IDFC First Bank aims retail loan book growth of 25% on long-term basis

Private sector IDFC First Bank is aiming its retail loan book to grow by 25 per cent on a long-term basis and expects the mortgage lending to account for 40 per cent of its loan book going forward.

Bank's profits before provisioning are low currently because of the DFI (development financial institution) background with higher cost of legacy liabilities, and due to the set-up cost of a new bank, V Vaidyanathan, Managing Director and CEO, IDFC First Bank, said in bank's Annual Report 2020-21.

"This is getting fixed at a quick pace because of our strong profitability on an incremental basis...the underlying quality of the bank we are building is not entirely visible at this stage to you," he said in his message to the bank shareholders.

Contending that it was not right to compare IDFC First Bank with the already established 20-30 years old banks or with entities who were profitable when they converted to banks, he said "the power of incremental profitability is lost in the noise".

IDFC First Bank reported a net profit of Rs 452 crore in 2020-21. There was a net loss of Rs 2,864 crore in FY20.

The erstwhile IDFC Bank had merged non-banking finance company Capital First with itself in December 2018, post which Vaidyanathan took over as the managing director and CEO of IDFC First Bank.

He said IDFC First Bank has strong incremental profitability of retail lending as well as corporate lending business.

In retail, the incremental borrowing cost is less than 5 per cent, the lending rate is over 14 per cent, thus the incremental spreads on retail is over 9 per cent.

"We have specialisation in these segments and our credit costs (provisioning) are expected to be about 2 per cent based on the combination of products we finance. Thus our incremental ROE (return on equity) in the retail lending business is estimated at 18-20 per cent," Vaidyanathan added.

There is strong incremental profitability of corporate lending business with estimated incremental business ROE at 14-15 per cent. However, he said that this is not visible on the bank's books because of the higher cost of Rs 1,000 crore from legacy liabilities and set up costs in retail business as it is a new bank.

It is carrying Rs 27,936 crore of fixed rated liabilities at 8.66 per cent, as it converted from a DFI to a bank.

"When our bank will replace this let's say 5 per cent, we would save about Rs 1,000 crore per year on an annuity basis compared to today. This is a legacy issue on the liability side and will go away with time," he noted.

On set up cost since merger, IDFC First Bank has invested in 390 branches, 565 ATMs, added over 12,000 employees, boosted technology and scaled up many new businesses like credit cards, wealth management, gold loans, prime home loans among others.

These investments are giving us a negative drag today but this will become profitable with scale, Vaidyanathan said.

"The negative drag because of high cost liabilities will go away as as the bank will repay these liabilities on maturity. And the negative drag because of investments will go away with scale," IDFC First Bank said.

Thus the highly profitable retail and wholesale businesses will shine the results. "Our lending business is immensely profitable. We expect to grow the retail book by nearly 25 per cent on a compounded basis for a long period of time."

"This is already playing out over the last two-and-a-half years, as the NIM (net interest margin) has already expanded from 1.84 per cent pre-merger to 5.09 per cent in Q4 FY 21 and further to 5.51 per cent in Q1FY22. We expect profitability to increase as we expand the loan book," Vaidyanathan added.

The lender is also expanding customer segments to cover prime home loans and has lowered interest rates.

"We can sustainably pursue prime home loans, the safest category of loans. We expect mortgage backed loans to form 40 per cent of our loan book in due course," said the official.

He said the bank is also targeting a 2-1-2 formula to keep its gross non-performing assets (NPAs or bad loans) at 2 per cent, net NPAs at 1 per cent and provisions at 2 per cent on a steady basis. In FY21, its gross NPAs were over 4.15 per cent and net NPAs stood at 1.86 per cent.

Speaking about bank's exposure to cash-strapped telecom player Vodafone Idea, the MD told the shareholders that he expects the government to support the industry, as out of the total dues of the telecom player, as high as Rs 1.5 lakh crore are owed to the government only.

"...hence they will be keen to solve this issue. In any case, we have a lot of growth capital by our side. We will peruse the matter through law of the land."

He said a "one-off incident does not dent the long-term story".

Bank's exposure to Vodafone Idea stood at Rs 3,244 crore as of June 30, 2021. Among others, the bank said it plans to raise up to Rs 5,000 crore debt capital and will seek shareholders' approval in the annual general meeting (AGM) next month.

After assessing its fund requirements, the board of directors of the bank in July 2021 have proposed to obtain consent of the members of the bank for borrowing funds from time to time, in Indian or foreign currency by issue of debt securities on private placement basis, up to an amount not exceeding Rs 5,000 crore, it said.

Bank's 7th AGM is on September 15, 2021.

The bank will also seek their consent to re-appoint Vaidyanathan as the MD&CEO for a period of three years from December 19, 2021.

He was appointed to head the bank for a period of three years from December 19, 2018.

His term would conclude on December 18, 2021 and the board of the bank had approved his appointment for another three years in June 2021, subject to approval of shareholders and RBI.

"Accordingly, the bank has filed an application with the RBI for re-appointment of V Vaidyanathan as the MD & CEO of the Bank. The approval of RBI is awaited."

The approval of the members is now sought for his reappointment for a period of three consecutive years commencing from December 19, 2021 up to December 18, 2024 (both days inclusive), it added.