Analyst Concall
IDFC FIRST Bk sees PAT down YoY Apr-Jun, recovery post that
This story was originally published at 21:50 IST on 26 April 2025
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--IDFC FIRST Bank: Incremental credit-deposit ratio 76.1% in FY25--CONTEXT: Comments by IDFC FIRST Bank's mgmt in post-earnings analyst call
--IDFC FIRST Bank: To pay off INR 45 bln of legacy loans in FY26
--IDFC FIRST Bank: Have paid off INR 70 bln legacy loans in FY25
--IDFC FIRST Bank: Credit card business has reached break even within 4 yrs
--IDFC FIRST Bank: Jan-Mar gross slippages in microfinance at INR 5.72 bln
--IDFC FIRST Bank: Special mention accts down on qtr, see lower NPA buildup
--IDFC FIRST Bank: Jan-Mar PAT largely affected by microfinance book
--IDFC FIRST Bank: Jan-Mar PAT down as credit cost normalised
--IDFC FIRST Bank: Raising capital to make an attractive customer franchise
--CONTEXT: IDFC FIRST Bank announced INR 75-bln fundraising last week
--IDFC FIRST Bank: Generating return on capital task at hand
--IDFC FIRST Bank: Want to raise return on equity to 15-16%
--IDFC FIRST Bk to investors:Have not delivered up to your expectations FY25
--IDFC FIRST Bank: Will stage a smart recovery FY26; FY25 lost to microfin
--IDFC FIRST Bank: Fall in PAT in FY25 not a trend
--IDFC FIRST Bank: Would like to grow loan book 20% FY26, deposits by 22-23%
--IDFC FIRST Bk: Plan to cut deposit rates soon by potentially large quantum
--IDFC FIRST Bank: May let go of high-cost FDs if no rollover at lower rates
--IDFC FIRST Bank: Jan-Mar may have seen the peak of provisions
--IDFC FIRST Bank: Could see 50 bps drop in credit cost to 1.85-1.90% FY26
--IDFC FIRST Bank: See NIM down 10 bps FY26 from Jan-Mar levels
--IDFC FIRST Bank: Holding adequate provision on microfinance book
--IDFC FIRST Bank: Aim to maintain LCR at around 115% after new RBI norms
--IDFC FIRST Bank: Hope to maintain CASA ratio at current levels
--IDFC FIRST Bank:About 61% of loan book fixed rate, 30% linked to repo rate
--IDFC FIRST Bk:See microfin business falling to 3-3.5% of loan book in a yr
--IDFC FIRST Bank: Trying to deliver 1% return on assets by Jan-Mar FY26
--IDFC FIRST Bank: Don't expect on-year growth in net profit in Apr-Jun
By Kabir Sharma and Aaryan Khanna
MUMBAI – IDFC First Bank Ltd. does not expect on-year growth in its net profit for the June quarter, but hopes to see a smart recovery after that, Managing Director and Chief Executive Officer Vaidyanathan said in a post-earnings analyst call on Saturday. Vaidyanathan said the year 2024-25 (Apr-Mar) was lost to microfinance. Owing to struggles in the microfinance business, the bank's net profit tanked nearly 60% on year in Jan-Mar, and its margins moderated for the fifth straight quarter.
Slippages in the microfinance book were at INR 5.72 billion in Jan-Mar, higher than INR 4.37 billion in the previous quarter. Special mention accounts I and II in the microfinance portfolio increased to 5.10% as of Mar. 31 from 4.56% as of Dec. 31 due to contraction in the loan book, the management said.
The fall in net profit can largely be attributed to stress in the microfinance book and normalisation of the credit cost, the management said. Excluding microfinance and one toll account, credit cost for the overall loan book of the bank was 1.76% in 2024-25 (Apr-Mar). Sequentially, it improved by 9 bps to 1.73% in Jan-Mar from 1.82% in Oct-Dec.
"It's true that we have not delivered to your expectation or even what we thought we could," Vaidyanathan said. "So, I want to share with you that this dip is not that there's any fundamental issue with the bank or the model where it's going to go cutting down this way."
The bank's net profit for FY25 nearly halved to INR 15.25 billion.
In its aim for greater profitability, Vaidyanathan said the bank would constrain growth in operational expenses at 12-13% on year in the next two years, in line with the on-year growth seen in Jan-Mar. In addition, the bank sees its credit card business "spinning money" in the next few years, after breaking even in that segment four years after entering it. Moreover, the bank is constantly looking to cut operational costs and has a team for this specific purpose, along with making transformational changes to some items to bring down costs.
However, the CEO said the bank wasn't looking to reduce headcount as it continued to grow. Instead, it is looking to soon slash fixed deposit rates, which are currently 70-80 basis points above its competition's pricing as the Reserve Bank of India cuts the policy repo rate. Around 61% of its loans are fixed rate and 30% linked to the repo rate, which has been cut by 50 basis points since February and is likely to be cut by 50 bps further, the management said. The bank has room to rationalise costs and protect its net interest margin, which is likely to fall by only around 10 basis points in FY26 from 5.95% in Jan-Mar.
Vaidyanathan said he wants the bank to grow into a stable and long-term business, and is looking to build a franchise that is attractive to both customers and long-term investors. He cited ICICI Bank – where he has served on the board – between 2000 and 2010 as a model for the growth of IDFC FIRST Bank in its current phase. The latter has raised nearly INR 210 billion in five years, and has announced another INR 75 billion fundraising last week. Arms of the Abu Dhabi Investment Authority and Warburg Pincus will pump in the capital through an issuance of preferential shares, IDFC FIRST Bank had told exchanges on Apr. 17.
The CEO said generating a return on capital was the task at hand, and the bank was moving to giving investors return on equity of 15-16%, against 4.27% in FY25. It was trying to deliver return on assets of 1% by Jan-Mar FY26, Vaidyanathan said, against an annualised 0.36% for the reporting quarter and 0.48% for FY25.
The impact of the microfinance business would take three-four quarters to disappear, and provisions have likely peaked in Jan-Mar, the management said. In the reporting quarter, net provisions and contingencies doubled on year to INR 14.50 billion. Of these, gross slippages in microfinance alone were INR 5.72 billion. The decline in special mention account – 0 holdings by 40% sequentially boded well for a reduction in the bank's asset quality going ahead, management said. The bank aims to reduce the microfinance portfolio to only 3.0-3.5% on its loan book in a year's time, from 4.0% on Mar. 31.
The bank expects its credit cost to decline by around 50 bps in FY26 to around 1.85-1.90%, Vaidyanathan said. In addition, IDFC FIRST Bank had paid off around INR 70 billion of legacy, high-cost loans in FY25 and plans to pay of around INR 45 billion of such loans in the current fiscal year. The CEO said the bank aims to reduce its ratio of borrowing from the current 11% to around 6-7%, instead of relying on deposit growth to fund loans.
In FY25, the bank's incremental credit-to-deposit ratio was 76.1%. It is looking to maintain a slightly higher pace in FY26, with loans expected to grow 20% and deposits by 22-23%. Vaidyanathan said the bank was aiming for a similar pace of loan growth as in the financial year ended March, as it was a comfortable pace that would not be hard to deliver, or cut its lending standards to achieve.
On the deposit front, the bank said it was open to letting go of high-cost deposits if customers did not roll over the lower rates that the bank plans to offer going ahead, the management said. It is also looking to maintain its current account savings account ratio at around the current 47%. Vaidyanathan said the bank's savings accounts were growing too quickly to show a quicker growth in current accounts, which stood at only around 7% of deposits despite an increase of over 20% on year.
Meanwhile, the bank plans to maintain its Liquidity Coverage Ratio at around 115% after the RBI's revised framework this week. With the bank's retail franchise to around 63% of its deposits, Vaidyanathan said, the increase in run-off factor is likely to hurt IDFC FIRST Bank's liquidity coverage more than most. The Reserve Bank of India Monday said banks will have to assign an additional 2.5% run-off factor for retail deposits which are enabled with internet and mobile banking facilities, as part of the revised Liquidity Coverage Ratio framework, which will come into effect from Apr. 1, 2026. End
Edited by Avishek Dutta
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