Armed with a commitment of new capital of Rs 7,500 crore from two marquee investors, IDFC First Bank managing director and CEO  V Vaidyanathan has moved on to his next big game plan of displaying operating leverage and lifting the lender's return on equity (ROE) to a level that is in line with the big players. 

The aim is to take the ROE up the ladder to 17%, from its current 7% sans microfinance. The first stop is to double it to 15%, make it self-sustaining, and then allow it to fly on its own.

“Now our job is to walk the path and take the return on equity to about 15%. We're serious about that. And then hopefully, our business model is such that probably will give us a return on equity even higher than that,” Vaidyanathan told analysts.

So how does IDFC First Bank do that? “We think the main thing is that we need to scale up. And we have got the capital to do that,” he said.

The bank has made a significant U-turn in its profitability, after starting with a net loss of Rs 1,944 crore in full financial year 2019 and Rs 2,864 crore in FY20. The turnaround was achieved with a net profit of Rs 452 crore in FY21 and Rs 145 crore in 2022, before scaling up to Rs 2,437 crore in 2023 and Rs 2,957 crore in 2024. There was, however, a drag down to Rs 1,525 crore in the financial year 2024-25, but this was due to stress in the microfinance portfolio.

“Despite the dip in FY25, this has nothing to do with any fundamental issue with the bank or our business model. The curve is not heading down this way for the next 2-3 years, nothing like that. You think of 2025 as a year that happened because of microfinance. It was an industry issue and happened to everyone who had a microfinance play. We too participated because it was meeting our priority sector requirement and returns were higher. We have suffered but the provisions in the MFI book have peaked out. We will stage a smart recovery in FY26,” Vaidyanathan said. 

The chief of IDFC First Bank believes that the private lender would be back to winning ways in FY27, FY28 and FY29. “After all, the financial years between 2019 and 2024 weren’t a fluke. We had built a fundamentally strong model that took us there and that's how strong institutions are built,” Vaidyanathan said.

The return of Warburg Pincus and the stepping in of Abu Dhabi Investment Authority (ADIA) has given Vaidyanathan the reassurance that the bank he is building is attracting global investors at a time when the microfinance portfolio has caused some wreckage and the global economic environment has slipped to a high level of uncertainty due to US President Donald Trump’s tariff weaponisation. 

While Currant Sea Investments BV, an affiliate of Warburg Pincus, is pumping in Rs 4,876 crore to own 9.8% of IDFC First Bank, Platinum Invictus B2025 RSC, a wholly owned subsidiary of ADIA, will put in Rs 2,624 crore for a 5.10% stake.

“The main thing is that you start building a really phenomenal franchise, a franchise that makes it attractive for new shareholders to come in and bring the capital. They would see if there's a strong business model. So what we've built was a really, really good customer franchise,” said Vaidyanathan.

Even as IDFC First Bank has weathered the storms of demonetisation and Covid-19, its customer deposit base has grown briskly from Rs 38,000 crore at the time of merger with Capital First in 2019 to Rs 2.4 lakh crore as of 31 March 2025. The low-cost CASA (current account savings account) ratio in the deposit mix has climbed from 8.7% to 47.7%, with the support of around  1,000 branches. The loan portfolio has advanced to Rs 2.4 lakh crore. 

During this six-year journey, IDFC First Bank has successfully raised capital to push  its growth in the early stages.  The private lender raised Rs 2,000 crore in 2020, Rs 3,000 crore in 2021, anther Rs 2,000 crore in 2022 and Rs 3,000 crore next year.  And now in 2025, it is raising Rs 7,500 crore. 

“If you go back and see what ICICI Bank was in 2000 or 2003, you will realize that the early stages of any bank is like that, specifically for a domestic financial institution (DFI) converting to a bank. If it (IDFC) had been a normal NBFC (non-banking financial company) which is already profitable and then getting a bank licence, then it can have a temporary period of turbulence just because of raising CRR (cash reserve ratio) and SLR (statutory liquidity ratio) ; they'll go through it maybe in a couple of years. But this was not that. This was a DFI, which really was not making any money. Its operating profit was 0.5%. So obviously, all of us know that with 0.5%, even if credit cost is 1%, you know that you're not making money at the core,” Vaidyanathan told analysts. 

So from that situation, how do you take a bank out? “You don't have the operating profit to spend money, you can't fix the CASA. You can't raise retail deposits, you can't fix the structural issues of the bank of not having a diversified liability base. If you don't spend, you can't fix the issue. This was really a hard-to-solve problem. So this was the reason why the bank has raised capital,” he elaborated.

Vaidyanathan believes that the new capital will be put to good use and there will be progress every year. Going forward, the bank will have operating leverage. In FY25, the bank’s total business grew 23% year-on-year to Rs 4.85 lakh crore, with deposits up 25.2% at Rs 2.43 lakh crore and loans up 20.4% at 2.42 lakh crore The operating expense for the full fiscal, however, grew by only 16.5%, progressively declining from first quarter onwards (21.1% YoY) to be at 12.2% in Q4 of FY25 .

For FY26, the bank is looking to grow the loan book by 20% and deposits by 22-23%. While the bank scales up, the  operating expense won't increase and is targeted to grow only at 12-13%.

 “So you can see that the bank is putting brakes on opex. It is rather leveraging the same balance sheet. With the same level of opex, we're growing the balance sheet by over 20%. And if we play this story out for the next 2-3 years, this has to naturally show an operating leverage,” Vaidyanathan told analysts. 

Was the constant raising of capital over the last six years needed? “This is how institutions are built. You got to raise capital and then you got to generate return on equity,” he summed up.