IDFC First Bank: How deep has Covid-19 hurt?

IDFC First Bank: How deep has Covid-19 hurt?

Last updated: 04 Aug, 2021 | 09:21 am

IDFC First Bank: How deep has Covid-19 hurt?

Key highlights from Q1 results

  • IDFC First Bank has reported a disappointing set of numbers in the Apr-Jun 21 period, mainly due to higher provisions. The bank has reported a net loss of Rs 621 crore, as against a profit of Rs 100 crore in the previous year. 
  • Provisions increased by three times from Rs 603 crore in the previous quarter to Rs 1,879 crore in Apr-Jun 21 period. This includes Covid-19 related provisions of Rs 350 crore during the quarter taking the total Covid provisioning to Rs 725 crore.

IDFC Bank: Trend Analysis

  • Due to Covid-19 IDFC First has seen a huge hit in its margins. The Operating Profit margin is down to 3.7%, as compared to 10.3% in the previous year. However, the margin has improved as compared to the previous quarter.
  • Due to the huge loss in the period, the Net Profit margin has plunged to -15.4% in Apr-Jun 21 period. 
  • IDFC First has maintained a steady NIM of 5.5% in the quarter. 
  • The Gross NPA has ballooned to 4.6% as compared to just 2% last year. It has also increased by 40 bps on a quarterly basis.
  • The Net NPA has increased to 2.3% as compared to just 0.5% last year.

What has led to the worsening of asset quality?

  • Due to COVID-19 related disruptions, a large infrastructure account (A Mumbai based toll road) of Rs 854 crores has turned into a NPA during Q1 FY22. The chart below shows the NPA profile of IDFC First Bank.

  • IDFC First Bank said that this was already a part of the identified stressed list as SMA 2 (Special Mention 2 Account). SMA 2 accounts are those which are overdue between 61-90 days. This has led to a huge spike in the company’s Gross (4.6%) and Net NPAs (2.3%). Without this infrastructure account default, the GNPA would have been 3.77% and the Net NPA would have been 1.61%. 
  • As seen from the table above, Infrastructure Transport now makes up for 16% of the bank’s total NPAs. The NPAs belong to stressed sectors such as vehicle loans, housing, and Infrastructure. 
  • IDFC First Bank said that it is confident of recovering the amount in the upcoming quarter.
  • Total slippages during Q1FY22 was Rs.2,800 crore (including Rs 854 crore infra). Out of the total slippages, Retail slippages were Rs.1,800 crore, majorly from Vehicle Finance and micro-finance institutions. For FY22, the Bank expects Credit Loss (including W/Off) to be 2.5% which will further come down to 2% in FY23.

What does the bank’s loan book look like?

Retail loan book

  • The bank’s retail book now consists of more than 60% of the overall loan book.  
  • Out of the three main verticals of the bank Commercial Vehicles, SME and micro-finance, vehicles segment has come under pressure in Q1. 
  • IDFC Bank CEO explained that as Covid struck, trucks stopped plying and they were losing money. The company has a total exposure of Rs 10,170 crore in the Wheels segment.
  • Further, IDFC Bank said that the lower pyramid customers have also been hit due to the pandemic. IDFC First has an exposure of Rs 6,700 crore in the rural JLG (Joint Liability Group) business. Joint Liability Group (JLG) is an informal group comprising preferably of 4 to 10 individuals for the purposes of availing bank loan either individually or through the group mechanism against the mutual guarantee.

  • As seen in the table above, the IDFC Bank has a total exposure of Rs 10,346 crore in the infrastructure business. 
  • The bank said that it is focussing on reducing its overall wholesale as well as infrastructure loan assets. 

What worked well for IDFC Bank?

While the rise in slippages has been higher than expectations, the bank has actually done well on some counts too. Here are a few highlights:

  • IDFC First Bank has shown a very healthy rise in its Net Interest Margin. Due to this, the core operating profit of the bank has reached a record high of Rs. 601 crores
  • The Core PPoP (Pre-provision operating profit) has more than doubled from Rs 276 crore in the first Quarter after merger with Capital First. (For context, pre-merger PPOP was Rs. 92 crores for H1-FY19)
  • The strong growth in PPoP came on the back of a 150 bps cut in savings account interest rate cut in May 2021 and the benefit of improving retail mix.
  • As the bank has shored up its provisions significantly, the slippages & provisions should subside as things improve on ground. 
  • The bank has a Tier-1 Capital Adequacy ratio of 15.03% as against the regulatory requirement of 10.875%. This implies that the bank remains adequately capitalised. 
  • Top 20 Depositors’ concentration as a percentage to total customer deposits has reduced to 9.39% as on June 30, 2021 from 16.86% as on June 30, 2020.
  • Top 10 Borrowers concentration as % of total Funded Assets has reduced to 5.8% as on June 30, 2021 from 7.3% as on June 30, 2020.
  • IDFC First Bank has guided to build more secured assets in both retail & corporate sectors. 

IDFC First Bank Outlook

  • IDFC First Bank shares have risen by more than two times in the last one year. Given such a huge rally, the recent correction due to an unexpected rise in slippages was imminent. 
  • The bank has proactively made adequate provisions (Provision Coverage ratio of 67%).  As the economy improves and opens up further, IDFC First Bank's slippages and provisions should subside, leading to better profitability.
  • Going forward, while the near term stress could remain a concern, the margins and operational performance should improve due to rise in net interest income
  • While the current environment is extremely stressful for the banking industry, IDFC Bank has the necessary firepower to tide through these turbulent times.