IDFC First Bank has the potential to gather substantial size in the next five years even as it normalises lending growth, hooks on to strong deposit growth and keeps guard on bad loans.

 The private sector lender is projecting its deposit base to be at Rs 5.85 lakh crore as of 31 March 2029, loan book at Rs 5 lakh crore, net profit at Rs 12,500 crore and net non-performing assets (NPA) at 0.4%.

IDFC First Bank’s loan book management deliberately slowed down the loan book growth in the first five years of existence to address the low CASA (current account savings account) ratio of 8.6% at merger with Capital First. In fact, the bank grew the loans by a mere 5.1% 3-year CAGR for the first three years, exercising caution. Loan growth is now guided at a 20.3% CAGR to reach Rs 5,00,000 crore by 31 March 2029 from Rs 1.89 lakh crore currently.

 Sharing his vision of the bank with analysts, managing director and CEO V Vaidyanathan said that the growth guidance on the assets side over a five-year period is reasonable and achievable. “We are currently growing at 24.5%. So, the projected growth of 20.3% CAGR is not too steep. A Rs 5,00,000-crore loan book, now including things like SLR (statutory liquidity ratio) and CRR (cash reserve ratio), should take us to an assets size of about Rs 7,00,000 crore,” he explained to analysts.

For the last five years, IDFC First Bank’s loan book has not grown much compared to the pace at which deposits have leapt during this period. The loan book has grown from Rs 1,04,000 crore to Rs 1,89,475 crore. The deposit base, on the other hand, has grown from Rs 39,000 crore to Rs 1,76,000 crore in five years.

“We slowed down loan disbursal just because we wanted to fix the CASA ratio. On the asset side we have a strong, stable business model, and we are growing healthily now. In our line of business, with fundamentals in place, you can keep growing for a long time,” Vaidyanathan told analysts.

The bank is projecting its deposits to rise to Rs 5,85,000 crore as of 31 March 2029. “The reason why we are reasonably confident that this is doable is because currently deposits are growing upward of 40%. For the next five years, we have assumed deposits growing by only 24.8% CAGR,” said Vaidyanathan.

When Capital First-IDFC merged in December 2018, the retail deposit book was something like Rs 10,400 crore and wholesale deposits accounted for about 29,000 crore. “It was sort of an odd sort of base on the deposit and borrowing side. Liabilities was 92% institutional and there was limited visibility into what the first five years would entail, how difficult it would be to address deposit side issues, market conditions, interest rates, infra loans, how much would take to address infra loans etc. Under those circumstances where we had little visibility, we came out with a guidance for five years. We have achieved almost every guidance,” said Vaidyanathan.

The bank’s total deposit base has grown from 39,602 crore to Rs 1,76,481 core in five years. The retail deposit segment has reached Rs 1,39,431 crore as of 31 December 2023 and the CASA ratio is about 46.8%.

“During the last five years, the key success for the bank has been deposit growth. It has been one defining factor. All of us know that deposits form the foundation of any bank. This is despite reducing the interest rates from 7% to 3% for up to Rs 1 lakh and paying only 4% up to Rs 5 lakh. I think that once the deposit base is strong, we are sorted,” said Vaidyanathan.

The bank is guiding for a gross non-performing asset (NPA) ratio of 1.5% and net NPA of 0.4%, as of 31 March 2029 even as it plans to progressively bring down its legacy infrastructure exposure. Currently, the gross NPA is at 2.04% but without infrastructure it is lower at 1.66%. Net NPA sans infrastructure is 0.47%.

“Our gross NPA and net NPA has been 2% and 1% for 14 years now. When we started, our cost of funds were high at 12-13% so we largely lent to unorganised segment. Now that our cost of funds is low, we lend to prime of every segment. Basically, we've come down the risk curve, so our credit quality going forward is expected to be better than the past record of 2% and 1%. We must watch this very closely, every month and every quarter,” Vaidyanathan told analysts.

The bank’s net profit is guided to surge to Rs 12,500 crore in March 2029 from Rs 2,230 crore for the nine months ended 31 December 2023. The return on assets (ROA) has increased from 0% to 1.1% in five years and guided to reach 2% in the next five years, with average assets of Rs 6.3 lakh crore in FY28-29.

“In our guidance 1.0, we have come good on almost every benchmark. Based on how the foundation is built and the momentum that we are having, we are now looking forward to how the next five years would look like. We have a lot more visibility now than when we gave our first guidance. I would like to caution that we still may not achieve all that we have projected in guidance 2.0. Past is not always a predictor of future, and, please take all our caveats seriously. These are being given in good faith with numbers which we believe are achievable, based on the strong foundations we have built,” Vaidyanathan summed up.