IDFC First Bank's MFI provision will go down every quarter from now; opex will fall further to 12-13%: V Vaidyanathan

Time of India

29-04-2025

V Vaidyanathan
, MD & CEO,
IDFC First Bank
, says the provisioning for MFI has peaked and in FY26 the base effect of the
MFI book
would kick in. Further
opex
will come down and there will be a marked improvement in ROA from Q3, Q4. However, it is a gradual progress from now on. He expects the PAT to go up from here because the microfinance story is behind them. Other than microfinance, rest of the levers – CASA, deposits, loans are all doing well.
Prima facie, the numbers look impressive. Overall growth in a tough environment is impressive. So, the bank in terms of the headline number has ticked all the boxes.
V Vaidyanathan:
Yes, it is very true. The way we see it is that the core balance sheet items of the bank are doing quite well because the loan book has grown by 20%, deposits by 25% in this environment and this is after the fact that we dropped rates. So, the core franchises of the bank are performing very strongly. The one thing that went down in terms of not being a good number was the fact that the PAT of the bank came down this year. We will address it in the upcoming year.
I will first address the elephant in the room and that is not about the core growth, it is about the MFI book. It has been an industry specific problem and the last time I spoke to you, you alluded to the fact that the worst was behind us. But in this quarter also, some stress was visible. So, is the worst really behind in the MFI book?
V Vaidyanathan
: No, let us be very clear about what we said. We talked about the provisions of MFI because we model a book and we see the impact. We had said that in Q4 of FY25 and then every quarter after that, progressively provisions on microfinance should come down. So, initially it went up, peaked out, and then it is coming down. We stand by that.
We already called out that in Q1 of FY26 we should see MFI provision less than that of Q4, Q2 should be less than Q1, and Q3 should be less than Q2 and so on. We feel the wave receding. But we should be very careful. This is a very sensitive segment. In fact, our SMA numbers of microfinance already suggest that to us.
So, are you ready to call out a bottom in the MFI book or is it still going to be wait and watch?
V Vaidyanathan:
Like we said, the provisions have peaked out. Provisions every quarter on MFI will come down from here.
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The
FY26 trajectory
for IDFC Bank would be dramatically different from that of FY25, that is what we need to focus on. One, the economy per se improves, MFI positioning has reached its peak, and then the access to Rs 7,500 crore of capital. The bigger question we need to bring out is how will FY26 be different from FY25?
V Vaidyanathan:
Well, the key thing that is going to be different, like we said that provisions are going to be lesser, but more important is the opex. Our bank has done a really good job in scaling up the bank without increasing opex. For the last four quarters, our opex growth YoY, if you take Q1 FY25, YoY growth was 21%, Q2 opex grew by 18%, Q3 opex grew by 16%, Q4 opex grew by 12%. So, it is a very clear trend that we are tightening the opex in the bank and that should also help the bank. FY25 is coming off a low base so to say, but we should look forward to a better year basically, from the opex point of view and from the credit cost point of view as well.
But your gross and net slippages are still elevated. The gross number stands at 3.8%, the net number stands at 2.8%. Do you see an improvement happening there?
V Vaidyanathan:
Net is 1.86% and this year if you remember, we had the toll road issue because in the Mumbai entry point there is toll road. We had a large exposure there also. This issue about microfinance is also there. But having said that, our Q4 slippage, just to be clear, is definitely lesser than Q3 and that is also because the MFI slippage is still higher compared to Q3 which definitely peaked this quarter. But the non-MFI book slippage has been coming down.
So, I believe that on the whole, the total SMA book came down this quarter. It has implications about subsequent quarters' credit cost and so on. So, the long and short of it, we feel the real thing about the bank was the MFI issue. We acknowledge that, but the rest of the book is Rs 2.3 lakh crore and that is really solid.
The other underappreciated aspect of the bank is the CASA numbers. Where do the CASA numbers stand? The retail deposit growth has been nothing short of outstanding in a tough liquidity environment.
V Vaidyanathan:
CASA is the big thing for banks. For the last five years at a stretch, our CASA has moved from 8.6% to 47%. I really do not think any bank has made that much of a progress in CASA at least in Indian banking history. This is a really good thing for the bank. We are focusing a lot on customer service, customer experience, and definitely one of the big factors and now, of course, we will be dropping interest rates and it will be our endeavour to continue to maintain CASA percentage while dropping interest rates.
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Where markets are perhaps not appreciating is the potential of ROA improvement. Is that something which you see as a real deal in FY26 that because of cost, opex, other factors, cost of capital, your ROA could dramatically improve, which in a sense markets have questioned in the last 12 months?
V Vaidyanathan
: Yes, markets have questioned in the last 12 months. We know the reason. We talked about MFI issues. MFI squeezed two things for you. One, we shrank the book, so that affected income. Second, credit cost came because there was a cycle. So, this year has been kind of depressed for that reason, but we certainly are endeavouring that by exit quarter of FY26, we want to get back to 1% and in the interim it will be a phased approach to get there.
Quarter-on-quarter, we expect our opex to grow only by about 12.5% to 13% this year even though we want to grow the book meaningfully. So that is a very big operating leverage . The main thing to observe is that this year while the book may grow by 20%, income will not grow 20%, I just want to be clear about that because the microfinance composition is coming down and yield is coming down. So, income may grow by 13-14%, maybe 13.5%, but opex also will grow much lower and FY27 really will be a breakthrough year and by Q3, Q4 of FY26, we should expect significant progress or breakthrough.
Your cost to income ratio has a legacy issue. Since I have tracked the franchise for a while now, everybody was hoping that the cost to income ratio should settle down in coming quarters. Where do you see the cost to income ratio moving because if that comes down, then that is another lever for the bank in coming quarters.
V Vaidyanathan:
It is the lever or this is one of the most important levers. So, cost to income has cost and income. It is cost divided by income. Income was affected because of the microfinance thing, so no matter we are cutting the cost, the income is also reduced.
Therefore, it is still very elevated and frankly, it had come down sharply from 95% to 72-73, but then the vehicle got stuck there for a couple of years. We think that by Q3, Q4, it should come down meaningfully because the base effect will come in and 27, 28, 29 I definitely expect the bank to start delivering cost income. Think of it that we were driving well, got stuck for a while because of A, B, C reasons but the journey will start again and people will see it. This period of two years where it did not come down, let me say, it is a temporary period.
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You are in the middle of expansion, new branches, investment in technology, and yet you are guiding to a lower opex. So, are you going to go slow in your expansion? Are you going to be cutting some corners there? What is the thought behind going low on opex?
V Vaidyanathan:
No, we will not cut corners but we will cut costs and that is the way we will think about it. We really never cut corners as a bank. We think of ourselves like a really large bank in making, that is how we think, that is how we are building the bank, building everything, that is how we are raising capital. You think of the big three or four banks. You think of that zone and scale they play. We see ourselves playing for that.
In terms of the cost, we believe that with the arrival of so much of technology and generative AI and newer technologies coming in, you can do a lot more with less and that is the reason why cost is coming down, not because we cut any corners. For example, the next year we expect our opex to grow only by 12-13%, like let us call it 13% just to be safe, and that will be material drop. By the way, our balance sheet grew by 22%, but our opex grew only 16%; next year we want to grow our balance sheet by 20% but we want to grow opex by 12%. So, these are some significant progress we are making.
The headline number one is that provisioning has peaked; headline number two, FY26 the base effect of the MFI book would kick in; third, opex will come down and you see a marked improvement in ROA in coming quarters.
V Vaidyanathan:
In the coming quarters like I am talking of Q3, Q4 definitely I am expecting it, but it is a gradual progress from now on. You should definitely expect the PAT level of the bank should only go up from here because the microfinance story is behind us and frankly, it is only microfinance because the rest of the levers CASA, deposits, loans all excluding microfinance they are all doing well.