Retail business is going to be the richest prizefight among banks in the coming quarters and newly merged IDFC First Bank has chalked out a mid-term plan to claim a sizeable chunk of that segment.
The small bank, which reported a staggering Rs 1,538 crore net loss for the quarter ended December 2018, hopes to more than double its retail share from the current 35 per cent (up from 13 per cent prior to the merger) to at least 70 per cent — in absolute numbers, growing the retail asset book from Rs 36,200 crore to over Rs 1 lakh crore — in the next 5-6 years.
During this time, the bank is targeting to increase its network of branches to 600-700 from the current 206, besides bumping up CASA from 10.3 per cent now to over 30 per cent. Though this is slightly lower than the 40 per cent CASA share that robust banks ideally like to have, nonetheless, it’s a significant improvement considering the low base.
As per the bank’s five-year roadmap, the merged entity’s return on assets is pegged at 14-16 per cent, while return on equity is estimated at 13-15 per cent. But brokerage Edelweiss believes continued investments in franchises, retail, strengthening CASA plus retail term deposits, and integration challenges may lead to a sub-optimal return on equity in the near-term transition phase, but will be value-accretive over the medium to long-term. It also added that though the roadmap appears credible, its execution will be critical.
While ramping up deposits in the medium to long term could be a challenge, it’s manageable, given both IDFC Bank and Capital First’s established platforms with investments in building processes, systems and infrastructure, diversified products, and adequate capital availability.
As for funding, IDFC First Bank will have to build up CASA and branches, which could be a challenge in the current scenario especially considering small finance banks are also poised to start their operations in next 18-24 months.
Some of the other risks include deterioration of the macro environment leading to a slowdown in credit offtake, while expanding the retail side of the balance sheet, be it retail liability or retail assets could be a challenge amid formidable competition.
IDFC First Bank is the outcome of a merger between IDFC Bank, a scheduled commercial bank, and Capital First Ltd, a systematically important NBFC. Announced last year, it was formally consummated in December, 2018. The combined entity has a network of 206 branches servicing a portfolio of over Rs 1 lakh crore.