IDFC First Bank Stock Analysis

IDFC Bank & Capital First Merger

Introduction

In this article, we will analyse the IDFC First Bank Stock. IDFC FIRST Bank was founded as a new entity by the merger of IDFC Bank and Capital First on December 18, 2018. Let us also understand the individual stocks before the merger.

IDFC First Bank Stock Analysis

Company Overview – IDFC Bank

• IDFC Limited was set up in 1997 to finance infrastructure focusing primarily on project finance and mobilization of capital for private sector infrastructure development.
• While, IDFC Bank was incorporated as wholly owned subsidiary of IDFC on October 21, 2014. In 2015, RBI has granted an in-principle approval to IDFC Limited to set up a new bank in private sector – IDFC Bank. Thus, IDFC Bank was created by demerger of the infrastructure lending business of IDFC to IDFC Bank.  IDFC Financial Holding Company Limited is a holding company of IDFC Bank.
• The bank diversified from being a predominantly infrastructure financier to wholesale banking operations. Since 90% of the bank was wholesale (infrastructure and corporate loans) as a legacy from IDFC Limited until 2017, the company swiftly put together a strategy to retailise its loan book. Retail required specialised skills for the marketplace, seasoning, and scale for profitability.
• The IDFC Bank was looking for a retail lending partner who already had scale, profitability and specialized skills, to merge with.

Capital First

• Capital First Ltd was a leading Indian Financial Institution specializing in providing debt financing to Self-employed Entrepreneurs, MSMEs and consumers in India.
• Around the same time (2010-2017), while these events were playing out at IDFC Group, certain events were playing out in parallel at Capital First. Mr. V. Vaidyanathan who had built ICICI Bank’s Retail Banking business from 2000-2009 and was the MD and CEO of ICICI Prudential Life Insurance Company in 2009-10, quit the group for an entrepreneurial foray.
• Mr. V. Vaidyanathan founded Capital First Ltd by first acquiring an equity stake in an existing NBFC, and then executing a Management Buyout (MBO) by securing an equity backing of Rs. 810 crores in 2012 from PE Warburg Pincus. The MBO included:

1. Buyout of majority and minority shareholders through Open Offer to public;
2. Fresh capital raise of Rs. 100 crores into the company;
3. Reconstitution of the Board of Directors
4. Change of business from wholesale to retail lending;
5. Creation of a new brand “Capital First”. Post the buyout he holds shares and options totalling 12% of the equity of the company on a fully diluted basis.

Under the Leadership of V. Vaidyanathan :

• On acquiring control of the management, Mr. V. Vaidyanathan exited legacy businesses of Real estate financing, Foreign Exchange, Broking, Investment management.
• And he transformed the Capital First into a large retail financing institution with operations in more than 225 locations across India.

From 31-March-2010 to 31-Mar-2018, the company has transformed across all key parameters including:

The % CAGR Growth of the key parameters between FY2013 to FY2018 as follows:

Funding could be a constraining factor, so the company was looking out for a banking license. So, Capital First, in the meanwhile, was on the lookout for a commercial banking license in order to access large pool of funds for growth and to access low cost of funds.

Founding of IDFC FIRST Bank :

IDFC Bank & Capital First Merger : IDFC Bank + Capital First = IDFC First Bank

• In January 2018, IDFC FIRST Bank and Capital First announced that they had reached an understanding to merge with each other.
• Shareholders of Capital First were to be issued 139 shares of the merged entity for every 10 shares of Capital First. 
• The Competition Commission of India approved the transaction in March 2018. The Reserve bank approved the transaction in June 2018.
• Shareholders of IDFC Bank approved the merger with an overwhelming 99.98% votes in favor. Capital First shareholders too approved the merger with an equally overwhelming approval rate of 99.9%. Such overwhelming approval rates for a merger were unprecedented for merger of listed companies in India.
• This was also the FIRST merger between an NBFC and a commercial Bank.
• Mr. Vaidyanathan, who was the Chairman of Capital First prior to the merger, was appointed the FIRST Managing Director and CEO of the new combined Bank, IDFC FIRST Bank. 
• Thus, IDFC FIRST Bank was founded as a new entity by the merger of IDFC Bank and Capital First on December 18, 2018.

Current Shareholding Pattern of IDFC FIRST Bank Stock Post Merger

Combining Individual Strengths

Future Strategy

1. Asset Strategy:

• Growth of Assets:  The Bank plans to grow the retail asset book from Rs. 36,236 Cr (December 31, 2018) to over Rs. 100,000 Cr in the next 5-6 years. Thus the Bank plans to increase the retail book composition from current figure of 34% to more than 70% in the next 5-6 years.
• Diversification of Assets: The Bank plans to reduce the loans to infrastructure segments (Rs. 22,710 as of 31 December 2018) as they mature.
• Gross Yield Expansion: As a result of the growth of the retail loan assets (at a relatively higher yield compared to the wholesale loans), the gross yield of the Bank’s Loan Book is planned to increase from 9.2% (as per Q2-FY19 published financials, before the merger) to ~ 12% in the next 5-6 years. The bank will expand Housing loan portfolio as one of its important product lines. 

2. Liability Strategy :

• CASA Growth: The key focus of the Bank would be to increase the CASA Ratio from 10.3% (December 31, 2018) on a continuous basis year on year and strive to reach 30% CASA ratio within the next 5-6 years, as well as set a trajectory to reach a CASA ratio of 40-50% there on.
• Diversification of Liability: Diversification of Liabilities in favour of the retail deposit (including CASA and Retail Term Deposits) is essential for the bank. As a percentage of the total borrowings, the Retail Term Deposits and CASA is proposed to increase from 10.5% currently (December 31, 2018), to over 50% in the next 5-6 years and set up a trajectory to reach 75% thereafter,
• Branch Expansion: In order to grow Retail Deposits and CASA, the bank plans to set up 600-700 more bank branches in the next 5-6 years from the current branch count of 206.

3.Profitability :

• Net Interest Margin: As the retail asset contribution moves towards 70% of the total fund assets, it is planned that the gross yield will continuously increase. Coupled with lower cost of funds (From improved CASA ratio), it is planned to expand NIM to about 5.5% in the next 5-6 years.
• Cost to Income:  The Bank plans to improve C:I ratio to ~50-55% over the next 5-6 years, down from ~80% (post merger results, Quarter ended December 31, 2018)
• ROA and ROE:  With the improvement in the NIM and cost to income ratio, the    bank aims to reach the following benchmarks in the next 5-6 years.
• ROA of 1.4%-1.6%
• ROE of 13%-15%