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When we had talked last time, we discussed a lot of things about future. Are things going as planned?
I remember the Walk the Talk show and there were certain things we discussed there. I am happy to say every one of them is playing according to the plan. It is actually not about a blowout or a fantastic quarter. If you think of the trend over the last three years, it is really very important. The trend line is very strong and that augurs well for the coming year.
Of course, we had a fantastic profit after tax of Rs 2400 crore this year and that is great. We feel good about that. But more importantly, while the loan book grew by 24% operating profit grew by 67%. What does that tell you? It tells you about good operating leverage kicking in.
Is IDFC First Bank now entering what could be called as a strong phase of loan growth and the drag from the wholesale business which in a sense had haunted us in the past, is behind you?
More than a strong phase, I would say a steady phase of growth because we believe that we should sustain a 23-25% growth rate for a long time. Last year also, it was 24%. And considering that most banks I would say are posting more than 20% odd growth rate in retail, 24% for us coming from a lower base should be reasonably possible. But more proud than a phase of growth, I would say we are very proud about asset quality and it shows in the gross NPA, net NPA all that.
Currently, there is a fight for liabilities and despite this fight for liabilities where big banks are trying to gather more deposits, your deposits have grown 37% year on year and 9% quarter on quarter. Will it sustain? Will you be able to generate this kind of liability?
You are right, this has been our most defining strength over the last few years. Our bank is really very good at getting deposits. There are branches, there are networks, our products are quite customer friendly. We focus really a lot on customer service like we go crazy about it. And we put a lot of systems and controls and tracking and monitoring and feedback loops and correcting our systems. So we put a lot of effort into customer service. The brand has come really well. People think of us as a good clean bank. So all of these things play a role in deposits. We feel these are sustainable factors with the service of the brand.
You are guiding for 40-45% growth for FY24 but what about FY25? Won’t this growth be a multi quarter phenomenon? Could it be a multi-year phenomenon?
Yes, it could be a multi-year phenomenon. Because in the last four years of our CAGR growth and deposits at a stretch – retail is upward of 70% while I am now talking of 40%. I am talking about slowing down. Still, it is good like 40%. Yes, even in ‘25-26, we feel the bank will be very strong because frankly deposits are not as difficult as it has been made out to be. Because one is, of course, we are an early stage bank. Secondly, if we need more deposits, we just need to put up some more branches, go to new territories that we are not present in today or open more locations. You should expect that we will do strong deposits every year.
Your cost to income ratio historically have, been a bit of an issue. Now that the operating leverage has kicked in. Do you see a marked improvement on that? Do you also see a marked improvement going forward in terms of your ROE now?
In the last four years, our cost to income has come down from 95% down to the 80s, the mid 70s and now we are down to 72%. It is pretty clear how that is headed and you should expect it to come down from here in a steady manner.
There are two reasons why it will come down. A credit card business is currently loss-making. The cost is more than income. But by FY25, we expect that to reverse, we expect credit card business to be firmly in profits and cost and income to be more than costs. So that is one big swing and the other is of course, the legacy liabilities that are going to be repriced and should come down.
First of all, it is good to have a few naysayers; it keeps us grounded also, and makes us come back with greater charge to achieve something. But having said that, yes, frankly, I always felt that Morgan Stanley never understood our business because they were just taking a ROA, ROE and putting it on the grid and coming out with valuations. They always called a stock a Rs 34 stock or Rs 20 stock, etc. But now that they have come back to 70, means one of the biggest bears or analysts who did not believe in us, has come back with a positive blow on us. Yes, it feels good. Actually, we were very confident of the business model. We were very confident. We were sure if we do our job, it will show and I am thankful they changed their mind.
How will FY24 be different from FY23?
As the bank begins to grow now, we will have two engines that will begin to fire now, and in FY24 we expect that phenomenon to play out. If you see, most large banks including the big ones that we know, have a large base of deposits and customer assets. The existing base gives them business. New business also gives them business.
For us, because we are a new bank, we did not have an existing base. We only had to hit runs from the new customers. So, going forward, we expect that the existing base will also give us deposits as will the new customers. It will get better for us.
In terms of technology, in terms of adaptation, are you working on something which could give you an edge or a lead over others?
On the technology front, we are making every effort to be cutting edge, and more important than cutting edge, we are trying to be in sync with the new ecosystem. For example, we have plugged into a number of bureaus so we get a full profile view of the customer. There are the new technologies of AI, ML that are coming in underwriting, using those capabilities. We have developed a really good data stack so that we can get a good view of the customer. The entire stack of infrastructure layer, application layer, middleware layer, engineering layer – the channels, the customers, the whole stack – we are really building well. I think we have some advantages.
In the course of the last two weeks, we have heard comments from other big banks also. Big banks are talking about moderation in credit growth. But what you are indicating to us is a completely different picture. You are indicating that the bank is firing on full cylinders and FY24 will be another year of high growth.
I would say moderate growth, actually. No, I am not, by the way, very different from others. The whole banking system is talking of reasonable growth. Between 17-20% everybody is posting, we are talking of maybe 23-24%. So, I would not take those credits the way you are saying it. But on the deposit side, we continue to be very strong; so that is one.
Two, all the work over the last four or five years, from my predecessor’s time in building the bank etc will come to fruition. We must have lost two or three years because of some issues here or there on a few things like Covid and bad loans and all that. I think that phase is behind us. If you look at the next five years, you should be pleasantly surprised.
Even though you are growing, for IDFC First Bank per se and for the sector per se, you do not think that there is an NPA ripple?
We track one thing and we are very particular about it and that is what is our collection percentage on our primary bucket. Our collection percentage – and we report it publicly, by the way, we report month on month, not quarter on quarter – is 99.5% to 99.6% consistently. If you collect 99.5, only 0.5% moves to 0 to 30 DPD. We are determined to sustain this. Our net NPA numbers on retail is 0.55%. Our gross NPA in retail is 1.55%. We are very clear that we will not want to leave asset quality as an issue and we have to be very watchful for that, but we will be.
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