While the share of potentially troublesome infrastructure loans has shrunk to Rs 21,459 crore from over Rs 26,832 crore a year ago, it may not necessarily translate into improving asset quality. To compound woes, the bank's share of low-cost current account saving account (CASA) deposits at 13 per cent is the weakest in the industry. The bank plans to add 600-700 branches in the next five years. The bank is currently spread across 205 branches.
However, growth in deposits happens with a lag. Hence, to reach a 30 per cent plus CASA ratio or improve its cost to income ratio from 80 per cent in FY19 to the target 55 per cent may take longer than five years.
The merger with Capital First did help the bank to expand its retail portfolio. Yet, with exposure to two-wheeler, consumer and personal loans, the bank leans towards high-yielding and unsecured loans. These segments are important to ensure fast growth, but don't necessarily add up much in terms of value. Home loans (including loan against property or LAP) account for a third of IDFC First's retail loans.
If the bank must increase the share of retail loans from the current 35 per cent to over 60 per cent in five years, a more granular and secured approach is essential. Analysts at Morgan Staley caution that the worst of corporate bad loans has been factored in, though rise in retail bad loans could be a spanner in the works.
These challenges, coupled with another weak year (FY19), are prompting the Street to remain cautious on the stock. A
new management taking over and valuations (1x FY20 book) are attractive points.
Yet, investors should wait for an improvement in financials before taking any exposure to the stock.