. – Highly likely
2. Decrease the mix of High RWA assets – like Credit cards – Highly Unlikely.
3. Raise T2 capital, IDFC is super smart in this sense and already raised T2 in Feb i.e before the reverse in the interest rate cycle- Unlikely.
4. Wait it out till the peak CAR levels of 12-12.5% – Risky Unlikely.
5. Slow down their AUM growth & Limit the growth to the extent of ROE accrual – Highly Unlikely.

If they were to raise equity?

1. There will be 4000cr hitting IDFC Ltd bank account in few weeks & will be available for equity infusion- Infusion of this capital into IDFC First bank at ANY PRICE ABOVE THEIR BOOK VALUE , will instantly increase the current book value of the bank, thereby giving a markup for all the existing investors. – My assessment is that IDFC Merger will increase bank book value by about 10% (Considering the merger discount).

2. on Paper considering their current ROE, IDFC FB need about 2k cr of new equity/T2 cap per year for the next 2 years to maintain their 25% growth & Current RW. with the current growth momentum, IDFC FB can easily raise via any channels. It is highly likely that they’ll take money from IDFC Ltd.

3. ROE cycle post new equity rise depends on 2 factors, ROA & Gearing. it is a matter of time before they inch up.
   ROA is the better metric to assess lending institutions, ROE can always be boosted with high gearing. ROA shows the true book quality & profitability.