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IDFC First Bank Ltd’s investors were disappointed by the lender’s June quarter performance as the bank reported a quarterly loss as against the expectations of profit, because of the slippage of a large infrastructure loan account.

The private sector lender’s gross bad loans rose to 4.61% of its book from 4.15% in the previous quarter. Much of the pain seems to have emanated from a single large infrastructure account that slipped during the quarter. The borrower was a Mumbai-based toll road account to which the bank has an exposure of 854 crore. This slippage increased the bad loan ratio of the infrastructure segment to a massive 15% from just 5.7% in the March quarter.

“This toll road account continued to repay its dues, partially, even during this quarter, which was affected by the second wave; the principal outstanding has come down by 19 crore during Q1FY22. The bank carries 154 crore provision on this account," IDFC First said in its earnings presentation.

One big hit
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One big hit

The bank has restructured 1,895 crore worth of loans in June or 2.01% of its loan book. During the quarter, though, the bank didn’t ease loan covenants through recast.

Beyond the infrastructure hit, bad loan ratios have, in fact, declined sequentially. The retail bad loan ratio was down to 3.86% in the June quarter from 4.01% in the previous quarter. The bad loan ratio in its corporate loan book dropped to 2.91%.

That said, it does not help the bank to have a modest provision coverage ratio of 51% as the lender is vulnerable to future stress.

While the quarterly loss and the increase in stress should be a cause for concern, investors seem to have noted the improvement in its operating metrics. IDFC First Bank’s core operating profit, excluding treasury gains, grew by 8% year-on-year. Improvement in margins gave a boost to net interest income even as the loan book shrank sequentially.

It should be noted that the bank’s large corporate loans showed a sequential increase of 16% even as all other parts of the loan portfolio shrank.

What works for the bank is that the share of infrastructure has progressively come down, while the share of retail has increased. The lender must demonstrate strong asset quality on its retail portfolio for its valuations to stick. On the back of the 7% drop since April, its shares trade at a modest multiple of 1.5 times estimated book value for FY22.

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