IDFC First Bank's shares fell over 10% in intraday trade today.
IDFC First Bank's shares fell over 10% in intraday trade today.

The reasons behind investors’ angst for IDFC First Bank

  • According to analysts, the bank hasn’t been able to put a lid on its costs even as it struggles to raise its core income
  • Credit Suisse has downgraded the stock now to underperform, according to Bloomberg

On 31 December, the record date for conversion of Capital First Ltd shares into IDFC Bank Ltd shares, the latter was valued at 43 per share. This was followed by a fair amount of optimism about the merged company’s prospects, and shares of the newly-formed IDFC First Bank Ltd soon galloped to 56 a piece.

(Sarvesh Kumar Sharma/Mint )

But investors had clearly gotten ahead of themselves, and things have now come crashing back to square one. It suddenly looks as if investors want nothing to do with IDFC First Bank, what with the stock falling more than 12.5% on Monday after the lender reported weak results for the March quarter. The stock now trades at 43.

IDFC First Bank reported unpleasant profitability metrics for the second straight quarter. The bank had to ratchet up its provisioning by 12% from the previous quarter towards decaying loans, even as its bad loan ratios turned worse. That led to a second consecutive quarterly net loss in the March quarter.

In light of this, it should be obvious why investors are taking a not-so-friendly view on the stock. But the struggle on asset quality was expected, given that IDFC Bank was reeling under a huge pile of toxic assets. IDFC Bank’s pain on asset quality overshadowed the pristine asset quality Capital First brought to the merger.

Analysts at global banks had already foreseen this and cut their expectations on IDFC First Bank. For instance, Morgan Stanley put an underweight tag on the bank in February and Deutsche Bank hasn’t changed its sell rating on the stock.

According to Bloomberg, Credit Suisse has downgraded the stock now to underperform, another reason behind the huge fall in the share price on Monday. According to analysts, IDFC First Bank hasn’t been able to put a lid on its costs even as it struggles to increase its core income.

Its cost-to-income ratio rose to 80% in the March quarter, while it could grow its core income by just 2.8% on a sequential basis. Mergers are typically salutary on the cost-to-income ratio and the contrasting rise is not a good sign. Then again, the focus on getting low-cost savings deposits would mean operating expenses will remain high.

Meanwhile, the pain from the infrastructure book remains, while the dividends of higher retail liabilities through the network of Capital First are yet to emerge.

As Deutsche Bank analysts noted in February, the gestation period for IDFC First Bank to get a meaningful return on its capital is long. Looks like investors too have finally come around to this conclusion.

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