Crisil has assigned FAAA/stable rating to the Rs 50,000 crore fixed deposits of IDFC First Bank Ltd while the ratings on existing debt instruments have been reaffirmed at AA/stable and A1-plus.
"The overall rating continues to reflect the bank's healthy capitalisation, increased focus on retailisation of the loan book and expectation of improvement in earnings profile over the medium term," said Crisil in a detailed rationale.
However, these strengths are partially offset by the relatively low, albeit increasing, proportion of current account and savings account (CASA) deposits in borrowings.
But the ability of IDFC First to maintain good asset quality in the growing retail portfolio over a longer period and on a larger scale will be a key monitorable, said Crisil.
On the deposits front, IDFC First continues to focus on expanding its CASA deposits franchise which improved to 24 per cent of total deposits and 12 per cent of overall resources) as on December 31, 2019.
CASA deposits are estimated to have further increased in the quarter ended March. Also, the bank has been focusing on increasing the granularity in its deposit base with the top 20 wholesale deposits as a percentage of overall deposits reducing to 16 per cent as on December 31, 2019 from 24 per cent a year ago.
Crisil said a few private sector banks have faced large withdrawals from certain state government institutions in the past few weeks -- especially post the recent moratorium event on a large private sector bank. However, IDFC First has not witnessed large withdrawals and continues to grow its liability franchise, particularly on the retail side.
Further, IDFC First continues to maintain comfortable liquidity levels with the bank's liquidity coverage ratio (LCR) at 119 per cent as on December 31, 2019.
Additionally, the bank also maintains excess statutory liquidity ratio (SLR) and has tied up refinance limits from sources such as Small Industries Development Bank of India and National Bank for Agriculture and Rural Development.
With RBI's announcement on liquidity measures, it is expected that the bank's liquidity profile will further improve leading to increase in LCR. Nevertheless, any significant withdrawals on the deposit front will remain a key rating sensitivity factor.
From a business perspective, the 21-day nationwide lockdown declared by the government to contain the spread of novel coronavirus (COVID-19) will have near-term impact on disbursements and collections of companies.
Crisil said any delay in return to normalcy will put pressure on collections and asset quality metrics. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
Given this, gross non-performing assets of IDFC First are likely to increase from current levels due to slippages in the corporate segment and vulnerability of the key retail segment of the bank's MSME borrowers, the economic slowdown and COVID-19.
In this context, given the aggressive provisioning policy followed by the bank, its profitability likely to be impacted in the near term. However, this stress on asset quality and profitability is expected to be temporary, with both improving as normalcy returns in economic activity.
The expertise of the management and its demonstrated ability to maintain retail asset quality in Capital First Ltd (CFL) across various cycles and events will also hold them in good stead, said Crisil.
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