IDFC First Bank Ltd.

| Initiating Coverage Report

IDFC First Bank Ltd. 17th Oct 2022

Right Time; Right Price – All set for growth
IDFC First Bank Ltd. (IDFCFB) was founded by merging erstwhile IDFC Bank BUY
(demerged from IDFC Ltd) and Capital First in Dec 2018. The Bank’s strategy CMP Rs. 55.7
was to incorporate Capital First’s tried and tested model of financing small
entrepreneurs and consumers. Post-merger, the retail deposit has soared at a TARGET Rs. 81 (+45.6%)
CAGR of 85%, and the retail lending book has grown at a CAGR of 30%. In
Company Data
Q1FY23, its CASA ratio touched 50%; it has substantially reduced its legacy
infrastructure lending book, improved its branch productivity, diversified the MCAP (Rs. Mn) 3,34,397
loan book, and return ratios have also started to improve. We believe IDFCFB is O/S Shares (Mn) 6,219
well-placed for quality growth. We initiate coverage on IDFC First Bank Ltd.
52w High/Low 55 / 29
with a BUY rating and a target price of Rs. 81.
Face Value (in Rs.) 10
V. Vaidyanathan – Best in-class execution track record Liquidity (3M) (Rs. 1,877
Mn)
With over three decades of experience in financial services in India, V.
Vaidyanathan has seen India through multiple lenses – first as a banker (1990 –
Shareholding Pattern %
2000, Citibank), (2000-2019, Head of ICICI Bank in retail division), as an
entrepreneur (2010-2019, Capital First), and now as an entrepreneur + banker Jun Mar Dec
22 22 21
(MD & CEO, IDFCFB).
Promoters 36.48 36.49 36.51
The merger with IDFC Bank was a vision that became a reality for V.
FIIs 10.99 13.48 14.77
Vaidyanathan as he got a banking license which he had always aspired for. The
philosophy that worked out well for him was not rushing for growth and taking DIIs 14.38 13.78 14.58
shortcuts. It was a déjà vu moment for the banking veteran when he took over as Non- 38.14 36.24 34.15
in charge of IDFCFB. Vaidyanathan's ability to scale the retail division and Institutional
maintain asset quality is evident from his past track record with Capital First;
during the time the NBFC was loss-making, Vaidyanathan turned around and IDFC First Bank vs. Nifty
scaled it over a retail franchise with a loan book of Rs. 300 Bn.

IDFC First Bank 2.0

Post-merger, IDFCFB laid out a five-year strategy to turn the Bank around and
make it future ready. The Bank plans to grow its CASA from 10% to 30%, increase
the pie of retail deposit in total borrowings from 10% to 50%, increase the
exposure of retail loan book in total loan book from 35% to 70%, reduce
infrastructure loan from 22% to 0%, reduce the cost to income ratio from 80% to Oct, 19 Oct, 20 Oct, 21 Oct, 22
55%, grow its branch network from 200 to 800, and improve Net interest margin IDFCFB NIFTY
(NIM) from 3% to 5-5.5%. Source: Keynote Capitals Ltd.

Over the last 15 quarters, the bank has progressed well in achieving its guidance Key Financial Data
with a significant ramp-up in retail deposits and granular loan base. IDFCFB
(Rs Mn) FY22 FY23E FY24E
transitioned itself in the last 15 quarters and is now in the IDFCFB 2.0 phase,
where we will see higher loan growth of 20-25%, stable NIM of 6%, an increase in NII 97,062 1,14,969 1,35,061

fee income, improvement in cost-to-income ratio and stable asset quality. PPOP 32,838 42,814 56,847
Progress in the above factors will lead to growth in profitability. Net Profit 1,455 17,194 28,051

View & Valuation Advances 11,78,578 14,73,223 17,67,867

ROE (%) 0.7% 7.6% 11.0%

We initiate coverage on IDFC First Bank with a BUY rating and a target price of Rs.
ROA (%) 0.1% 0.8% 1.1%
81 (2.5x FY24 Adj. Book Value). IDFCFB has transformed itself from infra focused
lender to a retail lender with a well-diversified loan book. We believe the Bank is Source: Company, Keynote Capitals Ltd.

set to grow its loan book at 20-25% with stable NIM of 6%. Normalization of
Devin Joshi, Research Analyst
asset quality will lead to lesser mishaps and improved profitability growth,
leading to improved return ratios. Devin@keynoteindia.net
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IDFC First Bank Ltd. | Initiating Coverage Report
Banking Sector
The Reserve Bank of India (RBI) regulates and supervises the banking sector.
Over the years, the banking sector has undergone several reforms to
promote a diversified, efficient, and competitive financial market. Some
reforms are

• Merging public sector banks

• Introducing the Prompt Corrective Action (PAC) framework

• Refining supervisory practices

• Tightening risk weights/provisioning norms (for sectors witnessing high

credit growth)

• Mandating best international practices and norms such as Basel III

• Issuing guidelines to deal with overall asset-liability mismatches

These measures have strengthened the banking system, increased

depositors’ confidence, and aided financial stability.

Over the past decade, financial inclusion has been one of the Government’s
and banks’ key priorities. Pradhan Mantri Jan Dhan Yojana (PMJDY),
launched in August 2014, aims to ensure affordable access to financial
services. As on March 31, 2022, 450 Mn PMJDY accounts had been opened.

In FY21, the Indian economy witnessed the sharpest contraction since

Independence due to the onset of the pandemic and the imposition of a
nationwide lockdown. To deal with the impact of the pandemic, the
government and the RBI took several initiatives to provide relief to
borrowers. While the impact was significant in the first half of FY21, a faster-
than-expected revival led to moderate credit growth of 5.6% in FY21. The
crucial initiatives included the Emergency Credit Line Guarantee Scheme
(ECLGS), the provision of a loan moratorium, and the option to restructure
corporates, MSMEs, and retail loans under the restructuring framework
(One-time restructuring OTR 1.0 and 2.0).

After nine years, the industry is seeing a sign of strength in loan growth,
which grew at 16% YoY in September’22. The credit growth is expected to
remain strong, led by continued traction in the Retail and SME segment. The
Corporate segment is also reviving due to improved working capital
requirements.

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IDFC First Bank Ltd. | Initiating Coverage Report
Industry Trends
Private Banks gaining market share
Traditionally, public sector banks (PSUs) have accounted for most of the
banking credit outstanding and deposits. However, in the past few years,
low profitability, weak capital position, low operational efficiency, and
increased stressed loans led to a slowdown in their loan growth. As a result,
private banks gained market share, which were relatively well-capitalized
and had a higher degree of operational efficiency.
Private Banks gaining Market Share (%) in Credit Private Banks gaining Market Share (%) in
outstanding Deposits
76%
74%
60%
58%

42% 40%

26% 24%

Public Banks Private Banks Public Banks Private Banks

2015 2022 2015 2022
Source: RBI, Keynote Capitals Ltd.

Loan growth to accelerate

In FY22, loan book (all Banks) grew by 11.5% on a YoY basis due to pent-up
demand and normalization in the economy. Due to the COVID impact in
FY21, the Indian economy witnessed the sharpest contraction since.
However, the Indian economy bounced back swiftly, and the loan growth
accelerated to ~15.5% YoY in August 2022.

As per CRISIL Research, bank credit is expected to grow 10-11% in FY23,

driven by the retail and agriculture segments and supported by a recovery
in services and industrial credit. The recovery will be led by private sector
50%
banks, which are expected to grow at a higher rate, 14-15%, leading to
further market share gains.

Corporate sector profitability has improved in the last couple of years,

leading to the company’s de-leveraged balance sheets. As we advance, we
will see a new leg of the investment cycle.

Private Banks loan growth higher than PSUs

20% 19% 19%

17%
14% 15%
11%
12%
7% 8%
7%
2% 3% 3%
1%
-1%
2015 2016 2017 2018 2019 2020 2021 2022
Public Banks Private Banks
Source: RBI, Keynote Capitals Ltd.
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IDFC First Bank Ltd. | Initiating Coverage Report
Asset quality of banks to improve steadily
Post FY18, the Government and the RBI took various measures to restrain
the deterioration in asset quality. As we advance, the overall asset quality of
banks continues to improve steadily.
Asset Quality
All Banks Public Banks Private Banks
Particulars
GNPA NNPA PCR GNPA NNPA PCR GNPA NNPA PCR
FY18 11.6% 6.1% 48.1% 15.6% 8.6% 47.1% 4.0% 2.0% 51.0%
FY19 9.3% 3.8% 60.6% 12.6% 5.2% 60.8% 3.7% 1.6% 57.0%
FY20 8.4% 2.9% 66.2% 10.8% 4.0% 64.2% 5.1% 1.4% 72.6%
FY21 7.4% 2.4% 67.6% 9.5% 3.1% 68.4% 4.8% 1.5% 70.0%
FY22 5.9% 1.7% 70.9% 7.6% 2.3% 69.5% 3.7% 1.0% 74.7%
Note: GNPA – Gross non-performing asset; NNPA – Net non-performing asset; PCR – Provision coverage ratio

Source: RBI, Keynote Capitals Ltd.

With better recoveries across the segments, especially in the industrial and
agriculture segment, asset quality in the banking sector started improving.
GNPAs of all Banks have improved from a high of ~12% in FY18 to ~6% in
FY22; PCR has also increased from ~48% to ~71%. While Private Banks are
comparatively doing better than the industry, the GNPAs have remained in
the range of 3-5% between FY18-22, and they have significantly improved
the provision coverage ratio, which reduces the risk of asset quality
deterioration. We expect the improvement in asset quality across lenders to
continue.

The banking sector is well-placed

The Indian banking system is well positioned to support economic growth,
with bank credit growing double-digits after a long hiatus and GNPAs of all
Banks declining to their lowest level in six years. A new leg of the
investment cycle led by improving trends in capacity utilization and rapid
expansion of credit aided by new loan accounts in the industrial and service
sector will drive growth opportunities.

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IDFC First Bank Ltd. | Initiating Coverage Report

About IDFC First Bank Ltd.

IDFC First Bank Ltd. (IDFCFB) was founded by merging erstwhile IDFC Bank
(demerged from IDFC Ltd) and Capital First in Dec 2018. IDFC Bank started its
operations in Oct 2015 after receiving a banking license from the RBI in 2014.
IDFC Bank was founded by demerging the lending business of IDFC Ltd to
diversify from infrastructure financing to retail banking franchises, but a large
portion of IDFC Bank’s book was skewed toward infrastructure and wholesale
loans; the Bank’s NIM was at a low level of 1.7%, resulting in low profitability,
thus impeding the Bank’s ability to invest in the retail business. So with a
strategy to diversify and build a retail franchise, the IDFC Bank, was looking for
a partner who had already achieved scale in retail lending.

Capital First was a leveraged buyout by Mr. V. Vaidyanathan. During his tenure
(2012-2018) at Capital First, the NBFC grew its loan book at a CAGR of 29% and
increased profitability by 56%. The market capitalization of Capital First
increased tenfold. Mr. V. Vaidyanathan always wanted to convert his company
into a bank so that it can avail the benefits of a lower cost of funds.

The merger strategically fit both companies. IDFC Bank shareholders got an
excellent retail franchise with stable asset quality, and Capital First
shareholders benefited from the banking license, which made way for low-cost
capital.

Source: Company, Keynote Capitals Ltd.

IDFCFB made a new beginning in Jan 2019 with a new Board of Directors
(BOD), new management, and a brand new logo.

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IDFC First Bank Ltd. | Initiating Coverage Report
Bank’s performance under Vaidyanathan’s leadership

Dec-18 Guidance for FY24-

Particulars June-22
(At merger) 25
30% (FY24), 50%
CASA as a % of deposits (%) 8.7% 50%
thereafter

Retail and commercial finance (Rs. Bn) 3,693 10,131 10,000

Retail and commercial finance as a % of total

35% 74% 70%
funded assets (%)

Infrastructure loans (Rs. Bn) 2,271 674 Nil

Infrastructure loans as a % of Total Funded Assets

22% 5% 0%
(%)
Top 10 borrowers as % of Total Funded Assets
12.8% 3.5% <5%
(%)

GNPA (%) 2% 3.4% 2-2.5%

NNPA (%) 1% 1.3% 1-1.2%

Provision Coverage Ratio (%) 53% 73% ~70%

Net Interest Margin (%) 3.1% 5.9% 5-5.5%

Cost to Income Ratio (%) 81.6% 73% 55%

Return on Asset (%) -3.7% 1.0% 1.4-1.6%

Return on Equity (%) -36.8% 9.0% 13-15%

Branches 206 651 800-900

Source: Company, Keynote Capitals Ltd.

Under Vaidyanathan’s leadership, the Bank has progressed well in achieving

its guidance. A few of the targets were met earlier than the guidance, i.e.,
Bank’s CASA ratio touched 50%, the retail deposit reached ~75% of total
funds, and the retail & commercial loan book crossed the 70% mark and
grew a CAGR of 27% in the last 15 quarters.

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IDFC First Bank Ltd. | Initiating Coverage Report
IDFCFB – The change in liability mix
At the time of the merger, IDFCFB had Rs. 1,082 bn of institutional borrowing
and deposits, out of which 32% was in the form of legacy & infra bonds. The
Bank has built a strong liability franchise based on the CASA ratio and retail
deposits in the last couple of years.

Strong growth in CASA Deposits (Rs. Bn)

567
512
459

207

64 79

Q3FY19 FY19 FY20 FY21 FY22 Q1FY23

Source: Company, Keynote Capitals Ltd.

..led to stable CASA Ratio (%)

51.8% 50.0%
48.4%

31.9%

11.4%
8.7%

Q3FY19 FY19 FY20 FY21 FY22 Q1FY23

Source: Company, Keynote Capitals Ltd.

Retail Deposits has surge at a 73% CAGR in last 3 years

72% 67%
64%

52%

758
639 680
19%
12%
339

76 132

Q3FY19 FY19 FY20 FY21 FY22 Q1FY23

Retail Deposit (Rs. Bn) Retail Deposit as a % of Total Deposit
Source: Company, Keynote Capitals Ltd.
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IDFC First Bank Ltd. | Initiating Coverage Report
Reduced the Top 10 borrowers’ concentration as Strong reduction in high-cost legacy borrowings
a % of customer deposits as a % of total deposit and borrowings

38%
28.7%
25.2%

22%
14.5%
16%
13%

5.5% 5.2%

Q3FY19 FY19 FY20 FY21 FY22 FY20 FY21 FY22 Q1FY23

Source: Company, Keynote Capitals Ltd.

Deposit profile has changed in favour of 1-3 years maturity from <1 year
2% 4% 3% 3%

18%

41%
21% 52% 54%

17% 12%
9%
11% 12%
9%
8%
43%
32% 27% 22%

FY19 FY20 FY21 FY22

<3 months 3-6 months 6 months - 1 year 1-3 years >3 years
Source: Company, Keynote Capitals Ltd.

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IDFC First Bank Ltd. | Initiating Coverage Report
Well-diversified Assets
At the time of the merger, IDFCFB had a loan book of Rs. 1,047 bn, of which
the share of retail assets were ~35%. Over the last 15 quarters, loan growth
had moderately grown at a CAGR of ~8%, while retail assets’ share expanded
significantly to 66% in Q1FY23, growing at a CAGR of ~28%.

IDFCFB’s key strategy is to incorporate Capital First’s tried and tested model
of financing small entrepreneurs and consumers. The Bank has invested in
scaling up the retail segment, such as home loans, auto loans, credit cards,
gold loans, digital cash management, trade forex, and wealth management.
IDFCFB is on track to achieve its target of taking the retail loan contribution
to 70% by FY24-25.

Rise in retail loan book and on track to achieve 70% loan mix

10% 15% 9% 14% 12%

16%
14% 5% 5%
22% 9%
19% 17%
18%
23% 19%

33% 29%

63% 66%
54% 56%
35% 37%

Q3FY19 FY19 FY20 FY21 FY22 Q1FY23

Retail loans Corporates loans Infrastructure loans Others
Source: Company, Keynote Capitals Ltd.

Diversified loan mix as on Q1FY23

Infrastructure finance, 5%
Home loan, 11%

Corporate and others,

22% Loan against property,
14%

Auto, 8%
Commercial finance, 8%

Credit card, 2%

Digital, Gold loan, and Consumer loans, 14%

Others, 7%
Rural finance, 10%
Source: Company, Keynote Capitals Ltd.

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 IDFC First Bank Ltd. | Initiating Coverage Report
Asset Quality
Asset quality was a critical concern for IDFCFB during the merger as the Bank
inherited the legacy wholesale book, which led to higher slippages and credit
costs due to the pandemic. The slippage ratio for the Bank increased from
3.1% in FY20 to 5.6% in FY21.

The Bank witnessed a higher GNPA/NNPA due to the pandemic, which was
accentuated by a large legacy infrastructure account that impacted
profitability. Since the Bank has grown its retail portfolio, the pain created by
legacy infrastructure lending is now behind us.

The Bank expects the credit cost to fall below 1.5%, guiding the retail NPA to
fall to less than 2% in FY23.

Asset quality continues to improve

Particulars Q3FY20 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23

Retail & Commercial Finance (%)
GNPA 2.3% 4.0% 3.9% 3.5% 2.9% 2.6% 2.1%
NNPA 1.1% 1.9% 1.8% 1.7% 1.3% 1.2% 0.9%
PCR 55.4% 57.5% 61.1% 61.4% 68.2% 69.6% 72.2%
Corporate Book (Non-infra)
GNPA 3.1% 4.0% 2.9% 2.9% 2.5% 2.8% 3.7%
NNPA 1.6% 1.9% 1.3% 0.8% 0.4% 0.3% 0.2%
PCR % 49.6% 72.3% 80.7% 87.4% 92.3% 94.5% 97.0%
Infrastructure
GNPA 4.7% 5.8% 15.7% 15.8% 20.1% 21.6% 21.7%
NNPA 1.2% 1.4% 9.8% 9.9% 11.6% 11.8% 11.8%
PCR % 74.6% 77.7% 41.1% 41.7% 47.9% 51.7% NA
Overall Asset Quality
GNPA 2.8% 4.2% 4.6% 4.3% 4.0% 3.7% 3.4%
NNPA 1.2% 1.9% 2.3% 2.1% 1.7% 1.5% 1.3%
PCR % 57.3% 63.6% 61.1% 63.0% 67.2% 70.3% 73.1%
Source: Company, Keynote Capitals Ltd.

Compared to Q3FY20, in Q1FY23 the GNPA/NNPA was in the range while the
infrastructure segment languished. The GNPA ratio on Wholesale (corporate
+ infrastructure) assets has been high due to legacy infra financing (GNPA of
22% as of Q1FY23). However, Bank has reduced the infra financing book
from Rs. 227 Bn as of Q3FY19 to Rs. 65 Bn as of Q1FY23 (~5% of the overall
loan book). It is expected to improve asset quality through resolution in
some accounts.

A significant part of the book, i.e., retail & commercial financing, has
continuously improved because of high-quality underwriting, credit bureaus,
technology, cash flow-based lending, and advanced scorecard-based lending.
The Bank expects retail NPA will be lower than 2% in FY23 based on
indicators such as improved quality of sourcing, reduced cheque bounce, and
increase in collection efficiency.

Overall, the Bank has improved its asset quality parameters post the COVID-
19 impact and is expected to improve them further.

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IDFC First Bank Ltd. | Initiating Coverage Report
Improving customer profile
As the Cost of Funds for the Bank reduced, it migrated toward customers
with proven credit track records.
Reduced New to Credit customers (as % of incremental booking)
17%
16%

13%
12%
10% 10%
9%

Jan - Jun 19 Jul -Dec 19 Jan - Jun 20 Jul - Dec 20 Jan - Jun 21 Jul - Dec 21 Jan - Mar 22
Source: Company, Keynote Capitals Ltd.

Increased customers with (>700) credit bureau score

83% 84% 85%
80%

68%
61% 60%

Jan - Jun 19 Jul -Dec 19 Jan - Jun 20 Jul - Dec 20 Jan - Jun 21 Jul - Dec 21 Jan - Jun 22
Source: Company, Keynote Capitals Ltd.

Improvement in Profit & Loss statement

At the time of the merger, the Bank was facing problems like low NIM, high
operating expenses, minimal operating profit, and loss-making operation.
Over the last 15 quarters, the Bank has improved its loan mix, and it is now
tilted towards retail lending, which is a high-margin business. Also, the Cost
of funds for IDFCFB has improved due to the high growth in retail deposits
leading to improvement in NIM.

There is an improvement in operating expenses (Cost to Income ratio) from

~82% as of Q3FY19 (at merger) to ~73% in Q1FY23. However, there is a
massive room for improvement still available. IDFCFB expects softening of
this ratio in the coming years. The elevated ratio is because Bank focuses on
increasing the branch network and employee count, foraying into new
products, and improving technology.

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IDFC First Bank Ltd. | Initiating Coverage Report
NII has grown at a 3-year CAGR (FY19-22) of 26% leading to improvement in NIM (%)

6.0% 5.9%
5.0%
97
3.9%
3.1% 3.2% 74
61
48

28
11

Q3FY19 FY19 FY20 FY21 FY22 Q1FY23

Net Interest Income (NII Rs. Bn) NIM (%)
Source: Company, Keynote Capitals Ltd.

Fee and Other Income

IDFCFB has scaled up many fee-based products in the last three years. These
products are in the early stage and have the potential to grow significantly.

Fee and Other Income (Rs. Bn) Fee Income Break up for Q1FY23
27 Others , 5%

General Banking Loan origination

16 16 Fees, 24% fees, 32%
12
9
Wealth Management
& 3rd Party Credit Card &
Distribution, 11% Toll, 16%
Trade & Client
FY19 FY20 FY21 FY22 Q1FY23 Fx, 11%

Source: Company, Keynote Capitals Ltd.

Improvement in Cost to Income Ratio (%) will ..leading to rise in PPOP (Rs. Bn)
continue..
27.5
81.6%
80.7% 19.1
17.6
78.8%
76.5% 9.4
76.2%
3.1
73.0%

-17.5
Q3FY19 FY19 FY20 FY21 FY22 Q1FY23 Q3FY19 FY19 FY20 FY21 FY22 Q1FY23
Source: Company, Keynote Capitals Ltd. Note: PPOP is Pre-provisioning operating profit

Provisioning

The Bank has continuously increased provisioning post the merger due to the
legacy infrastructure loan book. The Bank comments that the all-legacy
accounts of the Bank are either in NPA or the Bank has adequately provided
provisioning. 12
IDFC First Bank Ltd. | Initiating Coverage Report
Rise in PCR (%).. ..led to lower Profit After Tax (Rs. Bn)
70.3% 73.1% 4.5 4.7
64.5% 1.5
63.6%
57.3%
48.2%

-15.4
-19.4

-28.6

Q3FY19 FY19 FY20 FY21 FY22 Q1FY23 Q3FY19 FY19 FY20 FY21 FY22 Q1FY23
Source: Company, Keynote Capitals Ltd.

Note: PCR is Provision Coverage Ratio

Post-merger IDFCFB has grown its retail assets and deposits, due to which
the risk of the legacy loan book is behind us. The change in the cost of
deposits and lending helped IDFCFB to improve NIM. This translates to PPOP
growing at a CAGR of 30% in the period FY20-22. Operating leverage has
kicked in despite the high cost-to-income ratio. In the future, expect the
cost-to-income ratio to improve, maintaining the PPOP growth.

Improvement in the above parameters and no further negative surprises on

the provisioning front will lead to higher growth at a profit level.

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IDFC First Bank Ltd. | Initiating Coverage Report
Peer Comparison
We reviewed IDFCFB against its closest peers, AU Small, Bandhan Bank, City
Union, and Federal Bank.

Loan Book for FY22 (Rs. Bn)

1,476
1,291

993

478
412

IDFCFB AU Small Bandhan Bank City Union Federal

Source: Company, Keynote Capitals Ltd.

NII for FY22 and CAGR for last two years

97
87
30%
26%
60

32 17%
19 13%

7%

IDFCFB AU Small Bandhan Bank City Union Federal

NII (Rs. Bn) CAGR FY20-22

Source: Company, Keynote Capitals Ltd.

Higher PPOP (FY22) growth for IDFCFB as compared to peers

30%
80
23%
21%

38
33
9%
8%
18
16

IDFCFB AU Small Bandhan Bank City Union Federal

PPOP (Rs. Bn) CAGR FY20-22

Source: Company, Keynote Capitals Ltd.

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IDFC First Bank Ltd. | Initiating Coverage Report

Healthy NIM (FY22) for IDFCFB as compared to peers

6.6%
6.0%

4.8%

3.2%
2.9%

IDFCFB AU Small Bandhan Bank City Union Federal

Source: Company, Keynote Capitals Ltd.

Asset Quality (FY22)

75.5%
70.3% 70.6%
63.9%

38.4%

6.8%
4.8%
3.8%
2.9%
2.0%

IDFCFB AU Small Bandhan Bank City Union Federal

GNPA PCR (%)
Source: Company, Keynote Capitals Ltd.

Elevated Cost ratios (FY22) for IDFCFB as compared to peers

5.1%

3.5%

2.5%

1.8% 1.9%

76.2% 57.1% 30.5% 40.4% 53.3%

IDFCFB AU Small Bandhan Bank City Union Federal

Cost-to-Income Cost-to-assets
Source: Company, Keynote Capitals Ltd.

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IDFC First Bank Ltd. | Initiating Coverage Report
Credit Cost (FY22)

9.0%

IDFCFB’s guided that Credit Cost will

be less than 1.5% for FY23

3.2%

1.6%
0.9% 0.9%

IDFCFB AU Small Bandhan Bank City Union Federal

Source: Company, Keynote Capitals Ltd.

Best-in-class CASA Ratio (FY22) for IDFCFB

48.4%
41.6%
37.3% 37.1%
32.6%

IDFCFB AU Small Bandhan Bank City Union Federal

Source: Company, Keynote Capitals Ltd.

Return on Equity (ROE) – FY22

15.0%

11.5%
IDFCFB’s ROE is improving over the last
10.1% four quarters, i.e., 9% in Q1FY23

0.7% 0.7%

IDFCFB AU Small Bandhan Bank City Union Federal

Source: Company, Keynote Capitals Ltd.

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IDFC First Bank Ltd. | Initiating Coverage Report

Return on Assets (ROA) – FY22

1.6%
IDFCFB’s ROA is improving over the last
1.2% four quarters, i.e., 0.97% in Q1FY23

0.9%

0.1% 0.1%

IDFCFB AU Small Bandhan Bank City Union Federal

Source: Company, Keynote Capitals Ltd.

Valuation Metrics (P/B) vs. Peers

5.3

2.5
2.2
1.6
1.4

IDFCFB AU Small Bandhan Bank City Union Federal

Source: Company, Keynote Capitals Ltd., CMP as of 17th Oct 2022

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IDFC First Bank Ltd. | Initiating Coverage Report

Opportunities
V. Vaidyanathan – The man behind IDFC First Bank
With over three decades of experience in financial services in India, V.
Vaidyanathan has seen India through multiple lenses – first as a banker
(1990 – 2000, Citibank), (2000-2019, Head of ICICI Bank in retail division), as
an entrepreneur (2010-2019, Capital First), and now as an entrepreneur +
banker (MD & CEO, IDFCFB).

Since the early years of his career, V. Vaidyanathan wanted to start a Bank.
But it was impractical for an individual to apply for a bank license. So the
initial concept for him was to create an NBFC where entry licenses are
relatively easier. Pursuing this theme, he acquired an NBFC and scaled it as a
retail franchise.

Finally, the merger with IDFC Bank was a vision that became a reality for V.
Vaidyanathan as he got a banking license which he had always aspired for.
While announcing the appointment, the founder, MD & CEO of the IDFC
Bank, Dr. Rajiv Lall, said, “Mr. Vaidyanathan comes with an extraordinary
track record of success in financial services. Mr. Vaidyanathan had earlier
built ICICI Bank’s retail banking business to a great scale of Rs. 13,000 Bn,
built a large liability franchise, and, subsequently, in an entrepreneurial role,
founded Capital First and took it to scale with a loan book of over Rs. 30,000
Cr in an underserved market. I have no hesitation in endorsing him as the
leader of IDFC First Bank”.

The philosophy that worked out well for him was not rushing to chase
growth and taking shortcuts. It was a déjà vu moment for the banking
veteran when he took in-charge of IDFCFB. As when he acquired Capital First
during the time, the NBFC was loss-making; a similar concern laid out in the
IDFCFB merger, the Bank was loss-making with a high composition to
infrastructure book and negative return ratios.

Bank performance since V. Vaidyanathan took charge of IDFCFB

Retail Deposit (Rs. Bn) Retail Loan Book (Rs. Bn)

837
680

358
132

FY19 FY22 FY19 FY22

Reducing Infrastructure Loan Improving CASA Ratio (%)

Book (Rs. Bn)
48.4%
215

69 11.4%

FY19 FY22 FY19 FY22

Source: Company, Keynote Capitals Ltd.

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IDFC First Bank Ltd. | Initiating Coverage Report
V. Vaidyanathan has changed the composition of the balance sheet, reduced
dependence on institutional deposits, reduced exposure to Top-20
borrowers & depositors, and improved CASA Ratio. All the measures he took
have improved return ratios for the Bank.

He is proving himself for the third time as IDFCFB is progressing well. The
Bank is going well on a 5-year strategy laid out during the merger. He
expects the loan book to grow 20-25% on a sustainable basis for the
foreseeable future.

IDFCFB 2.0
Post-merger, IDFCFB laid out a five-year strategy to turn the Bank around
and make it future ready. The Bank plans to grow its CASA from 10% to 30%,
increase the pie of retail deposit in total borrowings from 10% to 50%,
increase the exposure of retail loan book in total loan book from 35% to
70%, reduce infrastructure loan from 22% to 0%, reduce the cost to income
ratio from 80% to 55%, grow its branch network from 200 to 800, and
improve NIM from 3% to 5-5.5%.

Over the last 15 quarters, the bank has progressed well in achieving its
guidance with a significant ramp-up in retail deposits and granular loan base.
As of June 22, Bank’s CASA ratio touched 50%, the retail deposit reached
~75% of total funds, and the retail & commercial loan book crossed the 70%
mark and grew at a CAGR of 27% in the last 15 quarters. Also, the share of
the infrastructure book has substantially reduced from 22% to 5%, with a
drop in top 10 borrowers as a % of funded assets from 12.8% in Dec’18 to
3.5% in Jun’22.

IDFCFB transitioned itself in the last 15 quarters and is now in the IDFCFB 2.0
phase, where we will see higher loan growth of 20-25%, stable NIM (%) of
6%, an increase in fee income, improvement in cost-to-income ratio and
stable asset quality. Progress in the above factor will lead to growth in
profitability.

Green shoots in return ratios are visible

Post-merger, IDFCFB has been consistently enhancing NIM as the Bank has
transformed both the assets and liabilities in favour of retail customers
resulting in improvement in overall yields and a reduction in the cost of
deposits.

The improvement in NIM Q-o-Q translated to growth in PPOP, at a CAGR of

30% in FY20-22. While due to higher provisioning, profit remains languishing.

The Bank is set to grow its loan book at 20-25%. The incremental growth will
result in operating leverage, improving profitability, and increasing return
ratios.

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IDFC First Bank Ltd. | Initiating Coverage Report
Improving Q-o-Q ROE trend; All set to reach double digit

9.0%

6.7%
5.4%

3.0%
2.5%

-1.5%

Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23

Source: Company, Keynote Capitals Ltd.

Strong Q-o-Q ROA performance

1.0%

0.8%
0.6%

0.4%
0.3%

-0.2%

Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23

Source: Company, Keynote Capitals Ltd.

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IDFC First Bank Ltd. | Initiating Coverage Report

Challenges
Growth taper down
Post-merger, IDFCFB loan growth remains muted, growing at a CAGR of ~8%.
While the retail loan book is growing at a healthy rate, management is
guiding the loan book growth by 20-25%. But at the same time economy is
facing challenges such as rising inflation, geopolitical pressure, volatility in
commodity prices, and global supply chain issues. The above factors can lead
to economic deterioration, which will impact the growth in the sector.

Elevated cost-to-income ratio will impact the profitability

IDFCFB’s cost-to-income ratio as of Q1FY23 is at 73%, which remains at a
higher level than its peers as the Bank expands its branches, adds a
workforce, and invests in building digital capabilities. In its five-year plan, the
management guided the cost-to-income ratio at 50-55%, while the target to
achieve the same looks challenging. The elevated cost-to-income ratio could
impact profitability and drag the return ratios.

Execution Risk
The management has given guidance to grow the loan book by 20-25%,
maintain the NIM at 6%, and achieve double-digit ROE in FY23, but all of the
above parameters are subject to how well IDFCFB executes.

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 IDFC First Bank Ltd. | Initiating Coverage Report

Financial Statement Analysis

Profit & Loss Ratios

Y/E Mar, Rs. Mn FY21 FY22 FY23E FY24E FY25E FY21 FY22 FY23E FY24E FY25E

Net Interest Income 73,803 97,062 1,14,969 1,35,061 1,60,877 Growth YoY (%)
Other Income 22,113 32,220 37,940 51,323 64,351 Advance Growth (%) 17.5% 17.2% 25.0% 20.0% 20.0%
Net Income 95,916 1,29,282 1,52,908 1,86,385 2,25,228 Deposit Growth (%) 36.2% 19.1% 25.6% 15.8% 15.0%
Operating Expenses 70,933 96,444 1,10,094 1,29,537 1,50,903 NII Growth (%) 21.5% 31.5% 18.4% 17.5% 19.1%
Pre Provision Operating Profit 24,983 32,838 42,814 56,847 74,325 PPOP Growth (%) 29.0% 31.4% 30.4% 32.8% 30.7%
Provisions 20,225 31,086 19,889 19,447 19,447 Ratios
Profit Before Tax 4,758 1,752 22,926 37,401 54,879 NIM (%) 5.1% 5.9% 5.9% 6.0% 6.1%
Tax 235 297 5,731 9,350 13,720 Cost to Income Ratio 74.0% 74.6% 72.0% 69.5% 67.0%

Profit After Tax 4,523 1,455 17,194 28,051 41,159 C/D Ratio 113.4% 111.6% 111.0% 115.0% 120.0%

CASA Ratio (%) 51.7% 48.4% 49.5% 50.0% 50.0%

Balance Sheet
ROE (%) 2.5% 0.7% 7.6% 11.0% 13.9%
Y/E Mar, Rs. Mn FY21 FY22 FY23E FY24E FY25E
ROA (%) 0.3% 0.1% 0.8% 1.1% 1.4%
Share Capital 56,758 62,347 62,340 62,340 62,340
Asset Quality
Reserves & Surplus 1,21,319 1,47,697 1,64,889 1,92,940 2,34,099
GNPA 4.3% 3.8% 3.2% 3.0% 2.8%
Networth 1,78,078 2,10,044 2,27,229 2,55,280 2,96,439
NNPA 1.9% 1.5% 1.3% 1.2% 1.1%
Deposits 8,86,884 10,56,344 13,27,227 15,37,276 17,67,867
PCR (%) 56.2% 59.5% 59.4% 60.0% 60.7%
Borrowings 4,57,861 5,29,626 5,45,959 6,09,678 8,06,260
Credit Cost (%) 3.1% 3.2% 1.5% 1.2% 1.0%
Other Liabilities & Provisions 1,08,615 1,05,812 1,08,962 1,11,909 1,15,444
Valuation
Total Liabilities 16,31,438 19,01,825 22,09,378 25,14,143 29,86,010
Book Value Per Share 33.8 36.5 41.0 47.7
ASSETS
Adjusted Book Value Per Share 26.6 29.0 32.5 38.1
Cash and Balance 58,279 1,57,579 1,62,868 1,77,671 2,25,245
P/BV (x) 1.6 1.5 1.4 1.2
Investments 4,54,117 4,61,448 4,63,549 4,56,868 5,25,572
Price-ABV (x) 2.1 1.9 1.7 1.5
Advances 10,05,501 11,78,578 14,73,223 17,67,867 21,21,440
Note: Price is taken as of 17th Oct 2022
Fixed Assets & Others 1,13,542 1,04,211 1,09,730 1,11,730 1,13,740

Total Assets 16,31,439 19,01,816 22,09,380 25,14,136 29,86,007

Source: Company, Keynote Capitals Ltd.

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IDFC First Bank Ltd. | Initiating Coverage Report
Valuation based on Adj. P/B

Valuation FY22 FY24E

Scenario Current Expectation

Networth (Rs. Mn) – A 2,10,044 2,55,280

GNPA (Rs. Mn) – B 44,691 53,036

Adjusted Book Value

1,65,353 2,02,244
(C = A - B)

No. of Shares (Mn) - D 6,220 6,220

Adj. Book Value Per Share

26.6 32.5
(Rs.) – (E = C/D)

CMP (Rs.) 55.7 -

Adj. P/B – (CMP/E) 2.09 2.50

Target Price (Rs.) - 81.3

% Upside/Downside - 45.9%

Source: Company, Keynote Capitals Ltd.

Post nine years, the industry is seeing healthy loan growth. Credit growth
came in at 16% YoY in September’22 and is expected to remain strong, led
by continued traction in the Retail and SME segment. Also, going by RBI’s
data, the demand for working capital loans from the Corporate segment is
expected to remain strong.

IDFCFB has transformed itself from an infrastructure lender to a well-

diversified retail lender. The Bank is set to grow its loan book at 20-25%,
with a stable NIM of 6%. The constant decrease in the Cost-to-Income ratio
will lead to growth in PPOP at a CAGR (FY22-24) of 32%, and given the
management’s guidance, a fall in Credit Cost will decrease provisioning by
21% from FY22 to FY24. The above assumptions will lead to a substantial
339% Net Profit CAGR over the same period. This will lead to a 10% CAGR
growth in Networth from FY22 to FY24.

We believe that the asset quality will further normalize. Therefore we

assume a 3.0% Gross NPA in FY24 from 3.8% in FY22.

Given Bank’s overall improvement, we ascribe an adjusted P/B multiple of

2.50x for FY24E Adj. Book Value, implying an upside of ~46% from the
CMP.
DEVIN Digitally signed
by DEVIN
PRAMO PRAMOD JOSHI
Date: 2022.10.17
D JOSHI 17:05:52 +05'30'
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IDFC First Bank Ltd. | Initiating Coverage Report

Rating Methodology
Rating Criteria

BUY Expected positive return of > 10% over 1-year horizon

NEUTRAL Expected positive return of > 0% to < 10% over 1-year horizon

REDUCE Expected return of < 0% to -10% over 1-year horizon

SELL Expected to fall by >10% over 1-year horizon

NOT RATED (NR)/UNDER REVIEW (UR)/COVERAGE SUSPENDED (CS) Not covered by Keynote Capitals Ltd/Rating & Fair value under
Review/Keynote Capitals Ltd has suspended coverage

Disclosures and Disclaimers

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the
Regulations).

Keynote Capitals Ltd. (KCL) is a SEBI Registered Research Analyst having registration no. INH000007997. KCL, the Research Entity (RE) as defined in
the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial
products. Details of associate entities of Keynote Capitals Limited are available on the website at https://www.keynotecapitals.com/associate-
entities/

KCL and its associate company(ies), their directors and Research Analyst and their relatives may; (a) from time to time, have a long or short position
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associates of KCL even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

KCL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the
recipients of this report should be aware that KCL may have a potential conflict of interest that may affect the objectivity of this report.
Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

Details of pending Enquiry Proceedings of KCL are available on the website at https://www.keynotecapitals.com/pending-enquiry-proceedings/

A graph of daily closing prices of securities is available at www.nseindia.com, www.bseindia.com. Research Analyst views on Subject Company may
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Financial Interest of Research Entity [KCL] and its associates; Research Analyst and its Relatives NO
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report or date of the public appearance.
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IDFC First Bank Ltd. | Initiating Coverage Report

The associates of KCL may have:

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The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way,
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requirement within such jurisdiction.

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IDFC First Bank Ltd. | Initiating Coverage Report

The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession
this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents
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Compliance Officer: Mr. Jairaj Nair; Tel: 022-68266000; email id: jairaj@keynoteindia.net

Registered Office: 9th Floor, The Ruby, Senapati Bapat Marg, Dadar West, Mumbai – 400028, Maharashtra. Tel: 022 – 68266000.

SEBI Regn. Nos.: BSE / NSE (CASH / F&O / CD): INZ000241530; DP: CDSL- IN-DP-238-2016; Research Analyst: INH000007997

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General Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on
www.keynotecapitals.com; Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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