If you are looking at a stock that can deliver good growth and returns in the next 5 years and is reasonably priced, IDFC First Bank could be a good stock to bet on. Let us examine, the reasons for the same.
IDFC FIRST Bank was formed by the merger of IDFC Bank, and Capital First Limited, a systematically important NonBanking Financial Services Company. The merger was supported by a near 100 per cent of the shareholders of Capital First and IDFC Bank.
The merger led to a very unique blend and was a win-win for both, particularly for the bank. In fact, let us explain what the merger has bought to the merged entity.
Improvement in margins and retail book
The immediate impact of the merger is on the loan book. The Retail Loan book has increased substantially from Rs 9,918 crore (standalone Erstwhile-IDFC Bank Q2 2019) to Rs 36,236 crores (IDFC FIRST Bank, Q3 2019). Of this, the rural book is Rs 4,704 crore, MSME loan book (largely LAP and Business Loans) is Rs 13,574 crore and Consumer loans book is Rs 17,957 crore)
The net interest margin of the bank was 1.9 per cent, which has shot up to 3.27 per cent, immediately post the merger mainly because of the loan asset book.
Impact of the merger
The bank going forward expects ROA to gradually increase to about 1.5 per cent and the Return on Equity to increase to between 13 to 15 per cent over the next 5 to 6 years. The Erstwhile Capital First had a stable business model with strong profitability, and if it is scaled up consistently over the years, then sustained addition to ROA and ROE is achievable and can be highly accretive to quality of earnings and profitability.
The bank would continue to build on the retail book and reduce exposure to the wholesale infra funded business. This means it would continue to focus on the retail book.
The shares of IDFC First Bank are trading at a price to earnings of 15 times anticipated EPS for 2019-20. The shares are also trading at 1.3 times the price to book of FY 2019-20. Private sector banks, with a significant retail book are always quoted at healthy p/e.
The shares are a good pick for those looking at a holding period of 3-5 years.
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