Tag: banking

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Editorial

Can IDFC First Bank Bounce Back from its Troubles?

IDFC or Infrastructure Development Finance Company and its subsidiary IDFC First Bank (formed in October 2015) have been under fire over the past few months. The IDFC Management has organized an informal conference call on September 14 to address concerns from investors. The management was bombarded with questions about their poor loan book, unsatisfactory financial performance, and dangerous exposure to the distressed teleco Vodafone Idea (Vi). As of August 31, 2021, its share price is much above than it was exactly a year back, yet still less than what it was in September 2016. In this piece, we explore what’s pricking IDFC First Bank and what lies ahead for its shareholders. 

Poor Loan Book And Additional Credit Costs

The company booked consistent profits in the financial year 2020-21. However, it recorded a loss of Rs 621 crores in its last quarter Q1FY22. The poor performance is owed to a jump in credit costs, poor quality of loans, and its high exposure to Vodafone-Idea. 

The company’s revenue for the quarter did go up by 11.08% over last year and 2.15% over the previous quarter. However, the credit costs and increasing provisions ate into its revenue. A loan book’s health is measured by two metrics, its Provisions and its Non-Performing Asset Ratio(%). The company’s Gross NPA went from 1.99% in June 2020 to 4.61% in June 2021. Its Net NPA (Gross NPA minus Provisions) has gone from 0.51% to 2.32% in the same period. 

To ensure that a bank doesn’t get into big trouble, it sets aside some money in proportion to its bad loans/NPA ratio. The process of setting aside such funds is called setting aside a Provision. IDFC First’s Provision went up by 54% from Rs 646 crore in Q4FY21 to Rs 1,001 crore in Q1FY22. The more the borrowers default on loans, the higher provisions the bank has to set aside. This time, the second wave of COVID-19 and poor asset quality led to IDFC First setting aside higher provisions. Additionally, the bank has been unable to control its operating expenses. Its Operating Expense went up by ~54% over a year, while its Total Revenue increased only by ~11% in the same period. 

Unsafe Exposure To Vodafone Idea

In the past few months, IDFC First shares were hammered down till August-end. Nevertheless, the stock regained its position throughout September. The stock has been under pressure since its loan book has high exposure to telecom operator Vodafone Idea. Vi is a financially distressed company. It has Rs 62,000 crore pending in Adjusted Gross Revenue (AGR) dues to the government. The company’s total debt is worth Rs 1.8 lakh crore. Out of the total debt, Vodafone Idea owes IDFC First Bank around Rs 3,240 crore. 

Essentially, IDFC First has 3% of its total loan book exposed to Vodafone Idea. The single-digit number isn’t insignificant. Even SBI, the largest lender to Vodafone Idea, has only 0.5% of its total loan book exposed to Vi. If the telecom company were to shut down completely, IDFC First Bank could face a huge blow. However, Vi’s shutdown is not certain as the government has provided a four-year moratorium to all telecom companies with pending AGR dues. IDFC First Bank had set a provision of Rs 324 crore, which is 15% of total exposure to Vodafone Idea.

Ideally, IDFC First’s share price revolves around news regarding Vodafone Idea. The day the government announced the moratorium for Vodafone-Idea’s AGR dues, IDFC First Bank’s shares rallied by ~4.5%. Apart from other indicators, an ideal investor should watch out for the status of Vi to map the share price of IDFC First Bank. 

Shareholder’s Concern

IDFC First Bank’s parent company IDFC Ltd is performing worse than its subsidiary. On September 14, 2021, IDFC Ltd. held an informal conference call to address investor’s concerns about the company’s performance in recent months. They were bombarded with questions from its shareholders. The entire conference call hinted towards dissatisfaction amongst the shareholders. They questioned the top-level management on CEO salary, management decisions, and the complexity in the structure of the company. They even addressed the loss in value for its shareholders and questioned the company about how it plans to address it. 

In the conference call, shareholders suggested two things: the sale of the Asset Management Business and a ‘reverse merger’ with its better-performing subsidiary IDFC First Bank. IDFC Ltd indeed plans to reverse merge with its subsidiary IDFC First Bank in which it holds close to 36.5% stake, mostly after the sale of its asset management business. You can check out the whole conference call here.

The Way Ahead

Despite some headwinds, why could IDFC First Bank be a good buy for investors? The reason is simple. Supportive technical indicators and a strong plan by the management. The company is ~30% below its 52 week high of Rs 51.4 per share. The moratorium provided by the government to telecom companies on AGR dues provided relief to IDFC First Bank shareholders. The share price rallied ~4.5% after the decision.

IDFC First’s management has some plans to turn the game around. The company plans to reduce its wholesale business (lending money to other big institutions) and increase its retail business (housing loans, personal loans, etc). The bank further plans to have at least 70% retail loans in its loan book in the next few years. This allows the company to diversify and reduce the burden of increasing corporate debt. India’s booming housing market in the coming years may support IDFC First’s plans of pressing on its retail business.  

IDFC First Bank is expecting to gain traction, reduce its credit costs, provisions for bad loans, and NPAs. This will eventually translate into very good profit numbers in the coming quarters and a rally in stock prices for the coming months. 

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Editorial

Union Budget 2021: Expectations

All eyes are focussed on the Union Budget 2021-22 that will be presented by Finance Minister Nirmala Sitharaman on February 1. As we know, the Covid-19 pandemic had led to disruptions in all major economic activities. The upcoming Budget has greater significance, as it would give us a clear picture of how the Central Government plans to allocate essential funds to revive our economy. The Finance Minister had stated that this budget would be unlike anything we have seen over the past 100 years of India’s history.

Over the past few months, there have been multiple reports or rumours that indicate the different sectors of India’s economy that are likely to benefit from the Budget. Let us take a look at some of these sectors.

Agriculture Sector

The agriculture sector had single-handedly supported the Indian economy while other major sectors were at a near standstill amidst the Covid-19-related lockdown. With the ongoing farmers’ agitation in Delhi, the government is expected to send across a positive message to the farmers in the country. It has been reported that the Union Budget would continue to focus on agriculture and allied sectors. In fact, ‘farmer welfare’ could be the central theme of this Budget.

A sharper focus is needed on the development of farm gate infrastructure, formulation, and strengthening of farmer collectives. Experts have suggested that the government could spend more to improve warehousing and cold storage facilities for farmers. There should be a further limit on the price of fertilizers and other chemicals. There are also expectations of providing nominal logistics support to poor farmers.

However, farmers have made their demands clear: a guarantee on the Minimum Support Price (MSP) and permanent withdrawal of the three farm laws. As farmers continue to protest, it will be interesting to see if the government has any plans to put an end to the agitation through its Budget. 

Healthcare Sector

The ongoing Covid-19 pandemic has taught the entire world the importance of having a strong healthcare sector. Increased public spending on healthcare will be one of the primary expectations of the upcoming Budget. We have realised the importance of improving healthcare infrastructure in public hospitals throughout India. More funds will have to be pumped into Ayushman Bharat, which is a scheme that aims to help economically vulnerable Indians who require healthcare facilities. People could expect the government to increase the deduction threshold for medical insurance. 

On the GST front, the government can consider making healthcare more affordable by introducing a ‘zero-rating’ of GST for healthcare services. [Zero rating means that the entire value chain of the supply is exempt from tax]. This will help in keeping the credit chain intact and ensuring that tax is not added to the cost of healthcare services.

One of the critical requirements in the healthcare ecosystem is a skilled workforce. The arrival of new products and technologies makes it imperative that there are continuous learning and skill enhancement for healthcare professionals. It is also important to provide greater investment for preparedness against other health emergencies that may arise in the future. Thus, there should be more investments in diagnostic testing capabilities and contact tracing mechanisms.`

Banking Sector

The financial system has been under severe stress following the Covid-19 outbreak, and the banking system is still facing asset quality issues. In Union Budget 2021, industry experts are hoping that the government will focus on better governance in the banking sector and simplification of compliance and regulation. There is an expectation that the number of public sector banks will be reduced from 12 to 4. This may include merging and also privatisation of banks. 

According to RBI, the gross non-performing assets (NPAs) of banks could increase to 14.8% by September 2021, under the worst-case scenario. Through recent interactions with the media, the Finance Ministry indicated the idea of setting up a ‘bad bank’ to handle the expected influx of bad loans after the Covid-19 pandemic. A bad bank will have the power to purchase bad loans from banks at the market price. It acts as an aggregator of all the stressed assets in the banking system. This will allow the banks to clear their balance sheets and improve their fundraising capabilities.

Automobile Sector

The automobile sector had been witnessing a slowdown even before the pandemic. This was primarily due to regulatory changes, millennial buying preferences, and an increase in the cost of ownership. According to Moody’s, the Indian auto sector is expected to decline by 30% in the calendar year 2020, amid a contraction in GDP and the Covid-19 pandemic. Even though the festive season had provided a boost to vehicle sales, the automakers are worried that the demand would not sustain. Large automobile firms are also increasing the prices of their two-wheelers, passenger vehicles, or commercial vehicles due to an increase in input costs.

The automobile industry has high hopes from Union Budget 2021. Here are a few: 

  • Currently, a bike that costs Rs 50,000 is taxed at 28% GST- which is similar to a passenger car worth lakhs. It has been reported that a 10% GST reduction could boost demand for two-wheelers. 
  • Vehicle loans under Rs 5 lakh could be considered as priority sector lending (PSL) by banks. This will encourage banks to provide more loans to customers and lead to enhanced credit creation. Ultimately, it would also increase the demand for automobiles.
  • A new policy to scrap cars, buses, and trucks that were more than 15-years-old, is expected to be announced in the Budget. It would also incentivise the purchase of new vehicles. You can read more about the vehicle scrappage policy here.
  • Electric mobility is another key priority area for the government. There are many Indian promoters and international groups that are willing to invest in the electric vehicle (EV) segment. To boost demand, India needs to improve upon essential infrastructure such as electric charging stations.

Realty Sector

The contribution of the real estate and construction sector to India’s overall economic activity is quite significant. The Covid-19-related lockdowns had caused severe disruption in sales and construction. With the easing of restrictions, there has been a strong recovery in sales and development activities. However, the housing sector will look forward to additional measures that can support recovery in demand and remove supply-side challenges faced by developers. 

There have been several reports stating that the Union Budget would consider expanding the current income tax benefits available for homeowners. There is an expectation that buyers will get home loans at affordable rates and a moratorium on loan payments. This would encourage more people to buy properties. Realty firms have stated that the government should allow real estate developers to set off Goods & Service Tax (GST) paid on inputs like cement from tax liability on rental income. This would help avoid double taxation and give a boost to the office market to help India maintain its advantage in various sectors like IT and startups. 

Covid Cess

Amidst the Covid-19 pandemic, the Centre should focus on providing more access to basic necessities such as healthcare, drinking water, and housing. More money should be put into the hands of citizens so that consumption receives a push. This is possible through well-defined tax reliefs or exemptions. In order to ensure a V-shaped recovery of the economy, all financial resources must be utilised or allocated judiciously. 

However, the government is likely to impose Covid Cess to fund additional spending due to the pandemic, including that on vaccines. If the government charges an additional 2% Covid cess on income tax, then the total cess amount would go up to 6%. The current 4% cess imposed on income tax was introduced in Union Budget 2018 by ex-finance minister Arun Jaitley. This means that our tax liability would go up (based on the current tax slabs). 

Such a cess will only help the Centre obtain more revenue, while states will gain nothing. Several reports indicate that the Covid-19 cess will be primarily imposed on large corporates and high net-worth individuals (HNIs).

Markets do not like increased taxes. In fact, when Nirmala Sitharaman decreased corporate taxes on 19 September 2019, markets rallied like anything and the candlestick formed was called the Nirmala Sitharaman candle. Will we see a fall like this if an increase in tax is announced?

Conclusion

We have only mentioned a mere five sectors that could receive benefits from the Union Budget 2021-22. Fast-moving consumer goods (FMCG), retail, logistics, power generation, telecommunications, and other essential sectors are also expected to receive a much-needed boost. To attain self-reliance of essential resources, the government is likely to introduce more programmes under the Atmanirbhar Bharat Abhiyan. Production linked incentive (PLI) schemes could be launched for more sectors. These measures would encourage domestic and multinational companies to ramp up their production activities in India. Lakhs of people would be able to obtain employment opportunities. It is also vital that our country gives additional importance to renewable energy sources and the infrastructure surrounding them. 

The Narendra Modi government may also introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the Budget session of the Parliament. This would lead to the ban of private cryptocurrencies in India (such as Bitcoin). Interestingly, the government has plans to launch a digital version of the Indian Rupee.

The Finance Ministry has sought valuable insights from industry experts from all major sectors. They have now prepared one of the most important budgets in India’s recent history, which would set the path for further economic growth. Will all the essential sectors receive the incentives or benefits that they require? We will have to wait and watch.