The story started on January 13, 2018,when the merger of IDFC Bank and Capital First is announced.There is a lot of hawa in the business news channels about the merger and the stock price of IDFC bank is going up.So I purchased some.The merger happened and I was holding some shares.
Why Mr. V. Vaidyanathan,created Capital First.My realization is ,he has an entrepreneurial spirit. Because ,if he had been in ICICI Bank,may be ,by now he would have been the CEO of ICICI bank.What I think that he has entrepreneurial spirit and entrepreneurs like to build their things from scratch.
Ok ...leave it...
There was a lot of hawa in the business channels about the merger and the profile and past achievements (i.e. Capital First) of Mr. V. Vaidyanathan and I listened to the business channels (which no one should ever have) and bought some shares.
Ok....what is the difference between a bank and NBFC ? The simple difference is, banks can raise their raw materials i.e. money in terms of deposits and account balance (i.e. minimum average balance in current account and savings account etc.) at very low interest rate and lend the same as loan in high interest rate.But , NBFCs do not have this luxury to raise money in low cost i.e. like banks, they can't get unlimited deposits from public.So, NBFCs raise money through of loans from banks ,bonds and equities etc.
But ,one thing is to be noted that with these limitations ,still the NBFCs like Bajaj Finance and Capital first have produced super normal profits since several years.What it shows that, these NBFCs have absolutely brilliant underwriting skills.In banking domain the simple meaning of "underwriting" is,the ability to sanction a good loan to a customer,which will not become NPA in future".This underwriting skill may be a person specific.But when a person having such skill becomes the CEO ,gradually the skill is crafted in the DNA of the organisation and became the culture of the organisation and remain with the organisation till anybody else disturbs it.What Capital First gets from the merger ,is ability to raise unlimited deposits from the people.Because ,in India banking license is not granted to everyone and highly is regulated.Since IDFC bank was a bank (i.e. has already a banking license) ,therefore post merger capital first also became bank.
Mr. Vaidyanathan, made very good terms prior to merger like, making IDFC Bank's NPA to below 1%.
The catch was very simple.Capital First will bring its brilliant underwriting skills to IDFC bank and get the unlimited deposit access and lend the money to retail and make profit.
But ,what were the challenges ?
The Problem is that ,IDFC bank was not a normal bank like HDFC,Kotak etc.IDFC Bank primarily was an infrastructure bank.This means It was like a B2B bank and not like a B2C bank.It was not raising money from public via retail deposits,current and savings accounts.It was raising money via bonds in very high interest rate ,from institutional investors and gives loan to companies having capital intensive businesses like Power,Road,Telecom etc.
So prior to the merger unlike HDFC bank what were not available in IDFC bank ?
- The branches : Since IDFC Bank was collecting money from institutional players via bonds ,so why would they need several branches ?.Again ,if they are giving infrastructure loans to 30-40 companies only ,then why would they need branches? ATMs ?
- The Banking Softwares-So,if IDFC bank was not taking retails deposits why would they need core banking softwares and they don't need to provide the basic banking service to public like deposit and withdraw cash etc.They also do not need loan disbursement and customer relationship softwares etc.
- The Other banking Services-IDFC bank did not have services like Credit cards,Cash Management,Wealth Management etc.
So ,The merged entity i.e. IDFC first bank has to do capital expenditure for the above things like setting up branches ,ATMs. Purchasing banking softwares for providing banking services to public and disbursing loans, hiring people to provide these services at branches.
The merged bank posted 1st quarterly result in Q3,FY 2019 with a loss of Rs.1538 crore.I remembered ,that the CEO mentioned that ,they have written off Rs.2,390.53 crore of goodwill in the quarter.Then COVID happened.The bank posted losses in subsequent quarters.
But in these quarters ,I am not at all interested in the profit loss statement or balance sheet.But I am more interested in in the management commentary.I used to listen what management is saying in the Q&A sessions,after the quarterly result.After listening the result I was trying verify their actions in ground.
My ground work started & sequence of events happened as follows
- After IDFC First bank is formed and bank has opened a branch in odisha ,I just opened a bank account with Rs.10,000/- monthly average balance,just to evaluate its quality of service.And also I would be able to keep track the quality of service offered by the bank.I opened it with completely online mode with e-KYC and after say 2 years around ,I have never visited the bank regarding any service request.Whatever service I need is available in its mobile application.What I wanted know from this, is to compare its banking experience with other banks.Since then,I was using its Internet banking platform.I can say that its net banking platform is just phenomenal.I have used platforms of other banks.Lets discard the PSU banking space.Because these are not even comparable.I have already used the platforms of HDFC,AXIS,ICICI,FEDERAL,KOTAK MAHINDRA,BANDHAN banks.I can say that FEDERAL and BANDHAN bank's platforms are pathetic and not even near with IDFC First Bank's platform.HDFC banks platform is below it.If I have to rate ,then only KOTAK and IDFC First bank's platforms appear in same level.This evaluation may appear very small thing,but what I wanted to decode is ,from the mobile banking application of the bank,I wanted to decode the vision of the people running it.I wanted to know how much importance the bank gives to technology and mobile banking experience.Imagine,if your mobile banking application becomes like Paytm or PhonePe ,then what would be the experience.What I evaluated that bank is serious about technology and user experience.This put a tick mark in my list.
- After opening the account ,one year passed.One day I received an email from the bank regarding regarding offer for on-boarding credit card.But after merger in 1st ,2nd quarter commentary Mr. Vaidyanathan had said that they will only focus on retails loans and not credit cards.So I was surprised and came to know that they have started the credit card business also.But I was happy that bank is offering full range of services.So I applied it on net banking portal.The system processed my application at instant and issued and generated the virtual credit card instantly within next 10 seconds.I had never seen like this before.Only fintech apps like paytm,freecharge,postpe,slice etc are providing this.Axis and Kotak mahindra banks are providing virtual debit cards instantly. I am using credit cards of HDFC,ICICI,SBI,AXIS since last 8 years.Their credit cards are not issued instantly in app and your application needs at least 7 days to be processed and will get the physical credit cards in 10-12 days.What I experienced in IDFC's case is far ahead than its peers.So I decoded that IDFC people's thought process and use of technology is well ahead than its peers.
- After some months while browsing in FACEBOOK,I saw a photograph of someone in facebook,whom I knew.The person has taken a selfie in his shop at Bhubaneswar,Odisha.The interesting thing is that the frame captured a logo of IDFC banks EMI which was pasted in his shop's window.So ,I was curious about whether IDFC First bank started giving consumer durable loans like Bajaj Finance and HDB financial services,because the person is selling inverters and batteries in his shop; which mostly Rs.20,000/- to Rs.25,000/- range.I gave a phone call to the person and started asking him about,whether IDFC first bank's people are offering consumer durable loans like Bajaj finance? How IDFC guys approached the person ? How is their service ? Whether customers are purchasing inverters from him through EMI with IDFC? etc...etc.. The person informed me that IDFC bank has an easy EMI card just like Bajaj Finance through which they finance consumer durable loans.But he also mentioned that the executives of Bajaj Finance are more responsive than that of IDFC's.What I knew from here is,that in consumer durable loan segment Bajaj Finance is ahead of them.But what I noted that ,IDFC bank also trying to expand in this segment.At least they have the vision to encash this segment.In my area ,till now I have not seen Federal or Bandhan bank providing loans in this segment.
- I generally purchase groceries from same kirana shops i.e mostly from one or two.One day when I visited the shop ,what I noticed that the shop keeper had put a UPI QR code of IDFC first bank and as usually I was curious about this because since launch the of UPI I have only seen QR codes of PayTM,PhonePe etc in my area and BharatPe just came to my area in 2021-22.I have never seen QR codes of Bandhan ,HDFC,KOTAK,AXIS,ICICI,FEDERAL etc in my area.I asked the shopkeeper ,whether he had opened an account with the bank? He said yes ? Then I asked whether he is maintaining Rs.10000/- minimum balance ?Again he said ..yes...I was surprised because in my area HDFC bank is asking for Rs.5000/- monthly balance.So,what I decoded that the marketing executives of IDFC first bank has good convincing skill as they convinced a small kirana shop keeper to open a savings account that too with Rs.10,000/- monthly balance.Again I asked about the quality of service the shopkeeper is experiencing.The shopkeeper said that he is liking the service and the account was opened within 5 minutes in his shop through hand held devices.I was very happy listening this.Why I was happy ? Later I realized that I started enjoying ownership of the business i.e. ownership of IDFC first bank and less concerned with its stock price movement.
- Mean time I was observing that ,I am receiving promotional mails daily from IDFC first bank since when I opened.I rarely get emails from Federal and Bandhan Bank.While browsing the internet ,google also placing IDFC's ads in the web pages that I visit.So I understood that they are good at digital marketing also.To confirm this I visited IDFC First Bank's Youtube channel.They have ads with south indian regional languages.This means they want to connect to regional people through local language also.
- Earlier,in my district IDFC first bank do not have any branch.But in june ,2022 while travelling ,I noticed that the bank opened a small branch in the road side.I was happy that my company is expanding.So,to check the ground reality I visited the branch and found that only two people were present .i.e.one sales executive and the manager.No body was at the cash counter.The executive asked me nicely about the purpose.I lied to him that I will open an account for my mother but not now,but in 1st week of august.I deliberately choosed 1st week of august ,because I knew that bank will declare its Q1,FY 23 result on 30th of july and If I asks the executive to visit after that,I can ask more questions to him based on the results and commentary made by the bank for Q1,FY23.But one thing I noticed that the executive did not push me to open the account immediately, but gently took the lead by asking my number.I waited full july month ,to know whether he is calling me in between and pushing me to open the account.But he just called me after 1st of august.So what I observed that their marketing is not push based and instead they are betting their marketing strategy on quality of service based.During my visited to the bank ,I had asked him about the current loan book ,number of accounts etc.I also asked why no one is at cash counter ?He mentioned that ,since their branch is opened recently and not much cash transactions are going in the branch,So they are busy at field to acquire new customers through opening accounts.I also asked him whether he is happy about how the bank is treating its employees and he mentioned that he is getting more salary and life insurance from the bank.I also asked whether they are offering consumer durable loans in this area or their executives are sitting in the car show rooms for disbursing loans ? He said yes.That was my ground work on that day.
- But since the merger till Q4,FY22;most of the quarter the bank was posting loss.Interesting thing is that bank is profitable in operating level i.e. its making profit in pre-provisioning level.But what is hurting is that the provisions.These are the loans which are sanctioned to infrastructure companies in pre merger era and became NPA in post merger era.Since 4-5 quarters this cycle was going.In each quarter's conference call Mr. Vaidyanathan says that all provisions are made,but again in next quarter some accounts slip and provisions occur.And due to this stock was beaten.I also noticed that Mr. Vaidyanathan is feeling little bit nervous ,I would say.Because he is unable to keep his words in front of shareholders.But I am decoding something else.What I observed that even if the bank is posting loss ,still they are making provisions aggressively and trying to keep the books clean and also they are putting the name of the defaulters i.e about NPA accounts in investor presentations and conference calls,what other banks do not disclose.I was trying to judge how the management is open about the problems to the shareholders and the integrity and honesty of the management.
- I was just observing whether the bank is building right processes or not.In the month of june last week,2022,the stock was beaten to Rs.29/- and the market cap came down to around 19K crore crore.In june 1st week Bandhan bank was available at 60K crore market cap and as on 12th Aug,2022 ,Bandhan bank is available at 44K crore.So ,I purchased the stock aggressively about 1/3rd of my earmarked amount for IDFC first bank.I was waiting for the final confirmation i.e. result of Q1,FY 23 i.e I want to check whether the processes are delivering the result at ground or not?.In the quarter the bank posted Rs.485/- crore profit with Rs.0.77 EPS. Full year EPS may go to Rs.3/- So,if 20 PE multiple will given to it ,then stock should go to Rs.60 and still market cap will be at only 40K crore.So I invested rest 2/3rd of my earmarked amount.
My Observations
- Management is not giving frequent media interviews i.e. only giving interviews after quarterly result.
- Management do not want to be in media attention.
- The CEO is little bit impatient while answering media queries and Q&As during conference calls.May be he is little bit excited to post profits after so many quarters of losses.
My Concerns
- Bank has already diluted equity two times, post merger.
- The equity size is already of Rs.6219 crore and will be going to dilute in future for fund raising and ESOPs.
- The bank is carrying infra bonds of Rs.22000 crore which will be maturing in 4 years (including FY 2022-23) and need to be paid by FY 2025-26.So, roughly avg Rs.5500 crore CASA + retail deposits is required by bank each year for repaying these bonds.Since the bank do not have that much profit to absorb Rs.5500 crore each year,So in case if it is not able to raise CASA ,then it may raise the same via equity ,which in turn will dilute the equity further.
I am writing this as my investment diary....If the business grows as I researched,then I will store it as my learnings and if the business do not perform ,I will rewind it and will check what I missed.
22.08.2022
- I observed today that ,the bank just provided a feature on its website to do video KYC for the existing customers.You just need to put your registered mobile number in the text box and the system will send you an OTP on your mobile number and you have to put your OTP and verify.Once the OTP is verified your name will be displayed and an link for Video KYC will be sent to you through SMS.What it means customers do not need to visit the branch in person for KYC.
- Kotak Mahindra Bank is not accepting video KYC for all locations.
- The bank tied up with ZERODHA for 3-in-1 trading account.The feature is like in single click the amount will be transferred to your trading account and you will also be able to access your holdings from IDFC bank's net banking portal.What it will provide the bank is ideal funds available with the trading account can be parked in the savings account and bank will get CASA.
- Similarly IDFC guys tied up with Flipkart for pay later service.
- Recently while doing recharge for JIO on its website ,on the payment gateway ,I saw cash back offer from IDFC banks credit card.What I think is ,they want visibility for their credit cards,which are absent from banks like Federal,Bandhan etc.
- They recently provided feature to bill payment for other credit cards (like CRED ) on their banking platform.
- What am I observing is that,they are making tie ups with No.1 entities (ex-Flipkart,Zerodha etc.) in their respective fields.The most important thing is ,they have the intent to grow.What am I observing is,they are providing features like Fintech companies in their application.Someone in their team is thinking like fintech guys.
Lets see how it goes ?
