Cost-income ratio will come down for IDFC First, says CEO Vaidyanathan

Lender sees growth in new gold loan business and it is scaling up wealth management unit, he says

V Vaidyanathan, managing director and chief executive officer of IDFC First Bank, says the company will expand its loan book and profits after addressing liabilities created over the last three years post a merger with Capital First. Vaidyanathan spoke to Manojit Saha.

Here are edited excerpts from an interview.

While announcing the Q4 results, the bank said that for the first three years after merger, it grew the retail deposits base and slowed down the loan growth. The bank is now planning a loan growth between 20- 25 over the next three years. Which are the areas the bank will focus on growing its loan book?

The current loan book composition is as follows: 38% of the loan book is home loans or loan against property 38%. Consumer loans are 18%, vehicles are 12% and small and medium enterprise loans are 12%. We feel that with each of these loans everything will grow in this country. So, for us to grow the home loans or any other loans by 20-25% is not a problem. In fact, we will be launching new businesses also in the next 2-3 years.

Which are the new businesses you plan to launch?

We have recently launched the gold loan business where we see good potential because we have a large number of branches. We are scaling (up) wealth management business, and also commercial vehicle business--it gives us to meet priority sector requirements also. We are doing well in the cash management businesses, we are growing the FASTag business. Our regular business, home loan and car loan, everything we will scale up.

When Capital First merged with IDFC Bank in December 2018, you said to increase the retail loan book to 70% of total loans in 5 years [from 30% at that point in time.] Have you achieved that target?

Yes, that was achieved long back. The way we are looking right now is, we have launched so many businesses…none of the businesses of the bank should exceed 15%, except home loans, loans against property – where we have kept the upper cap at 20%, and corporate loans. Basically, we want to be a diversified bank.

The bank’s Casa has reached almost 50%. Do you think such high Casa is sustainable going ahead?

Last year our Casa grew very strongly. In FY21 the bank’s average CASA was around 42%. During FY22, the bank’s average CASA rate was close to 50%. We feel that this will be definitely sustained by us, probably be grown. We want to be a 50% Casa bank. We have strong inflow of deposits in savings and current accounts.

Linked to Casa is net interest margin. The bank’s NIM for FY22, was 5.96% -probably highest among Indian banks. Again, you think such margins are sustainable?

The main reason for margin expansion was that Casa percentage increased. Earlier this money was from wholesale deposits or legacy borrowings – which was 8.8%. Now we are repricing the same 8.8% at 4.8%. So that amount is straight away coming to the NIM. The second reason is that last year cost of funds also came down. We feel that our business is well structured and for us this kind of NIM helps us me make necessary investment to build the bank for the future.

You also talked about bringing cost to income ratio to 55% from 80% during the merger. The ratio was at 76% as of March 2022. Will you be able to bring it down to the target level?

Whenever a new business is set up that is how cost income behaves. In the initial stage, there is very little income and you are setting up branches, ATMs, people etc. In fact, the half year pre-merger period, the cost income ratio was 92%. After that it is coming down every year and it will keep coming down for the bank. There are three reasons for cost-income to further come down. One, even today there are legacy borrowings where we are paying 8.7% today. When we replace them with the current cost of money which is 4% less, the cost-income ratio will get better. The other reason is credit card business – in this business we have high cost income – in excess of 130%, 140% - and we are very sure credit cards will be profitable and will reduce the cost-income in the next three years. The third reason is as we have set up branches, those will start to sell many products. We are very confident…there is a glide path, and the cost-income ratio will come down.

The bank has seen improvement in asset quality in the last four quarters. How do you think asset quality will shape up going ahead?

In asset quality, there are two-three things to look at. Our Gross NPA has come down from 4.01% in March 2021 to 2.63% as of March 2022 on the retail side. On the Net NPA from again it has come down from 1.9% in March 2021 to 1.1% as of March 2022.

Our SMA [special mention accounts] which is pre-NPA stage, the bucket is also shrinking quite sharply. Retail slippages are coming down every quarter. Excluding one wholesale account of the retail chain which was a one-off and well provided, the Q422 annualised net slippage was only 1.85%.

And recoveries are increasing for the last four quarters. Every indicator suggests our asset quality is getting better. By next year bank’s retail NPA is expected to come down to below 2% across and net NPA of retail should come down to below 1%.

How do you see profitability of the bank in the next few years?

I believe the bank is set for a very solid performance in the next three years. The first three years, we were not growing the loan book much because we have challenges on the liabilities side to address. But that is all sorted. From this year onwards, you will begin to see profitability rising. Last year our operating profit grew by 44%. We expect that this year as well as next year, that kind of track can be maintained.