Key Takeaways
Here are the key takeaways from the IDFC FIRST Bank Q1 FY'24 earnings call:
- The Bank is becoming more diversified with multiple lines of business like NRI banking, wealth management, credit cards, FASTag, trade finance, etc. This is leading to diversified revenue streams beyond just lending.
- Deposits have grown rapidly from Rs 38,455 crores at merger in Dec 2018 to Rs 1,48,000 crores now. Retail deposits as a % of total deposits have increased from 27% to 77% during this period.
- CASA deposits are up to Rs 71,000 crores with 27% Y-o-Y growth. Despite reducing savings rate from 7% to 4% for deposits up to Rs 10 lakhs, CASA growth has remained strong.
- Asset quality remains stable with Retail, Rural and SME gross NPA at 1.53% and net NPA at 0.52%. Infra NPA is 23.27% but the book size is small now. Overall bank NPA is 2.17% gross and 0.70% net.
- Core operating profit grew 45% Y-o-Y to Rs 1,427 crores showing the strength of underlying business. PAT grew 62% Y-o-Y to Rs 765 crores.
- Management expects margins to remain stable at current levels. Credit costs are expected to remain around 1.2% versus earlier guidance of 1.5%.
- ROA was 1.26% (annualized) for Q1 FY24 and ROE was 11.78%. Management expects steady improvement in profitability ratios going forward.
- Management remains confident of sustaining balance sheet growth of around 25% with strong performance on asset quality and profitability.
Question Answers Sections
Q. What's Management's Commentary on branch expansion plans and target for next 2-3 years.
On the question regarding branch expansion plans, the management commented that:
- They will keep adding branches as required to support business growth.
- They don't have a fixed target but keep the number fluid based on liability requirements.
- To support targeted balance sheet growth of 25% p.a., they may need to add around 150-200 branches annually.
- In the last 3 years, they have added 650-700 branches, reflecting 4x growth on the earlier base of around 150 branches.
- So the incremental addition could be in the range of 150 branches per year for the next 2-3 years.
- The focus is to expand in line with business growth needs rather than having a pre-set branch addition target.
- They monitor liability requirements to support targeted loan book growth and add branches accordingly to raise deposits.
So in summary, IDFC First Bank is looking to expand its branch network by around 150 annually over the next 2-3 years, in line with business growth requirements rather than having a fixed target.
Q. What's Management's Commentary on Average cost of savings accounts deposits currently.
On the question regarding the average cost of savings account deposits, the management provided the following comments:
- The average cost of savings account deposits currently is about 5.6% for IDFC First Bank.
- Earlier, the Bank had reduced savings deposit rate from 7% to 4% for deposits up to Rs 10 lakhs.
- Despite this reduction, CASA deposit growth has remained strong at 27% Y-o-Y.
- 44-45% of the growth in retail deposits is still happening despite the rate cut.
- They feel no need to increase rates further, given comfortable CASA growth momentum.
- The rate cut was a drop of 300 bps from 7% to 4% for a key deposit bucket.
- But deposits continued to rise after the rate reduction as well.
- So 5.6% is the current average savings deposit cost.
In summary, IDFC First Bank has managed to reduce savings deposit cost from 7% to 4% for a key bucket, yet maintain strong CASA growth momentum. The average savings deposit cost is now about 5.6% despite the rate cut.
Q. Management's Commentary on Potential impact if RBI increases risk weights on unsecured retail loans.
Here are the key comments from IDFC First Bank management on the potential impact if RBI increases risk weights on unsecured retail loans:
- They believe any such move would be guided by the regulator's wisdom and in the best interest of the overall system.
- IDFC First Bank has very healthy capital adequacy ratios currently.
- Their business model is generating very high collection efficiency, low SMA and gross NPA.
- So the underlying business fundamentals remain strong.
- If higher risk weights require passing on some costs to customers, they can consider it.
- Given the healthy margins, small increases in risk weights can be absorbed.
- They aim to maintain comfortable capital adequacy ratios.
- The priority is to sustain healthy asset quality rather than maximizing growth.
- So some impact can be managed by calibrating growth.
In summary, IDFC First Bank believes they are well positioned to absorb minor increases in risk weights on unsecured retail loans, if any. The underlying business model remains resilient. Any impact can be managed through calibrated growth while maintaining healthy return ratios and asset quality.
Q. Management's Commentary on Strategies to manage employee attrition, especially at junior levels.
Here are the key comments from IDFC First Bank management regarding their strategies to manage employee attrition, especially at junior levels:
- They acknowledged higher attrition is an industry-wide phenomenon especially at junior levels in sales roles.
- IDFC First Bank's attrition rates are slightly lower than the elevated levels seen at some larger banks.
- Attrition has improved in Q1 FY24 compared to full year FY23.
- There is a downward trend in attrition over the past few years.
- Focused efforts are on to make the end-to-end employee lifecycle more engaging.
- Special attention is given to training and development programs for junior staff.
- Work environment, culture and values play a key role in retention.
- Compensation benchmarking exercises are done regularly.
- Internal job postings allow rotational opportunities.
- Regular feedback is taken to address pain points.
- All of this has helped in improving staff retention.
In summary, IDFC First Bank is focused on better training, work culture, rotational opportunities, and competitive compensation to manage attrition. The efforts have helped bring down attrition, especially at junior levels.
Q. Management's Commentary on Demand outlook across retail loan segments given rising interest rates.
Here are the key comments from IDFC First Bank management on the demand outlook across retail loan segments given rising interest rates:
- They continue to see very strong demand across all retail loan products like mortgages, vehicles, personal loans, credit cards etc.
- Rate hikes have not impacted demand or the ability of retail borrowers to service debt.
- Collection efficiency remains very high at 99.5% in the current bucket.
- This indicates most customers have adequate repayment capacity.
- Loan growth across retail products remains healthy in the range of 15-45% YoY.
- Rates are still below pre-Covid levels despite the recent increases.
- Underwriting standards ensure adequate repayment capacity is available.
- Growing GDP provides buffer as incomes also rise over time.
- Diversified loan mix also provides stability to asset quality.
- Thus, management sees no concerns regarding retail loan demand. The opportunity to grow remains significant.
In summary, IDFC First Bank management expects continued strong demand in the retail segment based on on-ground trends despite rising interest rates.
Q. What's Management's Commentary on Performance of loan against property (LAP) segment.
Here are the key comments from IDFC First Bank management regarding the performance and outlook of the Loan Against Property (LAP) segment:
- The LAP book has remained flattish in recent quarters.
- This is partly due to some sell-downs of the LAP portfolio during this period.
- Otherwise the underlying LAP business remains stable for the bank.
- Overall mortgage book, including home loans and LAP, has grown by 31% YoY.
- LAP lending is focused on quality borrowers with adequate income proofs.
- Prudent LTV ratios are maintained within 70-75% on the portfolio.
- Demand conditions remain favourable for LAP lending.
- Competition in the segment has however intensified recently.
- IDFC First Bank remains selective in targeting LAP customers with proper credit assessment.
- There are no major concerns on asset quality or demand in the LAP business.
In summary, while IDFC First Bank's LAP book has seen some fluctuations due to sell-downs, the underlying business remains stable. The bank continues to focus on high quality LAP lending with conservative LTV ratios.
Q. What's Management's Commentary on Slippages, write-offs and credit costs during the quarter.
Here are the key comments from IDFC First Bank management on slippages, write-offs and credit costs in Q1 FY24:
- Gross slippages reduced by 1% YoY and net slippages reduced by 30% YoY.
- Net slippages also declined by 19% QoQ in absolute terms to Rs. 380 crores.
- If annualized, net slippages are at very comfortable levels.
- Specific write-off numbers were not disclosed, but write-offs happen as per usual norms at various stages like 360 days past due etc.
- The key metric driving P&L impact is provisions made.
- Credit costs for Q1 FY24 annualized were 1.16% of average funded assets.
- This is well below the earlier guidance of 1.5% credit costs.
- Low slippages and tight control on credit costs reflects strength of underwriting and collections.
- Management remains confident of sustaining low credit costs around 1.2% going forward.
- This provides cushion to absorb occasional blips in asset quality.
In summary, IDFC First Bank demonstrated excellent control over slippages and credit costs in Q1 FY24, reinforcing management confidence in maintaining benign asset quality going ahead.
Q. What's Management's Commentary on Growth driver for strong fee income growth trends.
Here are the key comments from IDFC First Bank management on the drivers of strong fee income growth:
- Fee income is becoming well diversified across multiple lines of business.
- Loan origination fees, while still meaningful, are reducing as a percentage of total fee income.
- Businesses like FASTag toll collections, credit cards, trade finance, FX are driving growth.
- Distribution of third party products like mutual funds and insurance also seeing strong growth of 87% YoY.
- Overall focus is on growing non-credit fee streams.
- As customer base rises, more account related and transaction fee income is accruing.
- New businesses like wealth management will further aid fee income diversification.
- Management expects fee income growth to outpace balance sheet growth healthily.
- If balance sheet grows 25% p.a., fees can outgrow materially above that rate.
- Operating leverage from business mix and volumes also aiding fee growth.
In summary, the rapid diversification across fee-generating business lines for IDFC First Bank is enabling strong growth in fee income.
Q. What's Management's Commentary on Profitability outlook and expected trajectory of ROA/ROE.
Here are the key comments from IDFC First Bank management regarding the profitability outlook and expected trajectory of ROA/ROE:
- The management believes ROA will sustain at healthy levels given the strength of core operating income.
- ROA of 1.26% in Q1 FY24 provides confidence of maintaining above 1% profitability.
- Core operating profit grew 45% YoY providing strong earnings momentum.
- Stable margins around 6.3% will support profitability.
- Low credit costs of 1.2% versus 1.5% guidance also positive.
- While some quarterly volatility of 2-3 bps in ROA can happen, the trajectory should be upwards.
- FY24 ROA expected to be better than FY23, and so on for next few years.
- ROE was lower in Q1 FY24 due to capital raise but should recover.
- Retail portfolio delivers ROE above 20% and as it grows, bank-level ROE will benefit.
- Management aims to sustain ROE above pre-Covid levels through business mix and operating leverage.
In summary, IDFC First Bank management expects robust profitability ratios with ROA above 1% and improving ROE on the back of growth in high-return retail assets and operating leverage.
Q. What's Management's Commentary on Factors driving strong growth in CASA deposits across the industry.
Here are the key comments from IDFC First Bank management on the factors driving strong growth in CASA deposits across the industry:
- CASA growth comes from providing complete cash management solutions to corporate clients.
- Banks with longer presence have existing client relationships and solution integration helping CASA growth.
- IDFC First Bank being relatively new is building these capabilities which will drive CASA.
- Progress being made but more work needed versus established players.
- Retail CASA growth aided by brand, service quality and pricing.
- As IDFC First Bank enhances brand image, it is seeing strong inflows into savings accounts.
- Retail CASA growth remains very robust at 27% YoY.
- For banks with strong operating models, some deposit inflows are at zero rates too.
- Digital transformation across banking also aiding retail CASA growth.
- Thus, established player advantages, brand pull and technology are driving industry CASA growth.
In summary, comprehensive cash management solutions for corporates and digital-led customer experience combined with brand pull are enabling leading banks to drive strong CASA growth.
Q. What's Management's Commentary on Economics and credit costs of the credit card business.
Here are the key comments from IDFC First Bank management regarding the economics and credit costs of their credit card business:
- The management team has decades of experience in credit cards to manage this business.
- They are targeting a return on equity of over 24-25% as the business matures.
- Credit costs are lower than the 6.5% reported by some credit card focused banks.
- Gross NPA is around 1.7% and net NPA is 0.2-0.4% for IDFC First Bank's credit card portfolio currently.
- Lending has largely been to existing customers with savings accounts initially.
- Co-branded cards are now helping acquire new customers.
- Underwriting is conservative with focus on existing customer data.
- SBI Cards financials reflect the potential economics of a pure-play credit card business.
- Operating leverage will help improve returns as volumes pick up.
- Ancillary revenues like interchange also boost overall income.
- Thus, IDFC First Bank is optimistic of delivering ROE above 25% with tight control on credit costs in the high-growth credit card segment.
In summary, management believes the credit card business can be highly profitable with ROE above 25% based on prudent underwriting, operating leverage and ancillary income streams.
Q. What's Management's Commentary on Scope to accelerate loan growth further from 25% levels.
Here are the key comments from IDFC First Bank management regarding the scope to accelerate loan growth further from current levels of around 25%:
- The management believes there is no need to accelerate loan growth from current levels.
- Maintaining current growth rates is itself significant on a larger base now.
- Adding more distribution points and new product lines can drive growth on current base.
- No need seen to relax credit norms or take higher risks.
- Priority is on sustaining healthy asset quality track record.
- Gross NPA below 2% and net NPA below 0.5% is highly valued.
- Would not like to jeopardize this by pushing growth recklessly.
- Retail loan growth already exceeds 25% since wholesale is degrowing.
- In few years, even retail growth can moderate to 20-25% levels.
- 25% growth sustained over years is itself a great outcome.
- No inclination to accelerate growth beyond 25% levels.
In summary, IDFC First Bank management does not see merit in accelerating already strong loan growth beyond 25% levels, given the focus on maintaining asset quality as the foremost priority.
Q. What's Management's Commentary on Overall asset quality outlook and trends in restructured loans.
Here are the key comments from IDFC First Bank management on the overall asset quality outlook and trends in restructured loans:
- Management feels very confident about sustaining current asset quality trends.
- Low SMA of 0.85% provides comfort that pipeline to NPA remains under control.
- Collection efficiency remains very high despite some restructuring.
- Total restructured book is just 0.47% of total funded assets, majority is secured loans.
- Adequate 25% provision cover is maintained on restructured loans.
- Infra segment restructuring is also minimal now and most exposure is fully provided.
- Corporate segment restructuring is negligible at 0.1% of corporate book.
- Secured nature of book provides comfort.
- Management expects restructuring figures to keep coming down gradually.
- Overall asset quality outlook remains stable given strong underwriting and collections.
In summary, IDFC First Bank management expects restructured loans to steadily decline given negligible additional restructuring. Tight control on SMA and high collection efficiency provides comfort on asset quality outlook.
Q. What's Management's Commentary on Growth trends and outlook across key retail loan products like mortgages, vehicle loans, personal loans, credit cards etc.
Based on the IDFC First Bank Q1 FY24 earnings call, here are the key comments from management on growth trends and outlook across major retail loan products:
Home Loans:
- Grew by 31% YoY showing continued robust momentum.
- Mortgages are a steady long-term growth driver.
- Opportunity to gain market share exists as housing demand remains strong.
Vehicle Loans:
- Wheels segment including 2-wheelers and cars grew 45% YoY.
- Increased distribution reach is aiding growth.
- Segment has potential for sustained rapid growth.
Personal Loans:
- Grew by 15% YoY on a larger base now.
- Diversified product mix being expanded further.
- Customer cross-sell opportunity significant.
Credit Cards:
- Strong growth of 68% YoY albeit on a smaller base.
- 1.7 million cards issued since launch in Jan 2021.
- Spends have increased by 72% YoY.
- Co-branded cards to help acquire new customers.
- Massive growth potential exists in cards business.
Overall, management remains very optimistic on rapid growth across mortgages, vehicles, personal loans and credit cards given distribution reach, diversified product suite and cross-sell initiatives. The opportunity for market share gains also exists.
Q. What's Management's Commentary on Progress on expanding distribution network through branches, POS, partnerships etc.
Here are the key comments from IDFC First Bank management regarding progress on expanding distribution network:
- The bank added 15 new branches in Q1 FY24 taking the total branch count to 824.
- 650-700 branches added over last 3 years reflecting rapid expansion.
- Further branch expansion will be calibrated to liability requirements.
- Target is to open around 150 branches annually over next 2-3 years.
- POS terminals for credit cards increased from 12,000 to 28,000 over last year.
- Partnership with Paytm for issuing FASTags expanded reach significantly.
- Tie-up with Indian Oil helped boost credit card distribution.
- New relationships being explored for co-branded credit cards.
- Technology being leveraged to enable paperless and presence-less account opening.
- API integrations with fintechs and aggregators being pursued.
- Distribution of third-party products via branches also being expanded.
- Omni-channel approach being followed to enhance reach cost-efficiently.
In summary, IDFC First Bank continues to make strong progress in expanding distribution through focus on branches, POS terminals, partnerships, digital channels and API integrations.
Q. What's Management's Commentary on Experience with digital initiatives like video KYC, OTP-based loans etc. and impact on customer acquisition.
Here are the key comments from IDFC First Bank management regarding their experience with digital initiatives for customer acquisition:
- Video KYC has been implemented successfully enabling completely paperless account opening.
- This has made the account opening process easy and instant for tech-savvy customers.
- OTP based loans are also doing well with good activation rates.
- For salaried customers, loans can be disbursed in a few minutes based on eligibility.
- WhatsApp banking platform launched for convenient self-service.
- AI-powered chatbot on website for instant query resolution.
- Positive response seen for pre-approved instant loans on mobile app.
- APIs developed for integrating with various fintechs and aggregators.
- Digital initiatives have reduced turnaround time and improved convenience.
- This is helping acquire technologically inclined millennial customers.
- Share of digital account opening and lending increasing steadily.
- Focus is on further improving digital product suite and user experience.
In summary, IDFC First Bank's digital initiatives have shown positive impact on customer acquisition by reducing friction and improving convenience especially for younger tech-savvy consumers.
Q. What's Management's Commentary on Current mix of secured and unsecured loans within the retail portfolio. Current mix of secured and unsecured loans within the retail portfolio. Asset quality performance of individual retail loan segments.
Based on the commentary in the IDFC First Bank Q1 FY24 earnings call, here are some key insights on the secured vs unsecured mix in the retail portfolio and asset quality of key segments:
Secured vs Unsecured Mix:
- Mortgages, which include home loans and LAP, account for 24% of total bank advances.
- Wheels segment comprising vehicle loans is around 10% of total advances.
- Together, around 34% of total advances are secured retail loans.
- Unsecured loans like personal loans and credit cards are around 15% of total advances.
- Management stated majority of restructured loans are also secured in nature.
Asset Quality of Segments:
- Overall retail GNPA is 1.53% and NNPA is 0.52%, indicating robust asset quality.
- Mortgage portfolio including home loans and LAP is expected to have negligible NPAs given significant collateral cover.
- Wheels segment also enjoys high asset quality given vehicle as collateral.
- Unsecured loans like personal loans, credit cards are at relatively higher GNPAs but still controlled below 2% as per disclosures.
- Management comfort on asset quality comes from high collection efficiency across retail products.
In summary, significant portion of IDFC First Bank's retail book is secured, especially mortgages and vehicle loans. Unsecured portfolio GNPA is also around 2% despite some elevation from secured loans. Overall asset quality is stable across retail products.
Q. What's Management's Commentary on Growth trends in the SME and corporate loan portfolio.
Outlook on credit costs for FY24 and any guidance for FY25.
Capital raise plans to support future growth while maintaining capital adequacy ratios.
Based on the commentary in IDFC First Bank's Q1 FY24 earnings call, here are some key insights on growth trends in SME and corporate loans, outlook on credit costs, and capital raise plans:
SME and Corporate Loan Growth:
- Loans to SME segment grew 23% YoY in Q1 FY24, faster than overall book growth.
- Management has highlighted SME as a focus area for growth.
- Corporate loans however degrew as past infrastructure loans run down.
- Emerging corporate segment grew 7% YoY.
- Management aims to sustain around 25% blend growth, with retail tapering to similar levels.
Outlook on Credit Costs:
- Credit costs guidance for FY24 is around 1.5% of advances.
- Actual credit costs in Q1 FY24 were lower at 1.16% annualized.
- Management expects costs to remain around 1.2% based on current trends.
- No specific guidance provided yet for FY25.
- But overall commentary indicates continued low credit costs.
Capital Raise Plans:
- Bank raised Rs 1,500 crores of Tier 2 capital in Q1 FY24.
- Capital adequacy ratio currently stands at 16.96% with healthy cushion.
- Incremental capital will be raised as needed to support growth while maintaining capital ratios.
- Management comfortable with current levels, no immediately upcoming raise indicated.
In summary, SME and corporate loan growth trends are stable, credit costs are expected to remain low around 1.2% in FY24, and further capital will be raised as required while maintaining adequate buffers.
Q. What's Management's Commentary on Details of restructured loan book - composition, security, provisions etc.
Ratios like cost-to-income, credit-to-deposit, fees-to-income etc. and outlook.
Here are some key insights from IDFC First Bank management's commentary on the restructured loan book and key financial ratios:
Restructured Loan Book:
- Total restructured loans are 0.47% of funded assets, reduced from 0.59% in previous quarter.
- Majority, over 85% of restructuring is for secured loans as per management.
- This provides comfort compared to unsecured loans.
- 25% provision cover is maintained on restructured loans.
- Infrastructure and corporate restructuring is minimal now.
- Expect further reduction in restructured book gradually.
Key Ratios:
- Cost-to-income ratio was 43.8% in Q1 FY24, improved from 49.2% in Q1 FY23.
- Management aims to contain operating expenses and improve productivity.
- Credit-to-deposit ratio was healthy at 75% supported by strong deposit growth.
- Fee income contributed 2.4% of total assets, diversification helping boost non-interest income.
- Management expects fee income growth to outpace balance sheet growth.
- Current account deposits improved to 13.4% of total deposits from 11.1% last year.
In summary, the bank's restructured loans are largely secured with adequate provisions. Improvement seen in key ratios like cost-to-income, fees contribution. Management focused on further improving productivity.
Q. What's Management's Commentary on Qualitative thoughts on enhancing brand awareness and reputation.
Impact of rising interest rates on NIMs and deposit costs.
Here are some key insights from IDFC First Bank management's commentary on brand building and impact of interest rates:
Brand Building:
- Management feels the bank enjoys a positive image among customers who know it.
- Brand pull is enabling strong inflows into savings accounts despite lower rates.
- Service levels and customer experience play a key role in building brand.
- No shortcuts taken just to expand visibility or awareness.
- Progress driven by delivering consistent performance on ground.
- Well regulated governance framework aids reputation.
- Focus is on responsible banking and ethics led growth.
- Resulting customer experience is the best brand ambassador.
Impact of Interest Rates:
- Cost of funds may have largely peaked out as rate hikes taper.
- Some lagged impact on deposit costs but offset by repo-linked loan repricing.
- Strong deposit growth momentum continues despite rate hikes.
- Overall NIMs expected to remain stable around 6.3% levels.
- Diversified loan mix and operating leverage aiding margin stability.
- Not concerned about modest rise in deposit costs if funded asset yields also rise.
In summary, IDFC First Bank aims for organic brand building through customer experience rather than visibility drives. Management feels margin outlook is stable despite some lagged impact of rate hikes on deposits.
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