IDFC First Bank eyes 25% retail loan book growth

Private sector IDFC First Bank is aiming its retail loan book to grow by 25 per cent on a long-term basis and expects the mortgage lending to account for 40 per cent of its loan book going forward.

Bank's profits before provisioning are low currently because of the DFI (development financial institution) background with higher cost of legacy liabilities, and due to the set-up cost of a new bank, V Vaidyanathan, Managing Director and CEO, IDFC First Bank, said in bank's Annual Report 2020-21. "This is getting fixed at a quick pace because of our strong profitability on an incremental basis...the underlying quality of the bank we are building is not entirely visible at this stage to you," he said in his message to the bank shareholders.

Contending that it was not right to compare IDFC First Bank with the already established 20-30 years old banks or with entities who were profitable when they converted to banks, he said "the power of incremental profitability is lost in the noise". IDFC First Bank reported a net profit of Rs 452 crore in 2020-21.

There was a net loss of Rs 2,864 crore in FY20. The erstwhile IDFC Bank had merged non-banking finance company Capital First with itself in December 2018, post which Vaidyanathan took over as the managing director and CEO of IDFC First Bank. He said IDFC First Bank has strong incremental profitability of retail lending as well as corporate lending business. In retail, the incremental borrowing cost is less than five per cent, the lending rate is over 14 per cent, thus the incremental spreads on retail is over nine per cent. "We have specialisation in these segments and our credit costs (provisioning) are expected to be about two per cent based on the combination of products we finance. Thus our incremental ROE (return on equity) in the retail lending business is estimated at 18-20 per cent," Vaidyanathan added. There is strong incremental profitability of corporate lending business with estimated incremental business ROE at 14-15 per cent.

However, he said that this is not visible on the bank's books because of the higher cost of Rs 1,000 crore from legacy liabilities and set up costs in retail business as it is a new bank. It is carrying Rs 27,936 crore of fixed rated liabilities at 8.66 per cent, as it converted from a DFI to a bank.