IDFC - Improved Asset Quality, Moderation In Credit Costs To Drive Further Re-Rating: HDFC Securities

HDFC Securities Retail Research

Post the restructuring of various businesses/subsidiaries carried over the last few quarters, IDFC Ltd. is now set to merge with IDFC First Bank Ltd. Currently it has shares of IDFC First Bank as its asset which will get extinguished upon merger. The value of IDFC currently is derived from IDFC First Bank.

IDFC First Bank continues to improve on its performance driven by its retailisation strategy. Retail funded assets have increased to ~69% of total funded assets and current account and savings account ratio is above 45%.

Operating costs are expected to moderate as the recent investments in digitization and branch expansion gets absorbed in higher scale of operations.

Replacement of legacy borrowings is likely to aid in net interest margin expansion. We expect this phenomenon to continue to play out over the next few years, which will result in increase in overall profitability and RoE/RoA. It has guided for credit costs of less than 1.5% in FY24.

The new retail products would provide strong support to NIMs and reduction in borrowing and credit costs would aid profit after tax expansion.

The bank expects new businesses such as commercial banking, credit cards, and home loans to drive loan growth and earnings.

We expect advances of IDFC First Bank to increase at 23% compound annua growth rate over FY23-FY25E. Improvement in profitability would drive return on asset to ~1.4% by FY25E and moderation in credit costs could result in further re-rating.

Further IDFC is available at a ~14% discount to the value derived from the swap ratio providing margin of safety, although the merger may take a few quarters to fructify.

We have valued IDFC at 145 and 158 (maintaining the discount) based on valuing IDFC First Bank at 2.4 times FY25E adjusted book value and 2.6 times FY25E ABV.

Investors can buy IDFC in Rs 130-133 band and add on dips in Rs 116-118 band.

Key triggers

• Discount with IDFC First Bank to compress,

• Simplification of holding structure,

• Strong industry credit growth,

• Run down of legacy high cost borrowing to aid NIM expansion,

• Well diversified loan book,

• Improving asset quality driving reduced credit costs,

• On track to achieve given targets by FY25

Risks and concerns

• Slower traction in building retail deposits could result in higher borrowing costs,

• Operating expenses may be higher as the bank builds its network/product suite,

• Increase in slippage ratios in future could impact the profitability and book value,

• NIMs could be impacted on higher secured lending,

• Slowdown in economy could result in slower advances growth.

Company background:

Headquartered in Mumbai, IDFC Bank is a universal bank, offering financial solutions through its nationwide branches, internet and mobile. Carved out of IDFC Ltd, it was incorporated in October-2014. It is a subsidiary of the erstwhile infrastructure lending institution IDFC.

Using technology and a service-oriented approach, IDFC Bank will focus on serving the rural underserved communities and the self-employed, while continuing to support the country’s infrastructure sector.

With best-in-class corporate governance, rigorous risk management, experienced management and a diversified team, IDFC Bank is uniquely positioned to meet the aspirations of its customers and stakeholders.

The Bank had merged with Capital First to form IDFC First Bank in December 2018. As of Q1 FY24 the bank had a network of 824 branches with total business of 3.2 lakh crore and a customer base of over 1 crore.

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