By Jinay Gala

India Ratings and Research (Ind-Ra) has downgraded IDFC Bank Limited’s (IDFCB) instrument ratings while resolving the Rating Watch Negative (RWN) as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Bonds*

-

-

-

INR291.25 (reduced from INR312.61)

IND AA+/Stable

Downgraded; off RWN

Infra bonds*

-

-

-

INR100

IND AA+/Stable

Downgraded; off RWN

*Denotes non-convertible debentures (NCDs)

The downgrade reflects Ind-Ra’s expectation that IDFCB would take longer than expected in building up a granular liability profile. The rating action also reflects the bank’s limited competitive strength on asset side and modest profitability buffers compared to similarly rated peers’, which could remain subdued in the medium term. The bank’s operating expenses may remain elevated as it builds a granular asset and liability portfolio. 

The ratings, however, are supported by the bank’s strong capital buffers, comfortable liquidity and reasonable provision coverage on stressed assets. IDFCB is focusing on expanding its non-infrastructure franchise through both organic and inorganic routes.

Ind-Ra had placed the ratings on RWN on
19 January 2018 following the bank’s 13 January 2018 announcement of a merger with Capital First Ltd (CAPF; a large non-banking financing company), subjected to regulatory and shareholder approvals. Ind-Ra has resolved the RWN factoring in the approvals from the Security Exchange Board of India, exchanges and the Reserve Bank of India for the merger.

KEY RATING DRIVERS

Retail Liability Scalability Taking Longer-than-expected: IDFCB’s progress on building a granular retail liability franchise has been modest and could take longer than envisaged by Ind-Ra. Its initial strategy to increase footprint (acquisition of retail liability) through tech-centric model, leading to control on operating expense, has met with limited success as per Ind-Ra. Incrementally, the bank would need to build on its branch network to support its franchise expansion. This however is likely to entail higher operating expenses which could put further pressure on its already high operating cost structure and weaken its average operating buffers. IDFCB’s liquidity however is comfortable with assets-liability tenure being largely matched with minor gaps. The bank has maintained a comfortable liquidity coverage ratio and is supported by legacy long-term borrowings. 


Profitability to Remain Muted:
IDFCB’s profitability remains weaker than private sector peers’; though it should benefit from the proposed merger, it would remain materially lower in the medium term. The impact of the negative carry on IDFCB due to the priority sector lending, higher funding cost on legacy borrowing book, higher portion of stressed book staying unresolved and the likelihood of an increase in operating expenditure for the expansion of its retail franchise would continue to weigh on the profitability in the medium to long term. 

Asset Quality Stress Accounted, Incremental Provisioning Pressure to Moderate:
The total stressed assets (gross non-performing assets + restructured assets + potential additional stress + security receipts) reduced to 8.3% of the gross corporate & retail assets in FY18 (FY17: 11.1%, FY16: 16.8%) largely due to asset sale to an asset reconstruction company. The provision against stressed book excluding security receipts increased to 76.1% in FY18 (FY17: 61.7%). 

Pre-Provision Operating Profit to Credit Cost Buffer to Weaken Post-merger:
IDFCB’s gross and net NPL ratios stood at 3.3% and 1.7%, respectively, in FY18. Ind-Ra expects IDFCB’s credit cost ratio (as a % of advances) to increase post the proposed merger, leading to a fall in pre-provision operating profit to credit cost buffer. The agency estimates there would be an incremental provision requirement on the existing stressed assets over the next three years, factoring in resolution delays. 

Inorganic Loan book Contributing Larger Portion to Loan Growth:
The bank’s loan growth has been modest. The direct lending portfolio (net advances) grew 8% yoy in FY17 and 5.6% yoy in FY18. The larger growth in loan portfolio has been through the inorganic route till date on the retail side of the business, as it acquired Grama Vidiyal Microfinance Ltd’s lending book in October 2016. The bank proposed merger with CAPF could aid franchise growth as organic growth of the same scale would have taken longer than envisaged, according to Ind-Ra.  

Granular deposits (excluding certificate of deposits) and current account saving account build-up have been modest; deposits excluding certificate of deposits were 31.5% of the total external liability and current account saving account was 11.8% in FY18. The proposed merger, if goes through, would further increase the bank’s reliance on wholesale funding, at least in the medium term. The historical high cost fixed rate borrowing adds to the challenge, resulting in a negative drag on return on assets (internal accruals) to the tune of 25bp at least till FY21. The accrual of benefits of the proposed merger on the retail liabilities could take longer than envisaged. 

Capital Buffers Strong, though May Dilute as Loan Portfolio Expands:
IDFCB’s capitalisation remains strong, though it would moderate as the bank expands its loan book. The 20% growth articulated by the management for the proposed combined entity, is likely to be higher than its internal accruals and would dilute its capitalisation. IDFCB tier 1 was 17.7% in FY18 (FY17: 18.9%); the proposed merger could result in the tier 1 ratio declining by 100-150bp.

Asset Book Graduating to Retailisation
: The proposed merger with CAPF would add a substantial portion of retail assets to the combined book, with the share of retail increasing to around 47% in FY18 from 29% pre-merger. However, direct retail would still be 34.1%, which is lower than those of similar rated peers. The book acquired comprises mostly the small medium enterprises and loan against property categories of borrowers which were the most impacted during demonetisation and have been facing challenges to protect margins while complying with GST; thus the benefit may be long ended.


RATING SENSITIVITIES

Positive: Establishing large stable granular funding tie-ups, diversity of income through a higher fee income, strong franchise value through a strong presence in key business segments along with strong operational profitability buffers and internal accruals comparable to higher rated peers would be credit positive.

Negative
: Higher challenges than envisaged on building a strong franchise, inability to build a granular low cost liability profile or sharp deterioration in the core profitability and capitalisation buffers would be credit negative. Also, sharp negative mismatches on asset-liability tenors that could lead to refinancing risk could lead to a negative rating action.


COMPANY PROFILE

Incorporated on 21 October 2014, IDFCB is a new-age private sector bank. IDFC Ltd is its ultimate parent, which was established in 1997 by the government for financing infrastructure projects. 

On 23 July 2015, IDFCB received a banking license. It commenced banking operations on 1 October 2015.

FINANCIAL SUMMARY

Particulars

FY18

FY17

FY16

Total assets (INR billion)

1,265.2

1,121.6

832.1

Total equity base (INR billion)

152.5

146.7

136.3

Net profit (INR billion)

8.59

10.2

4.67

Return on assets (%)

0.7

1.0

1.1

Tier 1 ratio (%)

17.7

18.5

21.5

Capital adequacy ratio (%)

18.0

18.9

22.0

GNPA (%)

3.3

3

6.2

Stressed asset (GNPA+SR+SRA+ potential stress book) (%)

8.3

11.1

16.8

Source: IDFCB, Ind-Ra’s estimates


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Rating Watch/Outlook

Rating Type

Rated Limits (billion)

Rating

28 March 2018

29 December 2016

21 December 2015

NCDs

Long term

INR291.25

IND AA+/Stable

IND AAA/RWN

IND AAA/Stable

IND AAA/Stable

Infra bonds

Long-term

INR100

IND AA+/Stable

IND AAA/RWN

IND AAA/Stable

IND AAA/Stable

ANNEXURE

ISIN

Instrument

Date of

Coupon

Maturity

Issue size (million)

Rating/Outlook

Rating

INE092T08014

NCDs

17 January 2006

7.75

17 January 2026

INR2

IND AA+/Stable

Downgraded; off RWN

INE092T08238

NCDs

25 August 2009

9.05

25 August 2019

INR1.5

IND AA+/Stable

Downgraded; off RWN

INE092T08246

NCDs

25 August 2009

9.15

25 August 2024

INR1.5

IND AA+/Stable

Downgraded; off RWN

INE092T08253

NCDs

31 August 2009

9.05

31 August 2024

INR1.5

IND AA+/Stable

Downgraded; off RWN

INE092T08261

NCDs

4 September 2009

8.95

4 September 2019

INR1

IND AA+/Stable

Downgraded; off RWN

INE092T08279

NCDs

15 September 2009

9

15 September 2024

INR0.5

IND AA+/Stable

Downgraded; off RWN

INE092T08287

NCDs

29 September 2009

8.9

29 September 2019

INR1

IND AA+/Stable

Downgraded; off RWN

INE092T08311

NCDs

17 November 2009

8.75

17 November 2019

INR1

IND AA+/Stable

Downgraded; off RWN

INE092T08352

NCDs

17 December 2009

8.75

17 December 2019

INR3

IND AA+/Stable

Downgraded; off RWN

INE092T08378

NCDs

15 January 2010

8.83

15 January 2025

INR1

IND AA+/Stable

Downgraded; off RWN

INE092T08386

NCDs

15 January 2010

8.81

15 January 2025

INR1

IND AA+/Stable

Downgraded; off RWN

INE092T08394

NCDs

27 January 2010

8.8

27 January 2025

INR2

IND AA+/Stable

Downgraded; off RWN

INE092T08402

NCDs

9 February 2010

8.77

9 February 2020

INR0.5

IND AA+/Stable

Downgraded; off RWN

INE092T08428

NCDs

5 April 2010

9.03

5 April 2025

INR2.5

IND AA+/Stable

Downgraded; off RWN

INE092T08436

NCDs

5 April 2010

8.96

5 April 2025

INR2.5

IND AA+/Stable

Downgraded; off RWN

INE092T08444

NCDs

9 April 2010

8.9

9 April 2025

INR2.5

IND AA+/Stable

Downgraded; off RWN

INE092T08451

NCDs

28 April 2010

8.9

28 April 2025

INR3.5

IND AA+/Stable

Downgraded; off RWN

INE092T08469

NCDs

13 May 2010

8.95

13 May 2025

INR5

IND AA+/Stable

Downgraded; off RWN

INE092T08477

NCDs

24 May 2010

8.65

24 May 2020

INR4

IND AA+/Stable

Downgraded; off RWN

INE092T08485

NCDs

28 May 2010

8.84

28 May 2025

INR2

IND AA+/Stable

Downgraded; off RWN

INE092T08493

NCDs

15 June 2010

8.8

15 June 2025

INR2

IND AA+/Stable

Downgraded; off RWN

INE092T08501

NCDs

8 July 2010

8.8

8 July 2025

INR2

IND AA+/Stable

Downgraded; off RWN

INE092T08519

NCDs

21 July 2010

8.8

21 July 2025

INR3

IND AA+/Stable

Downgraded; off RWN

INE092T08527

NCDs

6 August 2010

8.95

6 August 2025

INR2

IND AA+/Stable

Downgraded; off RWN

INE092T08535

NCDs

15 September 2010

8.79

15 September 2020

INR1

IND AA+/Stable

Downgraded; off RWN

INE092T08543

NCDs

15 September 2010

8.89

15 September 2025

INR1

IND AA+/Stable

Downgraded; off RWN

INE092T08550

NCDs

20 September 2010

8.77

20 September 2020

INR0.8

IND AA+/Stable

Downgraded; off RWN

INE092T08568

NCDs

20 September 2010

8.86

20 September 2025

INR1.2

IND AA+/Stable

Downgraded; off RWN

INE092T08576

NCDs

29 September 2010

8.72

29 September 2020

INR1.55

IND AA+/Stable

Downgraded; off RWN

INE092T08584

NCDs

29 September 2010

8.82

29 September 2025

INR2.6

IND AA+/Stable

Downgraded; off RWN

INE092T08592

NCDs

19 November 2010

8.9

19 November 2025

INR2.6

IND AA+/Stable

Downgraded; off RWN

INE092T08600

NCDs

2 December 2010

8.89

2 December 2020

INR3.06

IND AA+/Stable

Downgraded; off RWN

INE092T08618

NCDs

27 December 2010

9.05

27 December 2020

INR3.39

IND AA+/Stable

Downgraded; off RWN

INE092T08626

NCDs

6 January 2011

9.15

6 January 2026

INR2.08

IND AA+/Stable

Downgraded; off RWN

INE092T08AO5

NCDs

17 February 2011

9.35

17 February 2026

INR3.15

IND AA+/Stable

Downgraded; off RWN

INE092T08AP2

NCDs

14 March 2011

9.33

14 March 2026

INR1.31

IND AA+/Stable

Downgraded; off RWN

INE092T08634

NCDs

24 March 2011

9.25

24 March 2021

INR5

IND AA+/Stable

Downgraded; off RWN

INE092T08AQ0

NCDs

28 March 2011

9.33

28 March 2026

INR2.15

IND AA+/Stable

Downgraded; off RWN

INE092T08CG7

NCDs

21 February 2011

8

21 February 2021

INR1.03

IND AA+/Stable

Downgraded; off RWN

INE092T08CH5

NCDs

21 February 2011

8.01

21 February 2021

INR3.36

IND AA+/Stable

Downgraded; off RWN

INE092T08CI3

NCDs

30 March 2011

8.25

30 March 2021

INR0.34

IND AA+/Stable

Downgraded; off RWN

INE092T08CJ1

NCDs

30 March 2011

8.25

30 March 2021

INR1.08

IND AA+/Stable

Downgraded; off RWN

INE092T08CM5

NCDs

21 March 2012

8.7

21 March 2022

INR1.08

IND AA+/Stable

Downgraded; off RWN

INE092T08CN3

NCDs

21 March 2012

8.7

21 March 2022

INR3.57

IND AA+/Stable

Downgraded; off RWN

INE092T08AR8

NCDs

15 April 2011

9.28

15 April 2026

INR2.5

IND AA+/Stable

Downgraded; off RWN

INE092T08CK9

NCDs

30 December 2011

9

30 December 2021

INR0.74

IND AA+/Stable

Downgraded; off RWN

INE092T08CL7

NCDs

30 December 2011

9

30 December 2021

INR1.99

IND AA+/Stable

Downgraded; off RWN

INE092T08CO1

NCDs

31 March 2012

8.43

31 March 2022

INR0.32

IND AA+/Stable

Downgraded; off RWN

INE092T08CP8

NCDs

31 March 2012

8.43

31 March 2022

INR0.86

IND AA+/Stable

Downgraded; off RWN

INE092T08BB0

NCDs

13 September 2012

9.25

13 September 2019

INR0.8

IND AA+/Stable

Downgraded; off RWN

INE092T08063

NCDs

11 January 2013

8.7

10 April 2018

INR0.28

WD

Withdrawn

INE092T08774

NCDs

9 May 2013

8.34

9 May 2018

INR2.7

WD

Withdrawn

INE092T08782

NCDs

10 May 2013

8.35

10 May 2018

INR3.5

WD

Withdrawn

INE092T08808

NCDs

23 May 2013

7.98

23 May 2023

INR4.05

IND AA+/Stable

Downgraded; off RWN

INE092T08AU2

NCDs

18 December 2013

9.68

18 December 2023

INR20

IND AA+/Stable

Downgraded; off RWN

INE092T08824

NCDs

2 January 2014

9.63

2 January 2024

INR1.45

IND AA+/Stable

Downgraded; off RWN

INE092T08AS6

NCDs

8 January 2014

9.65

8 January 2029

INR11.65

IND AA+/Stable

Downgraded; off RWN

INE092T08BK1

NCDs

30 April 2013

8.95

30 April 2018

INR0.35

WD

Withdrawn

INE092T08BL9

NCDs

23 May 2013

8.8

23 May 2018

INR0.26

WD

Withdrawn

INE092T08BM7

NCDs

24 May 2013

8.5

24 May 2018

INR0.12

WD

Withdrawn

INE092T08840

NCDs

15 April 2014

9.61

15 April 2024

INR5.7

IND AA+/Stable

Downgraded; off RWN

INE092T08857

NCDs

29 April 2014

9.5

29 April 2019

INR1.85

IND AA+/Stable

Downgraded; off RWN

INE092T08AV0

NCDs

29 April 2014

9.6

29 April 2024

INR2.7

IND AA+/Stable

Downgraded; off RWN

INE092T08865

NCDs

29 April 2014

9.5

2 April 2019

INR0.1

IND AA+/Stable

Downgraded; off RWN

INE092T08AT4

NCDs

15 May 2014

9.5

15 May 2024

INR6.35

IND AA+/Stable

Downgraded; off RWN

INE092T08AW8

NCDs

11 June 2014

9.18

11 June 2024

INR5

IND AA+/Stable

Downgraded; off RWN

INE092T08BN5

NCDs

7 August 2014

9.3

7 August 2024

INR1.74

IND AA+/Stable

Downgraded; off RWN

INE092T08BO3

NCDs

21 August 2014

9.36

21 August 2024

INR10.25

IND AA+/Stable

Downgraded; off RWN

INE092T08BP0

NCDs

12 September 2014

9.38

12 September 2024

INR10.55

IND AA+/Stable

Downgraded; off RWN

INE092T08BQ8

NCDs

14 October 2014

9.17

14 October 2024

INR10

IND AA+/Stable

Downgraded; off RWN

INE092T08BR6

NCDs

11 December 2014

8.49

11 December 2024

INR4.8

IND AA+/Stable

Downgraded; off RWN

INE092T08BS4

NCDs

5 January 2015

8.67

3 January 2025

INR20

IND AA+/Stable

Downgraded; off RWN

INE092T08956

NCDs

30 January 2015

8.41

30 April 2018

INR0.85

WD

Withdrawn

INE092T08964

NCDs

18 February 2015

8.63

18 February 2020

INR7

IND AA+/Stable

Downgraded; off RWN

INE092T08AD8

NCDs

27 February 2015

8.54

30 May 2018

INR2

WD

Withdrawn

INE092T08AE6

NCDs

27 February 2015

8.55

10 April 2018

INR0.1

WD

Withdrawn

INE092T08AF3

NCDs

27 February 2015

8.55

12 April 2018

INR1

WD

Withdrawn

INE092T08BT2

NCDs

27 February 2015

8.52

27 February 2025

INR3

IND AA+/Stable

Downgraded; off RWN

INE092T08AH9*

NCDs

25 March 2015

8.66

25 June 2018

INR2.25

IND AA+/Stable

Downgraded; off RWN

INE092T08AI7

NCDs

25 March 2015

8.66

24 December 2018

INR0.55

IND AA+/Stable

Downgraded; off RWN

INE092T08AJ5

NCDs

30 March 2015

8.66

28 June 2018

INR1.75

IND AA+/Stable

Downgraded; off RWN

INE092T08AK3

NCDs

30 March 2015

8.65

27 September 2018

INR2.5

IND AA+/Stable

Downgraded; off RWN

INE092T08AL1

NCDs

30 March 2015

8.66

27 December 2018

INR2

IND AA+/Stable

Downgraded; off RWN

INE092T08AM9

NCDs

30 March 2015

8.59

28 May 2018

INR1.75

WD

Withdrawn

INE092T08139

NCDs

8 April 2015

8.64

27 February 2019

INR2.7

IND AA+/Stable

Downgraded; off RWN

INE092T08121

NCDs

8 April 2015

8.64

8 April 2019

INR2.7

IND AA+/Stable

Downgraded; off RWN

INE092T08972

NCDs

15 April 2015

8.64

15 April 2020

INR14.12

IND AA+/Stable

Downgraded; off RWN

INE092T08AN7

NCDs

17 April 2015

8.59

21 October 2021

INR0.25

IND AA+/Stable

Downgraded; off RWN

INE092T08CB8

NCDs

17 April 2015

8.61

19 April 2022

INR0.75

IND AA+/Stable

Downgraded; off RWN

INE092T08147

NCDs

24 April 2015

8.52

24 May 2018

INR1.45

WD

Withdrawn

INE092T08AA4

NCDs

29 April 2015

8.44

5 April 2018

INR2

WD

Withdrawn

INE092T08AB2

NCDs

29 April 2015

8.45

25 April 2018

INR5

WD

Withdrawn

INE092T08BU0

NCDs

20 May 2015

8.7

20 May 2025

INR7.41

IND AA+/Stable

Downgraded; off RWN

INE092T08BV8

NCDs

27 May 2015

8.73

30 May 2022

INR6.3

IND AA+/Stable

Downgraded; off RWN

INE092T08BW6

NCDs

29 May 2015

8.71

29 May 2024

INR2

IND AA+/Stable

Downgraded; off RWN

INE092T08BX4

NCDs

12 June 2015

8.73

14 June 2022

INR3.18

IND AA+/Stable

Downgraded; off RWN

INE092T08BY2

NCDs

23 June 2015

8.7

23 June 2025

INR3.95

IND AA+/Stable

Downgraded; off RWN

INE092T08BZ9

NCDs

9 July 2015

8.73

6 January 2023

INR5.11

IND AA+/Stable

Downgraded; off RWN

INE092T08CA0

NCDs

28 July 2015

8.75

28 July 2023

INR10.5

IND AA+/Stable

Downgraded; off RWN

Total outstanding

INR291.25

* awaiting confirmation from issuer for maturity.

 

ISIN

Instrument

Date of Issuance

Coupon Rate (%)

Maturity Date

Issue Size (billion)

Rating/Outlook

Rating Action

INE092T08CQ6

Infra bonds

19 May 2016

8.5

4 July 2023

INR4.8

IND AA+/Stable

Downgraded; off RWN

 

Total utilised

 

 

 

INR4.8

IND AA+/Stable

Downgraded; off RWN

Total unutilised

INR95.2

IND AA+/Stable

Downgraded; off RWN


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments please visit https://www.indiaratings.co.in/complexity-indicators.

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Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Analyst Names

  • Primary Analyst

    Jinay Gala

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40356138

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121