Tuesday, May 19, 2020

Is IDFC First Bank Poised to Rebound?

Soon into the lockdown, when V Vaidyanathan rushed in to raise Rs. 2000 crore as fresh equity from the market, there were people who either thought it was unnecessary or as a move that will result in dilution. But the way things have unfolded since then, proved that the IDFC MD & CEO was perfectly wise in his decision. 

In fact, the market trusts his acumen in reading the signals, and that is why the fresh equity raise had strong support from institutional investors as well as key stakeholders. The market knows this is a banking stock that can rebound as and when the lockdown eases and normalcy returns to the banking sector.

The already troubled Indian banking sector went in for a further fall recently when the Finance Minister said that debts related to Covid-19 will be excluded from the default category under the Insolvency and Bankruptcy Code (IBC) for a period of up to 1 year. While there are some experts who feel that the move is not very useful for companies, as IBC proceedings were already under suspension for one year, the way banking stocks fell showed that it is indeed a negative move for the banking sector.

It is clear that there is more to read in the fine print, and one clue might be that the Finance Minister also said that the minimum threshold to initiate insolvency proceedings has been raised to Rs 1 crore from Rs 1 lakh. The move is supposed to protect the smallest of micro, small and medium enterprises (MSMEs), from insolvency proceedings.

While nobody will dispute the fact that Covid-19 related debts, especially in the MSME sector, should be considered sympathetically, what this government move to protect the sector will entail is that the individual banks have no much say in segregating between genuine MSMEs and fraudulent companies that may use it as an escape route. Another reason is that, this 1 year moratorium will just postpone the pain for banks. These must be the reasons why banking stocks reacted badly to the recent move by the government.

But the main thing here is that V Vaidyanathan has the knack to expect setbacks and act well ahead in time. In another instance, IDFC First Bank’s policies for attracting deposits have kept it in good stead in these troubled times. Recent figures show that due to the uncertainties and risks with stocks and mutual funds, investors are making a beeline for bank deposits, especially to those banks that offer the best rates. 

And IDFC First Bank, with its 7.25% interest rate across tenors, is one among the top-five banks in offering higher interest rates. Such policies have ensured that the bank’s CASA deposit has grown by 157%.

Before Covid-19 struck and disrupted all sectors, including banking, IDFC First Bank has also been growing its retail loan book admirably. The private sector lender, which was formed by the merger of IDFC Bank and Capital First, has a loan book that has two streams – the legacy infrastructure loans that basically came in from IDFC Bank, and the newer retail loan business that the combined entity has been pursuing. During the past year, the bank could grow its retail loan book by an impressive 30%.

The bank’s stated aim is to grow this retail book to a dominant position and phase out the legacy loan book gradually. Before the lockdown came, this seemed achievable by IDFC First Bank, given how well its retail loan unit had performed over the last year, and even before it as the NBFC, Capital First.

While Covid-19 and the resultant lockdown has thrown most banks into disarray, there is a high chance that IDFC First Bank would be among the first few banks to rebound in lending activity, due to a particular expertise. The mainstay of its retail loan book as well as of its former avatar Capital First, has been MSME loans. 

Since this sector has been one of the hardest hit in the lockdown, government support to revive it too has been to the maximum extent, with the government facilitating a package of Rs. 3 lakh crore as additional debt for MSMEs. The government is also extending credit guarantees for all eligible MSME loans.

And when that growth phase kicks in shortly, IDFC First Bank would be one of the most ready banks to tap into it. And even if it takes more time than expected, the recent equity raise of Rs. 2000 crore would serve to meet any contingency arising from Covid-19.

The bank’s Rs. 2000 crore equity raise was subscribed by two of its major stakeholders, IDFC and Warburg Pincus, which also served to maintain their stakes in the bank at the previous level. While the main promoter IDFC invested Rs. 800 crore, the US based private equity giant Warburg Pincus invested Rs. 200 crore. 

The other half of the issue was subscribed by noted institutional investors, ICICI Prudential Life Insurance which invested Rs 600 crore, and HDFC Life Insurance and Bajaj Life Insurance which invested Rs. 200 crore each.

The bank is also likely to be one of the two beneficiaries of a proposed scheme by Reserve Bank of India (RBI) to adopt a differentiated strategy to implement a holding company structure for banks. Banks that do not have subsidiaries in insurance, asset management, and broking may be exempted from having a non-operative financial holding company (NOFHC), which had proven to be a hassle for many of the newer banks.

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