Ind-Ra Affirms IDFC First Bank’s Debt Instruments Ratings with Stable Outlook

India Ratings and Research (Ind-Ra) has affirmed IDFC First Bank’s debt instruments ratings at ‘IND AA+’ with stable outlook, the private sector lender said on Tuesday.

India Ratings & Research (Ind-Ra) has re-affirmed the rating/outlook of bank’s debt instruments (Basel-III Tier-2 Bonds, Infrastructure Bonds and Non-Convertible Debt Instruments) amounting to Rs 29,148 crore at ‘IND AA+/Stable’, the lender said in a stock exchange filing.

Further, Ind-Ra has also assigned ‘IND AA+’ with stable outlook to Basel III Tier 2 Bonds amounting to Rs. 3,000 crore.

Key Rating Drivers

Sizeable Retail Franchise with Diversified Product Lines: IDFCFB’s retail and commercial finance book accounted for 80.1% of the total funded exposure in 2QFY24 (2QFY23: 75.4%). The bank intends to continue focusing on diversifying its overall loan portfolio with focus on retail and SME loans, thereby increasing loan granularity. This increased retailisation would help maintain the margins, thereby reducing the impact of higher-than-peer funding cost and helping the bank absorb its above-average operating cost. IDFCFB’s net interest margin marginally improved to 6.3% in 2QFY24 (FY23: 6.05%), driven by a moderation in the cost of funds and continued retailisation of the loan book. However, sustaining margins at current levels would be monitorable as the recent Reserve Bank of India directive on unsecured lending could curtail loan growth for the impacted segments such as consumer loans, credit cards and other retail loans which constituted 23% of the overall loan book as of 2QFY24.

Retail Liabilities and Repricing of Legacy Borrowing to Reduce Funding Cost: IDFCFB’s top 20 deposit-to-total deposits moderated to 10.9% in 2QFY24 (FY23: 12.56%; FY22: 16.06%), thereby improving its granularity, in line with its peers. In line with the industry, the CASA ratio marginally moderated to 46.4% in 2QFY24 (FY23: 49.8%). In QFY24, IDFCFB’s current account saving account (CASA) deposits accounted for 35.4% (FY23: 35.7%; FY22:32.3%) of the total liabilities (deposits + borrowing). While the bank’s cost of funds has moderated from the historical levels, its borrowing cost is likely to remain higher than that of its peers in the medium term, due to its historically high-cost fixed rate borrowings which has been moving down and is being replaced with retail deposits. However, any reduction in the funding cost would be absorbed incrementally, as the bank builds up a higher proportion of secured book thereby marginally benefiting overall margins. With the growth in its retail deposit base, IDFCFB has been able to reduce its high-cost borrowings (2QFY23: INR150.0 billion; FY23: INR176.7 billion.