IDFC First Bank Limited

Observations After Q1 FY25 Results

Management appears to contradict its previous statements and has come up with new justifications for its performance issues. Here are a few instances:

1. Bank License and Merger Reasons
   V. Vaidyanathan has repeatedly highlighted the benefits of obtaining a bank license. He previously claimed that Capital First (an NBFC) was borrowing at 9% and lending at 13-14%. With the bank license, he expected borrowing costs to drop to 5-6%, which would provide a significant boost to the business. However, he now suggests that the bank license is a liability compared to the NBFC model. He explained that 30% of the bank’s balance sheet is not available for lending, whereas an NBFC does not need to maintain CRR and other ratios. (This was during the Q1 FY25 concall.)
2. High Cost-to-Income Ratio
   For context, the average cost-to-income ratio at a well-managed bank is around 45%. The projected FY27 cost-to-income ratio for IDFC First is 65%, despite the bank having been operational for 10 years by then.
   a) One reason given by management for this high ratio has been the legacy bonds on the balance sheet from the former IDFC Bank, which constituted nearly 35% of the balance sheet at the time of the merger. This has since decreased to less than 5% and is expected to be almost 0% by FY26. Nevertheless, the cost-to-income ratio for FY27 is projected to be 65%, which is extremely high.
   b) The credit card business has been cited as a drag on earnings. As of the end of Q1 FY25, the credit card business contributed around 3% to the total loan book. The impact of a high cost-to-income ratio on just 3% of the business should ideally be minimal, which makes this explanation unconvincing.
3. Book Quality
   During the Q4 FY24 concall, the guidance for FY25 credit cost was 1.65%. However, the credit cost for Q1 was 2% and has been revised to 1.85% for the year. The reason given was the deterioration in the JLG book, which comprises 6% of the loan book. Only 5% of this JLG book has moved to SMA status (5% of 6% of the book), contributing just 0.03% to the increase in credit cost. The rise in credit cost appears to stem more from other parts of the book than from JLG. Under ideal circumstances, there should be no need to specifically highlight the JLG book, as there will always be segments of the business performing slightly worse.
4. Building a Great Institution for the Future
   At the end of Q1, the bank unexpectedly raised capital of ₹3,200 crore, further diluting equity by 7%. Original shareholders from before the merger would have been better off keeping their money in a savings account with IDFC First rather than investing in the bank, which has not provided a 7% return since the merger. While Vaidyanathan may be building a great institution for customers and employees, he is definitely not for investors.

While each issue individually might not seem significant, the pattern of continuous blame-shifting raises some red flags.
Reminds of a Warren Buffett quote “What you find is there’s never just one cockroach in the kitchen when you start looking around “.