Rating Rationale
February 07, 2020 | Mumbai
IDFC First Bank Limited
  'CRISIL A1+' assigned to CD
 
Rating Action
Rs.45000 Crore Certificate of Deposits CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A1+' rating to the certificate of deposit programme of IDFC First Bank Limited (IDFC FIRST).

IDFC FIRST came into being on December 18, 2018, following the merger of IDFC Bank Ltd (IDFC Bank) and Capital First Ltd (CFL). At the time of the merger, IDFC Bank had assets under management (AUM) of Rs 75,337 crore (as on September 30, 2018) largely concentrated towards infrastructure and wholesale lending. On the other hand, CFL's AUM (Rs 32,622 crore as on same date) was primarily retail, focused towards small entrepreneurs and the consumer segment. The merged entity had an AUM of Rs 1,04,660 crore as on December 31, 2018.

In the initial few quarters post the merger, IDFC FIRST pro-actively recognised and provided for stressed assets as well as invested in expanding its reach for building a strong retail franchise. Its branches increased to 424 as on December 31, 2019, from 206 as on December 31, 2018.

The rating reflects the bank's healthy capitalisation, increased focus on retailisation of the loan book, and expectation of improvement in earnings profile going forward. These strengths are partially offset by the relatively low, albeit increasing, proportion of current account and savings account (CASA) deposits in borrowings. The ability of IDFC FIRST to maintain good asset quality in the growing retail portfolio over a longer period and on a larger scale will be a key monitorable.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of IDFC FIRST and its subsidiaries. This is because of majority shareholding, business and financial linkages, and shared brand.

Key Rating Drivers & Detailed Description
Strengths
* Healthy capitalisation
Capitalisation is healthy, as reflected in Tier 1 capital adequacy ratio (CAR) of 13.28% and overall CAR of 13.29% as on December 31, 2019, despite moderation from 15.27% and 15.47%, respectively, as on March 31, 2019. The capital position is supported by sizeable networth of Rs 15,240 crore and healthy cushion against asset side risks with networth coverage for net non-performing assets (NPAs) of 14.2 times as on December 31, 2019.

Furthermore, with incremental growth coming from the retail portfolio coupled with scaling down of the wholesale loan book, capital consumption is expected to be at lower levels than seen in the past. In addition, the management has demonstrated ability to raise capital on several occasions in the past.

CRISIL believes the bank's capitalisation will continue to be healthy and will support the bank's credit growth over the medium term.

* Increased focus on retailisation of loan portfolio
IDFC FIRST plans to be a retail-focused bank by significantly scaling up the retail book to 75% of the overall funded assets over the medium term. In line with this strategy, the retail portfolio has shown a healthy growth of around 42% in the past one year, to Rs 51,506 crore as on December 31, 2019, from Rs 36,236 crore as on December 31, 2018. Consequently, share of retail assets in total funded assets (advances + debt investments) increased to 49% from 35%. Furthermore, the management plans to leverage past expertise and track record and target small entrepreneurs and consumer segments to drive growth. The company has more than 9 million retail customers as of December 2019 and has demonstrated, in the past, ability to scale up its retail franchise profitably with steady asset quality.

In addition, to increase the granularity of the loan book, the bank is gradually scaling down its wholesale portfolio, leading to muted growth in the overall loan book. The wholesale funded assets reduced to Rs 42,951 crore as on December 31, 2019 from Rs 56,809 crore as on December 31, 2018. The bank's total funded assets remained flattish at around Rs 1,06,140 crore as on December 31, 2019 (Rs 1,04,660 crore as on December 31, 2018).

CRISIL believes IDFC FIRST will continue to focus on scaling up its retail portfolio, thereby improving the granularity of the portfolio. The bank does not plan to take on incremental exposure in the infrastructure segment and will focus on the relatively small-ticket, mid-corporate, and financial institution segments. Therefore, susceptibility to slippages in large exposures, which has impacted the bank in the past few years, will be reduced going forward.

* Expectation of significant improvement in earnings profile over the medium term
The rating factors in expectation of significant improvement in earnings profile from current levels. The bank's profitability has been impacted in the past few quarters by multiple non-recurring factors including (i) accelerated provisioning on stressed assets amounting to Rs 3,238 crore; (ii) write-off of goodwill & other intangible assets created on merger amounting to Rs 2,599 crore; and (iii) markdown of existing deferred tax assets due to change in corporate tax rate amounting to Rs 751 crore. Further, with continued branch expansion, operating expenditure was high at around 3.2% (annualised) of total assets for the nine months ended December 31, 2019. Consequently, the bank reported a loss of Rs 2,936 crore for the nine months ended December 31, 2019, and a loss of Rs 1,944 crore in fiscal 2019. Nevertheless, core earnings are already showing improvement, as reflected by pre-provisioning operating profit (PPoP) of Rs 1417 crore (1.2% (annualised) of average total assets) for the nine month ended December 31, 2019, compared with Rs 7641  crore (0.5% of average total assets) for fiscal 2019.

Further, incremental slippages from legacy wholesale exposures are expected to be limited going forward as bulk of the stressed assets has already been recognised and provided adequately (51% provision coverage on stressed assets as on December 31, 2019). Moreover, with planned ramp-up of the retail portfolio, credit costs are expected to remain under control over the medium term as asset quality is projected to be steady in the medium term. In addition, the net interest margin is expected to improve as the proportion of relatively high-yielding retail segment increases and reliance on high-cost wholesale borrowings decrease. However, operating expenditure is expected to remain elevated over the medium term due to ongoing expansion of retail banking operations.

Nonetheless, with the impact of the legacy portfolio reducing going forward, profitability is expected to show an improving trend. This will continue to remain a key monitorable.

Weaknesses
* Relatively low proportion of CASA deposits
The bank's resource profile reflects a significant component of wholesale borrowings (fixed rate debentures, wholesale term deposits, and certificates of deposit) which formed 43% of overall resources (total borrowings including money market borrowings + total deposit) as on December 31, 2019. Therefore, cost of funds remained high at around 7.45% for the nine months ended December 31, 2019. However, the bank plans to reduce dependence on wholesale borrowings and scale up its retail liability franchise.

Over the past few quarters, mobilisation of CASA deposits has improved significantly as reflected by increasing share of CASA deposits in overall deposits to 24%2  (12% of overall resources) as on December 31, 2019, from 8.68% (4.08%) as on December 31, 2018. The bank has also grown retail deposits (fixed deposits plus CASA) by Rs 18,866 crore in last 12 months. Total retail deposits (retail term deposits and CASA deposits) improved to 43% of overall deposits as on December 31, 2019, from 17% as on December 31, 2018. Since the bank has not increased the overall loan book, this has been partly used to run down corporate deposits and Certificate of Deposits.

Though CASA proportion is currently below industry average, it is expected to increase substantially over the medium term driven by efforts to grow retail liability franchise and the attractive pricing. The ability to scale up retail liability franchise to support credit growth will remain a key monitorable over the medium term.

* Inherent weakness in asset quality in legacy wholesale loans; can be offset by demonstration of stable asset quality in newly built retail portfolio on a steady state basis
Gross NPAs increased to 2.83% as on December 31, 2019, from 1.97% as on December 31, 2018, largely on account of slippages in the wholesale loan book. Furthermore, gross stressed assets ratio3  increased to around 8.8% from 3.7%, driven by significant increase in stressed exposures in legacy wholesale loans identified by the bank. Moreover, gross NPAs of the retail portfolio, which will be the key driver for growth, stood at 2.26% as on December 31, 2019 (2.18% as on March 31, 2019). Most of the retail portfolio came from the erstwhile CFL where the management has demonstrated its ability to maintain stable asset quality. IDFC FIRST, as part of its retailisation agenda, is planning to enter new retail segments over the next few quarters. Also, the share of total wholesale portfolio (including stressed equity and security receipts), despite reducing, remained sizeable at around 43% as on December 31, 2019.

Therefore, the bank's ability to manage asset quality in the newly built retail portfolio while scaling up operations and arrest slippages in the wholesale portfolio will remain key monitorables.
Liquidity Superior

Liquidity coverage ratio was 119% as on December 31, 2019, against the regulatory requirement of 100%. Furthermore, excess statutory liquidity ratio stood at Rs 6,782 crore as on December 31, 2019, around 6.4% of total net demand and time liabilities. The bank's liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the Reserve Bank of India (RBI), access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development. 

Rating sensitivity factors
Downward Factor
*Deterioration in asset quality with gross NPAs increasing to beyond 8%, leading to significant weakening in profitability and capitalisation.
*Lower than expected ramp-up in CASA and retail deposit base from existing levels.

About the Bank

IDFC FIRST came into effect on December 18, 2018, after the merger of IDFC Bank and CFL.

IDFC Bank was initially established as IDFC Ltd in 1994 to facilitate infrastructure finance in the country. In 2014, IDFC Ltd got a banking license from the RBI and IDFC Bank launched operations on October 1, 2015. Post the conversion to bank, all the lending business of IDFC Ltd was transferred to IDFC Bank.

Mr V Vaidyanathan started CFL in 2012 after acquisition of an existing NBFC, through management buyout (MBO) with equity backing from Warburg Pincus. Prior to the MBO, the NBFC was primarily engaged in corporate lending while post the MBO, it transformed into a retail lender with focus on consumer and small and medium enterprise (SME) segments. The MBO turned around the company from losses of Rs 32 crore in fiscal 2009 to profit of Rs 328 crore in fiscal 2018. The AUM of CFL grew at a compound annual growth rate of 29% over five years till March 2018. Over the same time frame, the profits grew at a five year CAGR of 56%.

Post the merger of IDFC Bank with CFL and its subsidiaries, the merged entity was renamed as IDFC FIRST. The bank has three business verticals: corporate banking, consumer banking, and rural banking. It had a network of 424 branches as on December 31, 2019. Additionally, it has 567 business correspondent branches and 272 automated teller machines (ATMs) across the country.

For the nine months ended December 31, 2019, IDFC FIRST reported loss of Rs 2,936 crore and a total income (net of interest expense) of Rs 5,310 crore, against Rs 1,944 crore and Rs 4,051 crore, respectively, for fiscal 2019.

1Includes only Q4FY19 PPoP of CFL
2excluding one government banking account which may not be a long term one
3Gross stressed assets/Total funded assets.

Key Financial Indicators - Standalone
As on/for the period ended December 31, Unit 2019 2018
(Erstwhile IDFC Bank)
Total assets Rs crore 1,60,684 1,56,916
Total income (net of interest expense) Rs crore 5,310 2,665
Profit after tax Rs crore -2,936 -1,726
Gross NPAs % 2.83 1.97
Overall capital adequacy ratio  % 13.29 16.51
Return on assets (annualised) % -2.4 -1.7
 
Key Financial Indicators - Consolidated
As on/for the period ended December 31, Unit 2019 2018
(Erstwhile IDFC Bank)
Total assets Rs crore 1,60,652 1,56,574
Total income (net of interest expense) Rs crore 5,573 2,857
Profit after tax Rs crore -2920 -1696

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Rating assigned with outlook
NA Certificate of Deposits Programme NA NA 7-365 Days 45000 CRISIL A1+
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
IDFC FIRST Bharat Ltd
(formerly known as IDFC Bharat Ltd)		 Full Subsidiary
Millennium City Expressways Pvt Ltd Full Associates

Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  45000.00  CRISIL A1+    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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