IDFC First Bank is an entity created by the merger of IDFC Bank and Capital First Management and will be under the management control of the latter. Capital First is a non-banking finance company (NBFC) which is engaged in consumer financing business which includes financing consumer purchases like phones, electronics, etc. Under the leadership of V. Vaidyanathan, Capital First has been able to enjoy Asset under Management growth of 29% and profit growth of 39% since 2013 with focus on retail lending. Whereas IDFC has a very low retail portfolio and with only 15% in retail and over 60% in infrastructure and corporate loans.
In the recent liquidity crisis, NBFCs with credible and known promoters got the funding while others were left out. Dried up funds result in fewer loan disbursements which further translates into lesser earnings and business. NBFCs have higher rate of acquiring funds than banks because deposits with NBFCs are not insured and also because they don't have access to CASA (Current and Savings Account) deposits. IDFC First Bank is ahead of its competition after its merger. IDFC has banking license which Capital First can leverage to get an access to cheaper funding than other NBFCs. Consumer financing is a less competitive market and IDFC First Bank will use the cheaper source of funding to operate in less competitive markets by getting access to CASA deposits. The combined entity will have a 32% in retail portfolio which they want to scale up to 70%, the management also wants to bring down the infrastructure portfolio to 0% and keep the corporate loans to 30%. We will see higher NIMs (Net Interest Margins) in this new merged entity because of cheaper funding. Due to increase base in no of middle class numbers and focus from present budget, on consumption we might even see growth in loan volumes as well. Capital First has also kept its net NPAs around 0% which is again a very healthy sign. Expansion in NIM, growth in volumes and 0% NPAs is perfect in making IDFC First Bank a good buy. IDFC Bank has seen significant underperformance vis a vis other banking cos, which now trade at 2-3 times book, whereas IDFC first trades at 1.14 times book. Technically, the stock has made a strong bottom at 37-40 kind of levels and at the same time any move above 47 could take it to newer highs.
The stock has made a huge sideways movement for the past 2-3 years and any breakout would be strong and sustainable.
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