Cost to income ratio is not a pain point.
It’s an opportunity.
All depends on your investment horizon.
IDFC Bank is building a bank…and they need to spend all this money to build out the bank. And don’t forget presently they aim to set up 150 to 200 branches. In future, as they grow, the need will be for a lot lot more branches to make an impact. All this is cost…but as the base grows, this will moderate (as a ratio). But it’s possible not to an extreme level.
And this cost to income ratio saga at the set up stage may not be the end of it anyway.
The one other bank which has ramped up investments in current times? An old, very well established, HDFC Bank. They opened appx 1,500 branches last year (on a base of 6,000+ branches – that’s HUGE). This year, it will be another 1,500 to 2,000 branches. All guns blazing.
Why? Because they do not want to miss out the opportunity that lies ahead.
This hurts near term ratios (like ROE) and profitability. But as these branches turn profitable, I think in two to three years, they have a sling effect on the business (and this will reflect in ROEs).
If you are a long term investor, this is good. Near term investments (reflected in among others in the cost to income ratio) set you up for even bigger long term gains.
If you are a short term investor, however, you are in trouble (kind of).
Having said that what could go wrong for long term investors is if the execution is not up to the mark, or if in the quest for growth the quality of the book falls. So keep a keen eye on that.
Discl: Interested
| Subscribe To Our Free Newsletter |
