How IDFC First bank is fighting its way from a scrappy underdog and into the big league

Chances are you have come across a financial influencer going ga-ga over IDFC First Bank. The private-sector bank, whose share price in June this year was pummelled close to an all-time low of Rs 29, has stupefied brokerage houses and market research firms alike by registering a near-miraculous bounceback in recent months. 

The sharp recovery in the scrip, currently trading in the range of Rs 57-59 has led to most, albeit not all, research firms taking an overweight stance on the stock. 

Quite expectantly, retail investors have been flocking in droves towards the stock and there is a renewed air of excitement for the bank, widely touted as the next HDFC Bank in the making.

But things weren’t always so peppy for the bank. 

Choppy waters from the get-go

From its very inception, the bank has been put through more than its fair share of trials by fire. Name a banking problem and chances are that the lender, in its brief history, has had a run-in with it: adverse macroeconomic conditions, legacy high borrowings, large infra loan book, low core profitability, and low CASA ratio in the teething years. A sudden explosion of big loans—DHFL, Reliance Capital, Cafe Coffee Day—going bad made matters worse. 

All these and more have attempted to bring IDFC First’s growth trajectory to a screeching halt. And, till now, they have failed in doing so. 

The surfeit of unfavourable events and developments that IDFC First has taken in its stride explains the larger narrative surrounding the lender. Throughout its formative years, when its Managing Director and CEO V Vaidyanathan was laying the foundation for a robust bank, investors could very well be segregated into two camps: the believers and the non-believers.

In the first camp are those who put their faith in the incremental model of scalability as pitched by Vaidyanathan. Besides the bank’s scalability model, IDFC First believers also put their faith in Vaidyanathan's capacity for steering the bank to greater heights; his lofty credentials evident from the past trysts with ICICI Prudential Life Insurance and Capital First—the NBFC that was merged with IDFC Bank to create IDFC First.

Meanwhile, in the second camp are those who refused to subscribe to the management’s vision of a highly profitable bank built on an incremental basis while harbouring a healthy scepticism about the bank’s credit disbursal policies. It is from this camp that concerns have repeatedly been raised about the rising provisioning levels and many have frequently voiced their belief that the current uptrend in IDFC First’s fortunes is a fallout of a positive bank credit cycle, which is at the risk of deflating in the face of an economic shock.

Before deciding on which camp one belongs to, we need to rewind the clock back to the very beginning.

Initial hiccups

Seen on a year-on-year basis, between FY19 and FY21, the bank’s bottom line took a terrible drubbing. The first and the second wave of the Covid-19 pandemic, and the accompanying phases of lockdowns, be they at a national or a localised level, badly bruised the asset quality of the bank. Gross non-performing assets nearly doubled from 2.43% in March 2019 to 4.15% in March 2021. With the asset quality down in the dumps, the bottom line wasn’t far from being a sore disappointment.

Consider, for instance, that in FY19 and FY20, the lender reported annual net losses running into a whopping Rs 1,944 crore and Rs 2,864 crore, respectively. The financial statement did cheer up a bit in FY21 with a net profit of Rs 452 crore but the happiness was woefully short-lived. Whatever marginal progress that the bank made quickly unravelled in FY22 as the net profit once again thinned down to a measly Rs 145 crore, a steep 68% drop on account of elevated provisioning. 

Retail shareholders and the markets at large were only too keen to dole out punishment for weak financial performance. Wedged in between the lockdowns and the follow-on economic hang-over, IDFC First managed to scrape through with profits in the last quarter of FY20 and in all the quarters of FY21, but these profits, at best, could strictly qualify only as wafer-thin and far too enervated to truly script a change of narrative for the young bank. 

Consequently, the intervening period between March 2020 and June 2022 has been nothing less than a roller coaster ride for the bank and its investors as a heated battle roiled between the believers and the non-believers. It was during this time that the non-believers seemed to have an upper hand. The image of IDFC First as a scrappy banking underdog steadily working its way to the big league had few subscribers and retail enthusiasm for IDFC First bank took a nosedive. Any claims of IDFC First morphing into tomorrow’s HDFC Bank elicited scoffs and derision on social media, and analysts and experts were unanimous in voicing sombre concerns over the ratcheting NPAs levels.

The much-awaited turnaround

However, the bank, to its credit slowly and steadfastly kept to its committed trajectory, and nascent green shoots of change started becoming visible to a larger community of investors. 

One key metric on which the bank soared rather impressively was its pronounced pivot towards making its loan book more retail-oriented. From Rs 36,236 crore in December 2018, retail loans leapt to Rs 65,300 crore in March 2021. In the latest quarter ended September, retail loans stood at a robust Rs 96,496 crore, barely a stone’s throw away from its forward guidance for FY25 of Rs 1 lakh crore retail-funded assets. 

The focus on retail loans is at the very heart of IDFC First’s banking persona, and it is based on quite rational grounds. Traditionally speaking, the Indian retail borrower has been extremely reliable and this subdomain boasts of less than 2% NPAs, which is one reason why several large and established banks including ICICI Bank, HDFC Bank, Axis Bank and IndusInd Bank have been gravitating towards assigning a higher weightage to retail loans in their portfolio.

Parallelly, IDFC First has been continuously expanding its branch network across India, which has zoomed upwards from a middling 206 branches in December 2018 to 670 in the latest quarter, and is steadily on target towards reaching the 800-900 mark by FY25. 

In the first two-quarters of FY23, the bank has scripted an incredible turnaround. In Q1FY23, it reported its highest-ever profit of Rs 474 crore, a stark contrast from the Rs 640 crore loss reported in the same quarter in the previous FY. As if that wasn’t enough, the lender went on to trump its own record profit levels in the next quarter ending in September, by reporting a net profit to Rs 556 crore, a 266% jump from a year earlier. 

Vaidyanathan’s guidance has been injecting much enthusiasm amongst institutional as well as retail investors. In August this year, he told a business newspaper that investors ought to keep an eye out for the next three quarters of the bank which will turn disbelievers into believers.

Question is: Which camp do you belong to now?