Key Rating Drivers & Detailed Description
Strengths:
Healthy capitalisation
Capitalisation is healthy, as reflected in Tier 1 capital adequacy ratio (CAR) of 14.2% and overall CAR of 16.8% as on March 31, 2023 (14.88% and 16.74%, respectively, as on March 31, 2022). The capital position is supported by timely capital raises of Rs 2,196 crore in fiscal 2023, and Rs 2,000 crore and Rs 3,000 crore in the first quarters of fiscals 2021 and 2022, respectively, along with Tier II bonds of Rs 1500 crore each, raised in the fiscal 2022 and fiscal 2023. Hereafter, the anticipated continuity of improvement in profitability would further support the capitalisation buffers, and the bank’s ability to demonstrate this remains critical. On March 31, 2023, the bank’s consolidated networth was sizeable at Rs 25,847 crore, thereby providing cushion against asset-side risks, with networth coverage for net NPAs of 19.8 times as on that date. (Rs 21,082 crore and 11.7 times, respectively, as on March 31, 2022).
As the growth strategy remains focused on the retail and commercial loans portfolio along with scaling down of the legacy infrastructure loan portfolio, the bank’s capital consumption is expected to reduce. Additionally, improved profitability will aid capitalisation ensuring that it remains healthy to support credit growth over the medium term.
Strengthened liability franchise:
With healthy growth rate of 37% in overall deposits (including certificate of deposits) in fiscal 2023 (19% in fiscal 2022), the bank has outpaced the banking industry’s deposit growth rate. The customer deposits (excluding the certificate of deposits) grew by 47% (year on year) to Rs 1,36,812 crore as on March 31, 2023, from Rs. 93,214 crore as on March 31, 2022. This was largely driven by traction in granular retail deposit franchise (CASA deposits and term deposits up to Rs 5 crore) which grew 45% between fiscals 2022 and 2023; These retail deposits comprised 79% of total deposits as on March 31, 2023. Mobilisation of CASA deposits have been steady, accounting for 49.8% of total deposits (35.7% of overall resources) as on March 31, 2023 (48.4% (32.3%), as on March 31, 2022).
Over the past few years, the bank has reduced its dependence on wholesale deposits, certificate of deposits and discharged majority of other high-cost legacy liabilities by replacing it with retail deposits. This has strengthened its overall liability franchise by making it more granular. In the near future, the bank is expected to retire ~Rs 14,859 crore of high-cost bonds and Rs. 2,814 crore, of legacy borrowings through refinance, which shall further strengthen its resource profile. As the bank’s credit grows over the medium term, its ability to adequately scale its retail liability base to support this traction will remain a monitorable.
Increased retailisation of asset book supporting asset quality improvement:
Total funded assets grew to Rs 1,60,599 crore as on March 31, 2023, from Rs 1,29,051 crore as on March 31, 2022 (Rs 1,17,127 crore as on March 31, 2021), registering annual growth rate of 24%. This growth was propelled by significant scale up in the proportion of granular retail and commercial book to 78.5% of the overall funded assets as on March 31, 2023, compared to 71.7% as on March 31, 2022 (38.2% as on March 31, 2019).
The retail and commercial portfolio grew 36% to Rs 1,26,135 crore as on March 31, 2023, from Rs 92,477 crore as on March 31, 2022 (Rs 75,404 crore a year earlier). There was growth across retail product offerings including prime home loans, credit card, gold loans, education loans, tractor loans being launched in the last 2 years and being scaled up from a relatively low base.
As the infrastructure financing portfolio, which was a major contributor to the GNPAs of the bank in the past, has already reduced sharply (being gradually replaced by retail loans which have grown at a steady pace) the portfolio composition has changed structurally, leading to improvement in the overall asset quality.
In the coming years, the management plans to maintain its steady growth trajectory in the retail and commercial loan book by leveraging their expertise and track record and targeting small entrepreneurs and retail customers to drive growth. On the other hand, the corporate book (non-infrastructure; 16% of total funded assets as on March 31, 2023) is expected to grow selectively while the infrastructure book (3% as on March 31, 2023) is left to run down. Consequently, the concentration risk in total funded assets has reduced, with the top 10 borrowers accounting for only 2.7% as on March 31, 2023.
The overall GNPAs reduced to 2.5% (Rs 3,884 crore) as on March 31, 2023, from 3.70% (Rs 4,469 crore) as on March 31, 2022, and 4.15% (Rs 4,303 crore) as on March 31, 2021. This was supported by lower overall slippages and improved asset quality in the retail and commercial funded assets and write-offs in the legacy infra book. GNPAs in retail and commercial portfolio reduced to 1.65% (Rs 2,075 crore) as on March 31, 2023, from 2.63% (Rs 2,432 crore) as on March 31, 2022 (4.01% (Rs 2,966 crore) as on March 31, 2021). At the same time, the GNPAs of the corporate (non-infrastructure) book was 2.87% (Rs 695 crore) as on March 31, 2023, against 2.75% (Rs 599 crore) as on March 31, 2022.
The bank continues to take various risk management initiatives including reducing borrower concentration, industry concentration, exposure to high-risk sectors, which should support the overall asset quality over the medium term.
Leading indicators of asset quality, that is high collection efficiency levels (~99.5%) and the improving trajectory of SMA 1 and SMA 2 levels to 1% as on March 31, 2023, from 1.8% as on March 31, 2022, point to steady asset quality levels. Nevertheless, given the recent high growth rates in the retail portfolio, asset quality performance as the portfolio seasons will need to be seen.
Weakness:
Modest, albeit improving, profitability:
Since fiscal 2022, IDFC FIRST’s overall profitability has continued to improve at a steady pace on a quarter-on-quarter basis. The net earnings on a consolidated basis rose to Rs 2,485 crore for fiscal 2023 with return on average assets (ROAA) of 1.2%, against Rs 132 crore and 0.1%, respectively, for fiscal 2022 (Rs 483 crore and 0.3%, respectively, for fiscal 2021).
Over the past few fiscals, net earnings have been low due to the investments required to scale up the business, as well as higher credit costs emanating from the legacy book and the Covid-19 pandemic.
Given that the bank has been in its early stage of growth, in order to enhance CASA deposits and retailisation of the loan book, the bank rolled out 603 new branches, 785 new automated teller machines (ATMs), hired more than 20,000 employees, and invested in digital innovation initiatives since December 2018. As a result, operating cost has remained relatively high for fiscal 2023. However, it is expected to reduce over the medium term with planned expansion in funded assets leading to economies of scale.
Substantial scale up in retail and commercial loan portfolio has been supporting the core profitability of the bank, leading to a pre-provisioning operating profit of Rs 4,996 crore for fiscal 2023 (2.3% of average total assets), against Rs 3,284 crore (1.9% of average total assets) for fiscal 2022 (Rs 2,542 crore [1.6%] for fiscal 2021). The net interest margin is also healthy at 5.9% of average total assets for fiscal 2023 (5.5% and 4.7%, respectively, for fiscals 2022 and 2021) given the asset-side focus.
Between fiscals 2019 and 2022, the overall earnings were also constrained by elevated credit cost as the bank made higher provisioning and write-offs to manage the impact of the pandemic as well as the stress in the legacy infrastructure finance portfolio. However, credit costs have reduced to 0.8% in fiscal 2023 from 1.8% in fiscal 2022 as lingering asset quality challenges have been surmounted to a large extent. Provision coverage ratio at 66.4% as on March 31, 2023 (59.5% as on March 31, 2022), was also adequate and continues to support the credit risk profile from potential credit losses. Including the technical write-off, the provision coverage ratio improved to 80.29% as on March 31, 2023, from 70.29% as on March 31, 2022, and 63.57% as on March 31, 2021. Excluding the run-down infrastructure book, the provision coverage ratio, including technical write-off stood at 86.85% as of March 31, 2023.
CRISIL Ratings expects overall profitability of the bank to benefit from increasing proportion of the relatively higher-yielding retail advances, reducing reliance on high-cost wholesale borrowings, operating efficiency kicking in with scale up and incremental credit cost remaining range bound. As the business scales up, the bank’s ability to sustain improvement in profitability will remain a key monitorable.