By Jinay Gala

India Ratings and Research (Ind-Ra) has affirmed IDFC FIRST Bank Limited’s (IDFCFB) debt instruments’ ratings at ‘IND AA+’ with a Negative Outlook as follows:
 

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Basel III Tier 2 debt#

-

-

-

INR20

IND AA+/Negative

Affirmed

Infra bonds*

-

-

-

INR100

IND AA+/Negative

Affirmed

Non-convertible debentures (NCDs)*

-

-

-

INR184.93

(reduced from INR205.19)

IND AA+/Negative

Affirmed

*Details in Annexure

#unutilised

Ind-Ra has maintained a Negative Outlook to reflect the asset quality challenges that could persist on account of COVID-19 especially in IDFCFB’s retail segment and also the ongoing uncertainty regarding its one large telecom exposure, resulting in higher provision and credit cost. This could lead to a moderation in the operating performance and dilute capital buffers. However, the bank has raised capital to the tune of INR50 billion, built-up adequate capital buffers for incremental provision requirements, strengthened liability franchise and improved funding profile both by reduction in cost and reduced concentration and increased granularity of asset profile.

KEY RATING DRIVERS

Retail Book Driving Loan Portfolio Expansion; Reducing Concentration Risk, Driving Margins: IDFCFB’s retail book accounted for 63.9% of the total funded exposure in 1QFY22 (FY21:62.9%; FY20: 53.6%; end-FY19, post the merger with Capital FIRST: 37%).The bank intends to continue focusing on expanding its retail loan portfolio, thereby increasing loan granularity, improving yields on overall book and resultantly strengthening margins, which would offset some of the impact of elevated funding cost compared to peers. Retailisation of the loan book led to IDFCFB’s net interest margin rising to 5.5% in 1QFY22 (FY21: 4.98%, FY20: 3.91%). However, Ind-Ra believes the retail portfolio (where 46.7% loans remain unsecured in nature) may witness heightened credit costs in the prevailing challenging economic scenario. Thus, the banks’ ability to manage its asset quality better than the peers remains monitorable. The bank’s retail GNPA rose to 3.86% in 1QFY22 (FY21: 4.01%; FY20: 2.22%), and could face further pressure because of the ongoing pandemic. Thus, the banks’ ability to adequately manage its asset quality remains key monitorable. 

Stable Capital Buffers:
IDFCFB raised INR20 billion in April 2020 and INR30 billion in April 2021, leading to an improvement in its common equity tier-1 ratio to 14.9% in 1QFY22 (FY21: 13.3%; FY20: 13.30%). The agency believes this improved capitalisation is necessary to strengthen bank’s buffers to absorb shocks in case of any higher-than-expected stress on the loan portfolio. The improved capitalisation also allows the bank to expand its loan portfolio, as and when demand recovers. However, with the retail book growth on higher side for FY22, there could be increased absorption of capital levels during the year. Furthermore, any impact due to the deterioration in asset quality on account of COVID-19 or the large exposure slipping would necessitate a capital raise. 

Liquidity Indicator – Adequate:
IDFCFB’s liquidity remained stable as of 1QFY22, with its quarterly liquidity coverage ratio improving to 166% (FY21: 153%; FY20: 111%). Moreover, the bank’s assets-liability tenure remained matched across shorter buckets as at end-FY21. Also, it maintains 6.2% of net demand time liabilities as excess statutory liquidity ratio, indicating that it will be able to meet its short-term funding requirements.

Retail Liabilities Improved, but Legacy Cost Keeps Funding Cost Elevated
: In 1QFY22, IDFCFB’s current account saving accounts accounted for 33.2% (FY21: 34.1%; FY20: 16.9%) of the total liabilities (deposits + borrowing). IDFCFB’s top 20 deposit-to-total deposit moderated to 9.39% in 1QFY22 (FY21: 7.75%; FY20: 20.36%), thereby improving granularity in line with peers. Ind-Ra believes maintaining the low-cost liability franchise would be a key monitorable for IDFCFB as it has been reducing its saving rates which was a significant driver in the build-up of its liability franchise. While the cost of funds has moderated, the borrowing cost remains elevated in comparison to peer banks due to the bank’s historically high-cost fixed rate borrowings, thus suppressing the net interest margin. With the growth in retail deposit base, IDFCFB has been reduced its high cost borrowings (FY21: INR50.47billion; FY20: INR37.39 billion). The management expects the same to reduce further post FY24, as the legacy long-term and infrastructure bonds start maturing. As a part of the reducing wholesale borrowings, IDFCFB has also reduced its certificates of deposits by 75% yoy in FY20 and 16% yoy in FY21. IDFCFB also intends to strengthen its digital capabilities and offerings for its customers by expanding  its retail branch network; however, the successful execution of this plan remains a key monitorable.

Above-average Stressed Credit Portfolio Compared to Peers due to COVID:
 The stressed assets (GNPA + gross nonperforming investments + gross security receipts + gross restructured book +potential additional stressed asset) as a percentage of total funded exposure stood at 11.2% in 1QFY22 (FY21: 10.0%; FY20: 9.6%). The provisions against the stressed assets including covid provision stood at 5.7% of the funded asset as of 1QFY22 (FY21: 5.2%, FY20: 5.5%), implying provision coverage of 51% (51.7%, 56.8%). The overall GNPA increased in 1QFY22 to 4.6% (FY21: 4.2%; FY20: 2.6%), due to the migration of one of the large legacy infrastructure loans (toll road part of stressed asset) with exposure of INR8.5 billion to a higher bucket because of the COVID-19 impact on toll collections.

The large telecom exposure of INR32.4 billion where bank carries 15% provision could see a higher provision impact amid the current financial challenges at the telecom entity. In event of deterioration, there could be a moderation on capital buffers from current levels in FY22 due to the incremental provision requirement and without materially diluting the existing provision coverage levels depending upon the loss given default for the exposure. The bank’s retail GNPA also rose to 3.86% in 1QFY22 (FY21: 4.01%; FY20: 2.22%), which could face further pressure as it largely caters to self-employed borrowers, and the large proportion of the retail book being unsecured could pose the risk of high write-offs or addition to GNPA in FY22 because of the second covid wave. The bank follows a proactive write-off policy on retail products where write-offs for retail book stood at 1.9% of the retail book in 1QFY22 (FY21: 2.5%). The management has guided for a provision of INR30 billion for FY22 which remains a key monitorable. 


Higher Operating Expense to Remain a Drag on Internal Accruals:
Post the merger, IDFCFB’s cost-to-income ratio exceeded 79.5% in 2HFY19, before falling to 68.8% in FY21 (1QFY22: 69.5%). Ind-Ra expects it to remain elevated in the medium term, largely due to branch expansion and technology related cost, thus adding pressure on the bank’s internal accruals. The drivers for strong retail fee income in the form of distribution fees may entail higher operating expenses, which would also keep the cost-to-income ratio elevated in the medium term. A further reduction in the saving rates would lead to a moderation in the cost of funds and with increased retailisation, there could be a further expansion in margins, helping absorb incremental credit cost coming from retail assets. However, the internal accruals would remain subdued and could be lower than peer banks’ in the near to medium term. According to the management, retailisation of the loan book would be the key focus area for the medium-to-long term. While this should be margin-accretive in the medium term, its impact on overall return ratios would depend on loan growth, a moderation of negative carry due to the legacy borrowing book, stabilisation of operating cost and a moderation in provision costs.


RATING SENSITIVITIES

Positive: A consistent improvement in the granularity of liability franchise, significantly improved operating performance, and strengthened asset quality while maintaining capital could result in a Stable Outlook. 

Negative
: Following events that could individually or collectively lead to a negative action include:

- higher-than-expected credit costs or a weakening of the provision cover or diluted tangible capitalisation buffers

- the common equity tier-1 buffer falling below 13% on a sustained basis

- if the bank posts a further losses in FY22

- a slowdown in the low-cost granular retail liability accretion


COMPANY PROFILE

Incorporated on 21 October 2014, IDFCB is a new-age private sector bank. IDFC Ltd was its ultimate parent, which was established in 1997 by the government for financing infrastructure projects. On 23 July 2015, IDFCB received a banking license. It commenced banking operations on 1 October 2015. IDFCB later merged with Capital First Ltd to form IDFC FIRST Bank in December 2018. IDFC Financial Holding Company Limited held 40% share; Warburg Pincus held 9.99%; the President of India held 5.47% share, followed by other shareholders in IDFC FIRST Bank, as on September 2019. 

FINANCIAL SUMMARY

Particulars

FY21

FY20

Total assets (INR billion)

1,631.4

1,492.0

Total equity base (INR billion)

178.08

153.4

Net profit (INR billion)

4.52

-28.6

Return on assets (%)

0.3

-1.8

Tier 1 ratio (%)

13.3

13.3

Capital adequacy ratio (%)

13.7

13.4

GNPA (%)

4.2

2.6

Source: IDFCFB

 

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (billion)

Rating

7 August 2020

10 December 2019

17 July 2019

27 June 2018

NCDs

Long term

INR184.93

IND AA+/Negative

IND AA+/Negative

IND AA+/Negative

IND AA+/Negative

IND AA+/Stable

Infra bonds

Long-term

INR100

IND AA+/Negative

IND AA+/Negative

IND AA+/Negative

IND AA+/Negative

IND AA+/Stable

Basel-III tier 2 debt

Long-term

INR20

IND AA+/Negative

IND AA+/Negative

IND AA+/Negative

-

-

ANNEXURE

ISIN No.

Instrument

Date of Issuance

Coupon rate (%)

Maturity Date

Issue size (billion)

Rating/Outlook

INE092T08014

NCDs

17 January 2006 

7.75

17 January 2026

INR2.00

IND AA+/Negative

INE092T08246

NCDs

25 August 2009

9.15

25 August 2024

INR1.50

IND AA+/Negative

INE092T08253

NCDs

31 August 2009

9.05

31 August 2024

INR1.50

IND AA+/Negative

INE092T08279

NCDs

15 September 2009

9

15 September 2024

INR0.50

IND AA+/Negative

INE092T08378

NCDs

15 January 2010

8.83

15 January 2025

INR1.00

IND AA+/Negative

INE092T08386

NCDs

15 January 2010

8.81

15 January 2025

INR1.00

IND AA+/Negative

INE092T08394

NCDs

27 January 2010

8.8

27 January 2025

INR2.00

IND AA+/Negative

INE092T08428

NCDs

5 April 2010

9.03

5 April 2025

INR2.50

IND AA+/Negative

INE092T08436

NCDs

5 April 2010

8.96

5 April 2025

INR2.50

IND AA+/Negative

INE092T08444

NCDs

9 April 2010

8.9

9 April 2025

INR2.50

IND AA+/Negative

INE092T08451

NCDs

28 April 2010

8.9

28 April 2025

INR3.50

IND AA+/Negative

INE092T08469

NCDs

13 May 2010

8.95

13 May 2025

INR5.00

IND AA+/Negative

INE092T08485

NCDs

28 May 2010

8.84

28 May 2025

INR2.00

IND AA+/Negative

INE092T08493

NCDs

15 June 2010

8.8

15 June 2025

INR2.00

IND AA+/Negative

INE092T08501

NCDs

8 July 2010

8.8

8 July 2025

INR2.00

IND AA+/Negative

INE092T08519

NCDs

21 July 2010

8.8

21 July 2025

INR3.00

IND AA+/Negative

INE092T08527

NCDs

6 August 2010

8.95

6 August 2025

INR2.00

IND AA+/Negative

INE092T08535

NCDs

15 September 2010

8.79

15 September 2020

INR0.85

WD(Paid in Full)

INE092T08543

NCDs

15 September 2010

8.89

15 September 2025

INR1.00

IND AA+/Negative

INE092T08550

NCDs

20 September 2010

8.77

20 September 2020

INR0.8

WD(Paid in Full)

INE092T08568

NCDs

20 September 2010

8.86

20 September 2025

INR1.20

IND AA+/Negative

INE092T08576

NCDs

29 September 2010

8.72

29 September 2020

INR1.35

WD(Paid in Full)

INE092T08584

NCDs

29 September 2010

8.82

29 September 2025

INR2.60

IND AA+/Negative

INE092T08592

NCDs

19 November 2010

8.9

19 November 2025

INR2.60

IND AA+/Negative

INE092T08600

NCDs

2 December 2010

8.89

2 December 2020

INR3.06

WD(Paid in Full)

INE092T08618

NCDs

27 December 2010

9.05

27 December 2020

INR3.39

WD(Paid in Full)

INE092T08626

NCDs

6 January 2011

9.15

6 January 2026

INR2.08

IND AA+/Negative

INE092T08AO5

NCDs

17 February 2011

9.35

17 February 2026

INR3.15

IND AA+/Negative

INE092T08634

NCDs

24 March 2011

9.25

24 March 2021

INR5.00

WD(Paid in Full)

INE092T08AQ0

NCDs

28 March 2011

9.33

28 March 2026

INR2.15

IND AA+/Negative

INE092T08CG7

NCDs

21 February 2011

8

21 February 2021

INR1.03

WD(Paid in Full)

INE092T08CH5

NCDs

21 February 2011

8.01

21 February 2021

INR3.36

WD(Paid in Full)

INE092T08CI3

NCDs

30 March 2011

8.25

30 March 2021

INR0.34

WD(Paid in Full)

INE092T08CJ1

NCDs

30 March 2011

8.25

30 March 2021

INR1.08

WD(Paid in Full)

INE092T08CM5

NCDs

21 March 2012

8.7

21 March 2022

INR1.08

IND AA+/Negative

INE092T08CN3

NCDs

21 March 2012

8.7

21 March 2022

INR3.57

IND AA+/Negative

INE092T08AR8

NCDs

15 April 2011

9.28

15 April 2026

INR2.50

IND AA+/Negative

INE092T08CK9

NCDs

30 December 2011

9

30 December 2021

INR0.74

IND AA+/Negative

INE092T08CL7

NCDs

30 December 2011

9

30 December 2021

INR1.99

IND AA+/Negative

INE092T08CO1

NCDs

31 March 2012

8.43

31 March 2022

INR0.32

IND AA+/Negative

INE092T08CP8

NCDs

31 March 2012

8.43

31 March 2022

INR0.86

IND AA+/Negative

INE092T08808

NCDs

23 May 2013

7.98

23 May 2023

INR4.00

IND AA+/Negative

INE092T08824

NCDs

2 January 2014

9.63

2 January 2024

INR1.45

IND AA+/Negative

INE092T08AS6

NCDs

8 January 2014

9.65

8 January 2029

INR11.65

IND AA+/Negative

INE092T08840

NCDs

15 April 2014

9.61

15 April 2024

INR5.70

IND AA+/Negative

INE092T08BN5

NCDs

7 August 2014

9.3

7 August 2024

INR1.74

IND AA+/Negative

INE092T08BO3

NCDs

21 August 2014

9.36

21 August 2024

INR10.25

IND AA+/Negative

INE092T08BP0

NCDs

12 September 2014

9.38

12 September 2024

INR10.55

IND AA+/Negative

INE092T08BQ8

NCDs

14 October 2014

9.17

14 October 2024

INR10.00

IND AA+/Negative

INE092T08BR6

NCDs

11 December 2014

8.49

11 December 2024

INR4.80

IND AA+/Negative

INE092T08BS4

NCDs

5 January 2015

8.67

3 January 2025

INR20.00

IND AA+/Negative

INE092T08BT2

NCDs

27 February 2015

8.52

27 February 2025

INR3.00

IND AA+/Negative

INE092T08AN7

NCDs

17 April 2015

8.59

21 October 2021

INR0.25

IND AA+/Negative

INE092T08CB8

NCDs

17 April 2015

8.61

19 April 2022

INR0.75

IND AA+/Negative

INE092T08BU0

NCDs

20 May 2015

8.7

20 May 2025

INR7.41

IND AA+/Negative

INE092T08BV8

NCDs

27 May 2015

8.73

30 May 2022

INR6.30

IND AA+/Negative

INE092T08BW6

NCDs

29 May 2015

8.71

29 May 2024

INR2.00

IND AA+/Negative

INE092T08BX4

NCDs

12 June 2015

8.73

14 June 2022

INR3.18

IND AA+/Negative

INE092T08BY2

NCDs

23 June 2015

8.7

23 June 2025

INR3.95

IND AA+/Negative

INE092T08BZ9

NCDs

9 July 2015

8.73

6 January 2023

INR5.11

IND AA+/Negative

INE092T08CA0

NCDs

28 July 2015

8.75

28 July 2023

INR10.50

IND AA+/Negative

 

 

 

 

Total outstanding

INR184.93

 


ISIN

Instrument

Date of Issuance

Coupon Rate (%)

Maturity Date

Issue Size (billion)

Rating/Outlook

INE092T08CQ6

Infra bonds

19 May 2016

8.5

4 July 2023

INR4.8

IND AA+/Negative

Total unutilised

INR95.2

IND AA+/Negative

 

Total

 

 

 

INR100

 


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity

Infra bonds

Low

Basel III Tier 2 debt

Low

NCDs

Low

  

For details on the complexity level of the instruments please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Jinay Gala

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356138

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121