IDFCFIRSTBNSEQ2 FY'24November 03, 2023

IDFC First Bank Limited

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77turns

9analyst exchanges

4executives

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Management on call

V. Vaidyanathan

MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER, IDFC FIRST BANK

Sudhanshu Jain

CHIEF FINANCIAL OFFICER

Saptarshi Bapari

HEAD, RELATIONS, IDFC FIRST BANK INVESTOR

Chintan Shah

ICICI SECURITIES

Key numbers — 40 extracted

Rs. 1.65 lakh crore

row we're able to raise deposits in a very strong manner. So, our deposits have now reached over Rs. 1.65 lakh crores and it's grown by over Rs. 50,000-odd crores with the growth of about 44% over the last year.

Rs. 50,000

strong manner. So, our deposits have now reached over Rs. 1.65 lakh crores and it's grown by over Rs. 50,000-odd crores with the growth of about 44% over the last year. 2. The second thing that I point ou

44%

d over Rs. 1.65 lakh crores and it's grown by over Rs. 50,000-odd crores with the growth of about 44% over the last year. 2. The second thing that I point out is that the CASA ratio, all of you kno

46.4%

y from current, saving into term deposit etc. But we have seen a CASA ratio being quite stable at 46.4% this quarter, down marginally from 46.5% last quarter, but really that's marginal. 3. Our plan

46.5%

c. But we have seen a CASA ratio being quite stable at 46.4% this quarter, down marginally from 46.5% last quarter, but really that's marginal. 3. Our plan to diversify our liability base, the strate

77%

versify our liability base, the strategy which we started about four or five years ago continues. 77% of our customer deposits of Rs. 1.65 lakh crore is now retail diversified deposits. Just for cont

73%

is now retail diversified deposits. Just for context by the way that when we started 73% was wholesale and 27% was retail. Now it's the other way around. So that's one massive progress I

27%

sified deposits. Just for context by the way that when we started 73% was wholesale and 27% was retail. Now it's the other way around. So that's one massive progress I'd like to call out an

25%

our ability to raise deposits is so strong that we're able to fund our growth of the loan book at 25% comfortably and also, be able to repay the high-cost bonds as and when they are maturing. As you

Rs. 25,000

ble to repay the high-cost bonds as and when they are maturing. As you know we had closed about Rs. 25,000 - 26,000 crores of high-cost bonds at the time when the merger started. Today, that number has com

26,000 crore

the high-cost bonds as and when they are maturing. As you know we had closed about Rs. 25,000 - 26,000 crores of high-cost bonds at the time when the merger started. Today, that number has come down to some

Rs. 15,000 crore

ost bonds at the time when the merger started. Today, that number has come down to something like Rs. 15,000 crores. Even I think for the rest of this financial year, another Rs. 3,000 crores coming up for repa

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Guidance — 17 items

V. Vaidyanathan

opening

“Our plan to diversify our liability base, the strategy which we started about four or five years ago continues.”

V. Vaidyanathan

opening

“At this Bank things are absolutely stable, and we will try to maintain it like that going forward.”

V. Vaidyanathan

opening

“So, you should expect this kind of a stable performance from the Bank for a while now because we don't see anything fundamentally changing in our story.”

Moving on to profitability

opening

“The credit cost on an annualized basis as a percent of average funded assets was at 1.19%, which is well below our guidance which we had given earlier.”

Moving on to capital adequacy

opening

“We would like to maintain it around these levels going forward as well.”

Dixit Doshi

“So where do you feel that we will be breakeven by this year end, maybe start making profits next year?”

V. Vaidyanathan

“So probably next year we'll need to raise Rs.”

V. Vaidyanathan

“Even if a slightly higher cost-to-income ratio than what we initially guided for, the way the economics fall in the P&L, the return on equity front, we are broadly quite confident that in the exit quarter of FY25 we should be able to meet our guidance.”

V. Vaidyanathan

“Yes, you're right, we had said that by FY25 we should be able to breakeven and in FY26 we should start making money, that's probably the direction continues.”

Kaitav Shah

“Does it in anyway change the growth trajectory for you or you will be more data dependent on what's happening within your firm and you will be going ahead with the show as it's been going?”

Risks & concerns — 10 flagged

Therefore, the short point is that we are very careful and with the kind of heightened attention to this matter, we have been very cautious, but I think we have become more cautious now.

— V. Vaidyanathan

So, we have tightened many of our norms because we don't want to be caught on the wrong foot and there's a long list of tightening that we have done over the last two years which we presented to our risk management committee of the board in today's board meeting as well.

— V. Vaidyanathan

One more company reporting yesterday, SBI Cards which sounded caution on the stress building up in the unsecured loan book and that is also showing stress in their credit card book.

— Hardik Shah

So yes, we'll continue to incur the necessary expenses and the drag is coming on the liability side.

— V. Vaidyanathan

So, as long as we keep expanding, I guess on the liability side, there will always be a bit of a drag.

— V. Vaidyanathan

Of course, it takes its own time, difficult to predict, but things are moving smoothly on this front.

— Sudhanshu Jain

Then thirdly is the risk management division of the Bank which runs independent of the underwriting teams.

— V. Vaidyanathan

The risk management committee is presented with 160- 170 pages and there we present a full trend line of 12 months or four quarters or eight quarters as required.

— V. Vaidyanathan

Then after risk management committee, then come to the board, then we finally present all of these numbers to the board and literally in every single board meeting we present all the key parameters to the board.

— V. Vaidyanathan

In fact, in yesterday's risk management committee, we presented vintage analysis.

— V. Vaidyanathan

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Q&A — 9 exchanges

So, sort of just ask a couple of questions. So first in the retail loan portfolio, so like we are seeing a strong growth in the digital loan segment. So, could you give us more color like what is the nature of these loans and what is the ticket over there like like who are the major customers as well?

V. Vaidyanathan

These are the digital loans, like how every other institution is doing digital loans, because these are loans that we can originate either through partners where loans are originated digitally, they could come from a partner, even be loans that are maybe we advertise in Google or somewhere and prospective customers click on it and then you process them digitally end-to-end. So again, how would it be different in terms of ticket sizes as compared to our consumer loans and digital loans? Much bigger, much bigger. For example, consumer loans of durable financing that we do that ticket size could

The bureau data indicates that the unsecured loans per borrower has been increasing in the last couple of years. Can you share some color around this for your book in terms of what the data is like?

V. Vaidyanathan

See, specifically for less than Rs. 50,000 I called it out earlier in the discussion. Our book is Rs. 540 crores, that is below ticket size of Rs. 50,000, which is what was flag for us. Even that book is behaving well, it works out at 0.3% of the overall funded book of the Bank and it works out to 0.37% of the retail, rural and MSME book. That is the number that we are calling on specifically. But other than that, as we discussed earlier, there are three categories, just to give a little more color. The way we do it is that whether secured or unsecured, we follow the concept of cash flow. Beca

So almost on all the fronts, be it advances, asset quality, deposits we are doing exceedingly well. Just one question is if I see our H1 or even the Q2 numbers, the operating income growth is around 35-37%, but at the same pace, our operating expenses are also growing, we are in that 71%, 72% cost-to-income from last almost three quarters now. Obviously, we are expanding the branches for the growth also, but when we will start seeing the material reduction in the cost-to- income ratio if you can touch upon that. And my second question is regarding the credit card business, in earlier calls you

V. Vaidyanathan

On the cost-income front, yes, I mean, as long as expansion is continuously going on because remember, we are growing our deposits very strongly by Rs. 50,000 crores a year. So probably next year we'll need to raise Rs. 65,000 crores. So yes, we'll continue to incur the necessary expenses and the drag is coming on the liability side. Our retail asset side is posting a return on equity of 20% even though we give transfer pricing at some rates from the liability point of view. So, as long as we keep expanding, I guess on the liability side, there will always be a bit of a drag. But we should loo

First question from my side would be on the interest rate on the deposit side. So, are we largely through you think on the interest rate pricing on the deposit front or do you see that there is still some sort of increase left for your deposits to get repriced?

Sudhanshu Jain

I would say a large part of the catch-up cost has already come in. There could be another 10, 15 bps which could happen in H2. Having said that, as I mentioned earlier, we have also some legacy borrowings which would retire. So, that came down by Rs. 1,000-odd crores in Q2, another Rs. 2,500 crores which is broadly evenly spread between Q3 and Q4, that will come off that is at 8.9%. That should give us some relief on the interest cost. So, we feel that cost of fund could go up marginally from the current levels, but the large part of the term deposit pricing has sort of come in. Maybe some inc

Two questions. One is on margins, like while we have reported a stable margin, but this quarter we have also raised a lot of liquidity and deposit growth has been very strong. But for this looks like margins could have been better this quarter and now that we have sailed through the entire last year with a relatively higher mix of fixed rate book, how do you look at the margins going ahead, what levels will be comforting to us given that that some risks on the delinquency side that the industry is watching for and how do you want this to progress going ahead?

Sudhanshu Jain

Nitin, we expect the NIMs to be quite stable, right. In fact, as you saw for this quarter also we came down by 1bps, there was 2bps impact which came because of ICRR. Going ahead, as I said, large part of the deposit cost has come in on the term deposit front. There could be some increase which could happen, but at the same time we are also seeing some benefit which continues to come in in terms of repricing of investments when they get churned on the liquidity which we get deployed, interest rates have moved over a period of time, then even on advances because we had certain loans which were

Sudhanshu, if you can come to slide 93, loans and advances, firstly, could you give us the size of the credit substitute book?

Sudhanshu Jain

It's a small book of about Rs. 5,000-odd crores, which includes certain bonds and also the PTC portfolio which we have. And then on unsecured retail, right, in all form and shape, if I were to look at this loan mix, where does it sit and what is the size of the total unsecured retail book, I'm not talking small ticket, I'm talking about overall unsecured retail? We have given more of a product wise cut in this portfolio and that's the kind of disclosure we put out since the beginning. Which is what I'm trying to understand that of the consumer loan book, for example, 22,000 crores, how much wo

Sir, wanted to check on your term deposit pricing strategy, right. So, if I look at your current structure of term deposit, right now, we are offering up to one year at 6.5%, whereas our SA rate above 5 lakhs is 7%. So that looks a bit unusual. What does it mean? Could TD rates be revised upward or you think there is a chance that SA rate could move downwards or how should one think of this and what are we trying to achieve? Of course, given a choice at 6.5% TD and 7% SA, you would see a lot of inflow in SA only, but from your ALM perspective is that the optimal way you would want to strategiz

V. Vaidyanathan

So, I will tell you our rates and then you can derive our view from that. So, our interest rates on term deposit for let me say 180 days is 4.5%. So, we pay 3% up to say 45 days, so 46 days to say 180 days we pay 4.5% and let me say 181 days to say a year we pay 5.75% and up to one year we pay only 6.5% for your information. So, one year, one day and above we pay 7.5%. So, by the way, these rates are not too high let me tell you. If you go and check out the interest rates for, let me say. Even leading state-owned Banks, our rates are very competitive, competitive meaning not high, on the lower

A few questions have already been answered. A couple of questions. I heard that you talked about more in a detailed way on the branch vintage and all that thing. If you can also talk about on the customer acquisition run rate, what has been in your Bank for the last couple of quarters and vis-à-vis what was the run rate for, let us say, a few years back on that? Also, nowadays I mean when I hear a lot of Banks, I mean people all talk about going more penetration on the existing customers base. So, on that front I mean, what would be your product per retail customer, how has been that trend if

V. Vaidyanathan

So now this thing about number of accounts and how the trend line of product per customer etc., is, see, we are let me say little underperforming on product per customer. If any of your customer you may have noticed that you're not getting aggressive calls from the Bank, you don't get too many calls from the Bank and pushing products, we are trying to tone down our team, so that we don't disturb the customers too much. Of course, it's an exception to the rule and if any of them is disturbed, I apologize for that. But generally, 99% of the time you will not get very many calls from the Bank. So

My God, it is like one hour and twenty minutes. That's a lot more than we expected. So maybe moderator, you can keep track of next time for our sake. So, thanks very much, friends for being with us today.

Sudhanshu Jain

Thank you, everyone. Have a great weekend. Thank you, everyone.

Speaking time

V. Vaidyanathan

Moderator

Sudhanshu Jain

Lalit Deo

Manish Shukla

Hardik Shah

Dixit Doshi

Kaitav Shah

Jay Mundra

Suraj Das

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Opening remarks

Chintan Shah

Good evening, everyone, and welcome to the Q2 FY24 Results Conference call for IDFC First Bank. We have with us from the senior management Mr. V. Vaidyanathan, Managing Director and CEO, along with the senior management team. So, without further delay, I would now like to hand over the floor to the management. Thank you and over to you, sir.

V. Vaidyanathan

Hello, everyone. First of all, thank you very much for joining us this Saturday afternoon. We just announced results just a very short while ago. The key highlights I'd like to call out for this quarter is as follows: As far as our broad direction of the deposits, of loan growth, of profitability, of asset quality, all of them are quite stable and I think things are proceeding very well at our Bank. The numbers briefly are as follows: 1. On the deposit front, I think is one of our big strengths I'd say now it has been established for many, many years in a row we're able to raise deposits in a very strong manner. So, our deposits have now reached over Rs. 1.65 lakh crores and it's grown by over Rs. 50,000-odd crores with the growth of about 44% over the last year. 2. The second thing that I point out is that the CASA ratio, all of you know there is a movement of money from current, saving into term deposit etc. But we have seen a CASA ratio being quite stable at 46.4% this quarter, down

Sudhanshu Jain

Thank you, Vaidya. Again, good evening, everyone. I will touch upon key numbers for the quarter and the half year ended on September '23. To start with the balance sheet size now stands at Rs. 2.64 lakh crores and expanded by 24% on a YoY basis. We continue to witness a strong momentum on our lending book and in deposit mobilization as Vaidya said. Our customer deposits he already said that we had a very strong growth of 44% on a YoY basis to reach Rs.1.64 lakh crores. In fact, the growth in retail deposits was higher at 50% on a YoY basis. CASA ratio was also very stable at 46.4%, CASA deposit increased by 26% on a YoY basis. Average current account deposits increased by 31% on a YoY basis, while average CASA increased by 24% on a YoY basis. We continue to see a faster growth in term deposits, which grew by 68% on a YoY basis and 11% sequentially as customers are looking for locking in the higher interest rates in the system. The growth here was predominantly driven by retail. We open

Moving on to asset quality

The gross NPA of the Bank further improved by 7 bps during the current quarter to 2.11% and net NPA improved by 2 bps to 0.68% during the current quarter. If we exclude the rundown infrastructure book, this GNPA is more like 1.69% and net NPA is 0.46% at Bank level. PCR gross of technical write-off was at 84% as of this quarter. GNPA in retail, rural and SME segment on a combined basis stood at 1.53% and net NPA is just at 0.52%. The corporate non-infra book is well provided and as a net NPA ratio is only 0.11%. The standard restructured book continues to come down and has further reduced to 0.38% as compared to 0.47% last quarter. More than 85% of the restructured book is secured in nature. The SMA-1 and SMA-2 as Vaidya mentioned, that is reduced to now only 0.77%, which is a good indicator of a better portfolio. Even in the corporate book, the ratio of SMA-1 and 2 is very low at around 0.3%.

Moving on to profitability

Profit after tax for H1 FY24 increased to Rs.1,516 crores versus Rs.1,030 crores in H1 of last year and this was up by 47%. For the quarter, profit grew by 35% YoY to Rs.751 crores versus Rs.556 crores in Q2 FY23. This was largely driven by strong growth in core operating income. Core operating profit which is NII plus fees excluding trading gains for H1 grew by 41% YoY to Rs.2,883 crores. For the quarter, it grew by 38% to Rs.1,456 crores. NII increased by 32% on a YoY basis to Rs.3,950 crores. The net interest margin was steady on a sequential basis at 6.32%. Fee and other income increased by 46% to Rs.1,376 crores for Q2 FY24 and this was largely retail-led which is at 93% of the total fee. Operating expenses increased by 34% on a YoY basis due to increase in business volumes, branch expansion and increase in some tech expenses. We had a trading gain of Rs.54 crores during the quarter and provisions came in at Rs.528 crores for the quarter. The credit cost on an annualized basis as

Moving on to capital adequacy

The Bank has maintained strong capital adequacy, including profits for H1 FY24 was at 16.54% at September 30, 2023 with CET ratio at 13.49%. During first week of October '23, the Bank successfully raised Rs.3,000 crores through a QIP from a set of marquee investors. Considering this, CET-I and total capital adequacy would be higher by about 150 bps at September. We continue to maintain healthy liquidity levels and average LCR was at 122% for Q2 FY24. We would like to maintain it around these levels going forward as well. With this we can move on to the Q&A.

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