A closer look at IDFC First Bank’s Q3FY24: Soaring Net interest income and Proactive Asset Management

Sector Outlook – Positive

In the third quarter of the financial year 2024, IDFC First Bank (IDFC) its Net Interest Income (the difference between the revenue from loans and the cost of handling deposits) rose to Rs. 4,287 crores, which is a 30.5% increase compared to the same time last year.

Its operating profits before setting aside money for potential bad loans (Pre-provision operating profit) also grew to Rs. 1,562 crores.

However, the bank had to set aside more money (Rs. 655 crores) for possible loan losses (provisions), which is higher than the previous quarters. This led to a slight drop in its quarterly net profit to Rs. 716 crores, which was less than what the market expected.

Despite this, the bank’s profit margin on loans (Net Interest Margin) improved significantly to 6.42%. The bank did well in managing bad loans, with Gross Non-Performing Assets decreasing to 2.04%.

The bank also increased its safety net (Capital Adequacy Ratio) to 16.73%. Deposits from customers grew impressively to Rs. 1,82,549 crores, mainly due to an increase in retail deposits.

This helped the bank grow its lending (Gross Advances) to Rs. 1,85,503 crores. The percentage of low-cost deposits (Current and Savings Account) saw a slight improvement to 46.8%.

Key Concall Highlights

The bank’s bad loans (Gross Non-Performing Assets) are at 2.04% in Q3FY24, but if you don’t count loans for infrastructure, it’s even lower at 1.66%.
The bank aims to reduce bad loans further to 1.5% and improve its Net Non-Performing Assets to 0.4%.
They have a plan to increase their Return on Assets (how much profit they make from their assets) to 1.9-2.0% by the year 2029.
The bank also wants to boost its Return on Equity (how well it generates profits from shareholders’ investments) to 17-18% in the long term.
Most of the bank’s deposit growth is coming from individual customers. Now, 79% of all their deposits are from retail customers, up from 76% last year.
The bank has paid off Rs. 1,400 crores of expensive old loans in Q3FY24 and plans to pay off another Rs. 1,300 crores in Q4FY24.
The bank has significantly cut down on its infrastructure lending, which is now only 1.6% of its total loans.
The bank’s operating costs (Cost-to-Income Ratio) are high at 73.3%, compared to the usual 50% in the industry, and there’s no sign of it decreasing soon.
High operational expenses should start decreasing from Q3FY25, which will help improve profits.
Provisions (money set aside for bad loans) are higher because the bank is now recognizing bad loans a day earlier than before.
IDFC First is focusing on financing used cars instead of new ones, as they find it more profitable and less risky.
The bank expects to keep growing its balance sheet (total value of loans and assets) by about 20% consistently.
There was a slight increase in credit costs (money lost due to bad loans) this quarter, but the bank expects this to improve in the next quarter with efficient collection of payments.

Valuation and Outlook

IDFC First Bank showed steady performance in the third quarter of FY24, but its net profit wasn’t as strong. This was mainly because the cost of borrowing money for the bank increased faster than the income from loans.

However, the bank’s lending to retail, rural, and small businesses is doing well with low bad loans, thanks to their careful loan approval process and technology use. They focus on the borrower’s ability to repay, which should keep bad loans low in the future, helping maintain good asset quality.

The bank is bringing in more deposits than loans, which is a good sign. It’s also focusing on services that earn fees, which should increase its non-interest income and profits. Yet, the bank’s operating costs went up by 33.5% compared to last year, and it set aside more money (Rs. 655 crores) for potential loan losses.

This shows the bank is being cautious about future risks. Despite these challenges, IDFC First Bank is set for growth due to its strategy and handling of finances. However, its operating costs are higher than usual, which needs improvement. Overall, the bank looks set to grow steadily.