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'Synergy realization' paving the way for IDFCFIRSTB
IDFCFIRSTB's retail focused portfolio, recent QIP success, attractive pricing and adequate provisioning vs. industry average gives comfort around forward looking performance. We are LONG.
IDFCFIRSTB was established in Dec’18 following merger of IDFC Bank with Capital First. The bank has a strong retail loan book growing 41% annually since the merger.
The stock appears well positioned to ride the wave of rising retail loan penetration after consecutive quarters of consumer slowdown due to the pandemic. India’s home loan segment is expected to rise by 22% for FY 2021-26 with personal loans growing at roughly 10% year on year.
Shifting asset base towards retail and departing from infrastructure segment
IDFCFIRSTB is focusing on increasing its retail loan book portfolio, share of which within the total has already risen from 35% as at Dec’18 to 67% as at Mar’21.
In parallel the contribution of riskier and longer dated infra loans under the wholesale segment are targeted to be Nil by FY25, having already decreased by 26% on a Y-o-Y basis as at Dec’20.
Steady post-merger growth and sound asset quality de-risk the investment profile
Post-merger the bank’s NIM has risen from 2.9% to 4.7% in Dec’20 with a further target to achieve 5.5% by FY25. NII grew by 14% to INR1,744cr in Dec’20 from INR1,534cr in Dec’19.
Cost to income ratio has been on the higher side at 79%, but a large share is driven by buyouts of PSL certificates – expected to drop due to higher priority sector lending. With improving profitability, ROA and ROE are expected to hit 1.5% and 14.1% in the long term, from 0.3% and 2.9% respectively as at Dec’20.
Asset quality remains satisfactory with Proforma GNPA for retail assets at 3.9% and NNPA at 2.4% while overall GNPA stood at 4.2% and NNPA at 2%. Provision coverage stood at 52% as at Dec’20.
IDFCFIRSTB loan book as at FY 2021 (Prov.) stood at INR118,000cr, 10% growth on Y-o-Y basis. Share of retail loans stood at 67% while Loan to deposit is around 1.4x. Recent venture into credit cards along with reduction in savings account interest rate from 7% to 6% are some other notable developments expected to improve profitability in near term.
Potential risk factors to be watched closely
The bank has been maintaining high loan-to-deposit at 1.4x against industry average at 0.8x. Further, capital adequacy stood at 14% as at Dec’20 against industry average of 18%. However management has also displayed reasonable capital raising capabilities considering the recent INR3,000cr QIP expected to add at least 2.5% to CT1 and subscribed by marquee investors.
Valuation on absolute and relative terms looks fairly attractive
Stock currently trades at 23.8x P/E and 1.4x P/BV on FY23F. Close comps ICICI Bank (NSE: ICICIBANK) trades at P/E of 15.0x and P/BV of 2.1x while Indusind Bank (NSE: INDUSINDBK) trades at 8.9x P/E and 1.3x P/BV on FY23F. Improving profitability and growing retail asset base will be the potential growth drivers in medium to long term.
A retail focused portfolio, recent QIP assuaging concerns around regulatory capital, attractive pricing on P/BV basis vs peers, and 7% plus provisioning vs. industry average of 5.9%, gives comfort around IDFCFIRSTB’s forward looking performance expectation. We are LONG.