· web viewidfc limited became a highly successful and diversified group under his leadership. the...

Prepared by Aditya Kondawar Twitter @adi2five

An aspiration for accelerated and sustained growth paved the way for the merger of erstwhile IDFC Bank Ltd and erstwhile Capital First Ltd on December 18, 2018. Thus, a new bank with a new DNA was born – IDFC FIRST Bank. Renewed focus on retail.

IDFC FIRST Bank now has a strong funded asset base of more than Rs 1,10,400 crore with 37% in the retail segment. Its quarterly annualized Net Interest Margin has expanded from 1.9% to 3.0% post merger. The Bank now enjoys a leading position in some of the retail asset segments. As part of our evolution, we wanted to be able to provide financial services to a larger segment of the population, diversify away from infrastructure and provide banking services in under banked locations in the country.

As part of the demerger, the Bank inherited the large infrastructure book of its parent IDFC Ltd. In order to diversify the balance sheet, we took a call to build a retail banking franchise. By FY19, the Bank had successfully expanded its reach to serve new customer segments both on the retail as well as the wholesale side of the business, and was well on course to build a sustainable banking franchise.

Mr. Vaidyanathan(CEO) had earlier built ICICI Bank’s retail banking business to great scale of ` 1,30,000 crore, built a large liability franchise with 1,419 branches, 4,713 ATMs, large Retail CASA and Retail Term Deposits for the bank, internet and mobile banking, and subsequently, in an entrepreneurial role, founded Capital First and took it to scale with a loan book of over ` 30,000 crore in underserved segments.

Capital first initial days - Over 50% of our target customers were not on the credit bureau as no one in the formal sector had lent to them. So we had to be extra careful.

The other big development for the banking sector in FY19 was related to RBI’s February 12 circular, which was a turning point for asset quality recognition. Under this circular, banks had to classify an asset as being in default if repayments were missed even by a day. This has now been replaced by a revised prudential framework for stressed asset resolution that allows banks 30 days to monitor the account and frame a plan, instead of mandatorily having to use the bankruptcy courts. The move provides some flexibility to banks in the resolution process for stressed assets while continuing to hold them to higher standards of financial discipline and corporate governance.

In three years until September 2018, the Bank had raised Rs 2,555 crore of retail CASA from over 4,00,000 customers and had acquired over 1.8 million MFI customers, including customers of Grama Vidiyal. Quite a remarkable achievement in such short timespan.

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FY19 Performance –



Branch Reach –

Borrowings –



Concentration –

Credit Ratings –



Remuneration –

Frauds –



Funded Assets and CASA –

Investments –



Company Logo Meaning –

Loan Assets breakup and buildup –



Maturity profile of Debt –



Merger Details –



Interesting Image on Social Media –



Q1FY20 Snapshot –

Sector Wise advances –



Real Estate exposure-

Shareholding Pattern –

The dynamic IDFC Group: Meanwhile, in parallel, by strong coincidence, a great story was playing out at the IDFC Group under Dr. Lall's dynamic leadership. Under his leadership, IDFC Limited, which was primarily into infrastructure financing, had successfully expanded into Asset Management (acquiring Standard Chartered AMC), Alternative Asset Management (infrastructure Focussed), Securities (acquiring SSKI) and Investment Banking. IDFC Limited became a highly successful and diversified group under his leadership. The loan book grew from Rs 21,000 crore in 2009 to Rs 57,000 crore in 2013, with strong growth in PAT. But Dr. Lall's extraordinary foresight told him that life as an infrastructure financing company had its limitations, particularly if markets turned hostile to infrastructure. So IDFC Limited had applied for and successfully acquired a banking licence in 2014. The Bank was successfully launched in 2015 and had already set up 17 urban and 83 rural branches, and more were rolling out in the pipeline by the time Dr. Lall reached me in November 2017.



Plans of IDFC First Bank – They have guided for the following simple strategy. Grow CASA % from 10% to 30%, grow retail deposits (CASA +TD) as % of total borrowings from 10% to 50%, grow retail loan book as % of total loan book from 35% to 70%, reduce infrastructure loans from 22% to 0%, reduce Cost to income ratio from 80% to 55%, grow branches from 200 to 800, grow NIM from 3% to 5%, all in five years. In short, build franchise, diversify liabilities, diversify assets, and improve margins. We plan to implant the erstwhile Capital First’s tried and tested model of financing small entrepreneurs and consumers [a retail franchise, growing at 29% per annum and 5-year profit CAGR of 55%, (FY18 PAT grew by 37%)], on a bank platform, (IDFC Bank’s strong branch network of 242 and growing, excellent technology stack, quality internet and mobile banking, and strong rural presence).

The value proposition for merger of IDFC Ltd and Capital First was straightforward for both of us. IDFC Bank needed to retailise the loan book away from infrastructure. Building retail financing takes years or decades. Capital First fit the bill perfectly as a merger partner as the retail lending franchise was already built, the last-mile connectivity was built, intellectual property created and the loan book was large at over ` 22,000 crore (Sep 17). Not just that, the loan book was seasoned over cycles through seven years. It was a one-shot fast forwarding for IDFC Bank's diversification.

The New business model: The easiest way to understand the new business model is as follows. We plan to implant the erstwhile Capital First’s tried and tested model of financing small entrepreneurs and consumers [a retail franchise, growing at 29% per annum and profits 5-year CAGR of 55%, (FY18 PAT grew by 37%)], on a bank platform, (IDFC Bank’s strong branch network of 242 and growing, excellent technology stack, quality internet and mobile banking, and strong rural presence). We will also find cutting edge solutions for larger entrepreneurs and corporates and customise technology solutions to meet their needs for trade, forex, credit, deposits, and payments.

“Large infra book related issues”: says Deutsche Bank. Our response - this will wind down over time to NIL. We are not doing this anymore.

IDFC First Bank -

The Net Interest Income for the year ended on March 31, 2019 was ` 3,199 crore.

The Total Operating Income (net of Interest Cost) for the year ended on March 31, 2019 was ` 4,138 crore.

The Net Interest Margin for the year ended on March 31, 2019 was at 2.37%.

The Cost to Income ratio for the year ended on March 31, 2019 was at 79.45%.

The Profit/(Loss) Before Tax (without considering the exceptional item) for the year ended on March 31, 2019 was ` (696) crore.



The Book Value of the Share (Net worth considering as of March 31, 2019 and total number of shares adjusted for shares issued pursuant to merger on January 5, 2019) was at ` 37.98 per share.

Diversification of Assets - The Bank plans to increase the retail book composition to more than 70% in the next 5-6 years.

Gross Yield Expansion - As a result of the growth of the retail loan assets (at a relatively higher yield compared to the wholesale loans), the gross yield of the Bank’s Loan Book is planned to increase to ~ 12% in the next 5-6 years. The Bank will expand Housing loan portfolio as one of its important product lines.

CASA Growth - The key focus of the Bank would be to increase the CASA Ratio on a continuous basis year-on-year and strive to reach 30% CASA ratio within the next 5-6 years, as well as set a trajectory to reach a CASA ratio of 40-50% thereon. Array of digital savings & current accounts are to be offered to the customer base (more than 7 million customers) of erstwhile Capital First.

Diversification of Liabilities - Diversification of Liabilities in favor of the retail deposit (including CASA and Retail Term Deposits) is essential for the bank. As a percentage of the total borrowings, the Retail Term Deposits and CASA is proposed to increase from 10.5% currently to over 50% in the next 5-6 years and set up a trajectory to reach 75% thereafter

Branch Expansion - In order to grow Retail Deposits and CASA, the bank plans to set up 600-700 more bank branches in the next 5-6 years from the current branch count of 242. This would be suitably supported by the attractive product propositions and other associated services as well as cross selling opportunities.

Net Interest Margin - As the retail asset contribution moves towards 70% of the total fund assets, it is planned that the gross yield will continuously increase. Coupled with lower cost of funds (from improved CASA ratio), it is planned to expand NIM to about 5.0% in the next 5-6 years.

Customers - IDFC FIRST Bank has over 7.3 million live customers, of these about 3.9 million are urban customers and the remaining 3.5 million customers are semi-urban and rural. The Bank has 242 liabilities branches as on March 31, 2019.

Funded Assets - The Bank has gross funded assets of ` 110,400 crore as of March 31, 2019. Prior to merger with Capital First Limited, The Gross Funded Assets as of March 31, 2018 was at ` 73,051 crore but the numbers are not comparable with prior years. The Retail funded assets contribute 37% of the overall funded assets and are at ` 40,812 crore as of March 31, 2019. The Wholesale funded assets stood at ` 53,649 crore as of March 31, 2019. The decrease in wholesale book was mainly because of decrease in the book of financing large corporates and infrastructure. The infrastructure book of the Bank decreased by 20% from ` 26,832 crore as on March 31, 2018 to ` 21,459 crore as on March 31, 2019. To cater to the priority sector lending (PSL) requirements, the Bank had to acquire PSL assets and PSL Buyouts now stands at ` 12,924 crore as of March 31, 2019.



Core Deposits - The core deposits of the Bank (retail CASA and retail term deposits) increased by 132% from ` 5,693 crore as on March 31, 2018 to ` 13,214 crore as on March 31, 2019. The core deposits now contribute about 9.41% to the deposits and borrowings of the Bank. The Retail CASA increased from ` 1,586 crore as of March 31, 2018 to ` 4,445 crore as of March 31, 2019.

Capital Adequacy - The Bank has maintained a healthy Capital Adequacy Ratio over the years, at well above levels as directed by RBI. As of March 31, 2019 the Capital Adequacy Ratio is 15.47% with Tier-I Capital Adequacy Ratio at 15.28%.

NPA - The Gross and Net NPA of the Bank as of March 31, 2019 was at 2.43% and 1.27% respectively. As a good corporate governance practice, during the financial year ended on March 31, 2019, the Bank has proactively identified stressed assets in the Wholesale Financing and Infrastructure Financing loan book and has created credit provisions on these accounts accordingly. The overall provisioning coverage ratio on the NPA and other stressed assets is 55.9% as of March 31, 2019.

Deposits: Making relationships count - A slew of initiatives in FY19 enabled customers to make most of their Savings Accounts and Fixed Deposits with us. We made savings a lot easier and encouraging by offering an interest rate of 7% p.a. on the Savings Account for balances upwards of ` 1 Lakh. For balances below ` 1 Lakh, the Bank offers interest rate of 6% p.a.

New products –

The Bank launched a 3-in-1 integrated trading, demat and savings account facility in partnership with Zerodha, the country’s largest brokerage. The first-of-its-kind integrated account, it can be opened online and enables seamless transactions at zero brokerage.

During the year, the NRI account opening process was completely digitised, crunching the process within just a few days, ahead of industry average. This process, coupled with best-in-the-market interest rates on deposits, has led to a strong growth in NRI CASA deposits

The Bank’s contact centre, ‘Banker-on-Call’, offered relentless round-the-clock service to our customers all through the year.

the retail financing loan book for the consumer segment stood at ` 19,860 crore as of March 31, 2019.

The retail financing loan book for the MSME segment stood at ` 15,767 crore as of March 31, 2019.

The retail financing loan book for the rural segment stood at ` 5,185 crore as of March 31, 2019.

the Bank’s Government Business Liability book size, including Fixed Deposits, reached a new high of ` 12,000 crore benchmark.

As of March 31, 2019, the Bank’s wholesale credit book stood at close to 50% of the overall funded assets and the Bank would defocus on some of the segments of wholesale credit book including the infrastructure financing.



The Bank’s mobile banking app, which supports 90 functionalities, recorded 4.82 lakh downloads during the year.

Corporate Coverage - The Bank’s Corporate Coverage Group has focussed on reducing the Bank’s balance sheet risk profile from long-term and big ticket Infrastructure legacy assets to predominantly loans to operating mid-sized and more granular corporate banking assets. In the year under review, the Corporate Coverage Group successfully managed to bring down funded exposure to Infrastructure Legacy Assets by around ` 5,373 crore (21% decrease over last year). During the same period, the Emerging Large Corporate assets grew by 14% growth over last year. Consequently, the composition of Infrastructure Legacy assets in the total funded book has come down from 42% to 34% at the end of FY19.

IDFC FIRST Bank continue to be one of the leading acquirer at 82 toll plazas, having issued approximately over 1,80,000 tags in FY19. The Bank has further worked with various transporters and Tech providers in the logistics space to provide Digital solutions which are simple and secure to use for the truck operators

Rs20 crore Diwali gift! V Vaidyanathan of Capital First gifts personal shares to colleagues, close relatives and family staff - Capital First's founder and chairman V Vaidyanathan has gifted 4.29 lkah shares, worth over Rs20 crore from his personal stake to 26 of his colleagues, three former employees, 10 close relatives and five of his personal staff including house help and drivers. This is a gesture of gratitude to his colleagues, close relatives and personal staff, who stood with him in all the ups and downs of building the Capital First brand.

https://www.moneylife.in/article/rs20-crore-diwali-gift-v-vaidyanathan-of-capital-first-gifts-personal-shares-to-colleagues-close-relatives-and-family-staff/55678.html

Things to look at in Q2FY20Retail loans as a % of total loans has quickly improved to 40% as of 30 June 2019 from 13% pre-merger, and from 35% as of 31 Dec 2018, at merger. We plan to take it to 70% in five years.

The Net Interest Income for the quarter ended on 30 June 2019 was Rs. 1,174* Cr as compared to Rs. 1,113 Cr for the quarter ended on 31 March 2019, strong annualized growth of 22%.

The Total Operating Income (net of Interest Cost) for the quarter ended on 30 June 2019 was Rs. 1,485 Cr as compared to Rs. 1,386 Cr for the quarter ended on 31 March 2019, strong annualized growth of 28%.

The Net Interest Margin for the quarter ended on 30 June 2019 was at 3.01%* which was at 3.03% for the quarter ended on 31 March 2019.





The Cost to Income ratio for the quarter ended on 30 June 2019 was at 78.60% in comparison to 82.79% for the quarter ended on 31 March 2019.

The Net Loss for the quarter ended on 30 June 2019 was Rs. (617) Cr, primarily because of additional provisioning taken during Q1 FY20 towards two identified financial services loan accounts to the extent of 75% of the total exposure of Rs. 1,461 Cr.

These Financial Services companies have been recently downgraded by the credit rating agencies. With provision cover of 75%, we believe we have adequately provided for these accounts and no incremental provisions are now expected on account of these in the near future. If the bank does extra provision this time, it’s bad.

Need to check the status of those provisioned accounts on concall. Whether they r still standard, or sliped.

CASA -

5.98% June 2018

6.49% Mar 19

7.02% in June 19

CASA to be monitored this quarter

Plan to take CASA to 30% in next 5 years

Loan to deposit ratio to be checked

Name Cost of Funds CAR Loans/Advances DepositsLoan to Deposit

RatioHDFC Bank 5.03% (FY19) 16.90% 880939 953774 92%

Kotak Mahindra 5.51% (SA) 18.40% 208030 232931 89%ICICI Bank 5.23% 15.87% 592415 660732 90%Axis Bank 5.70% 15.82% 497276 540678 92%

IndusInd bank 5.94% 14.90% 193520 200586 96%Bandhan Bank 6.60% 27.03% 44776 43232 104%IDFC First Bank 7.75% 14.01% 104660 142269 74%

Branch Addition to be seen


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