IDFC FIRST Bank is confident of clocking a much stronger profit growth over the next five years on the back of a good show in its core operating performance, its MD & CEO V Vaidyanathan has said.

“Next few years we will be on a very very strong wicket. We believe the profitability of the bank will be much, much higher than today by an order of magnitude. 

Since you said five years, I can only say that profitability will look much, much stronger because two things will happen. There is a power of compounding that will come into play and the second thing that will happen is that the power of operating leverage will come into play”, Vaidyanathan told businessline in an interview post the announcement of the bank’s Q2 performance.

Vaidyanathan was replying to a question about the strategic plan for the bank for the next five years and how he sees the profitability growth of the bank shaping up in the coming years.

Without giving a specific profit growth guidance, Vaidyanathan said he wanted to stick to only long-term guidance as the bank does not guide for quarter after quarter. 

“We feel very confident that FY24 as a whole will be much better than FY23 as a whole, and FY25 as a whole will be much stronger than FY24 as a whole. And FY26, we feel will be much stronger in profitability than FY25”, he said.

This trend line of strong growth of profitability year-on-year will be sustained, Vaidyanathan said.

His remarks are significant as IDFC FIRST Bank had in 2022-23 recorded its highest ever net profit of ₹2,437 crore, higher than net profit of ₹145 crore in the previous fiscal.

For the just concluded second quarter ended September 30, 2023, the bank’s net profit grew 35.2 per cent year-on-year to ₹751.3 crore.

Currently, deposits of the bank are growing at 44 per cent, while the loan book is growing at 25 per cent. 

“If you see the performance of the bank over the last many, many quarters, you will find that it’s very consistent in terms of its approach. 

The approach is very simple, that we continue to grow, you know, the loan book in a steady manner. Our deposits should grow faster than our assets, that is our fundamental requirement”, he said.

IDFC FIRST Bank would also continue to keep a laser-sharp focus on maintaining high asset quality all the time, he added.

“So these are our approach, and in this larger approach, and larger opportunities, it is just another quarter in the process”, Vaidyanathan said.

He highlighted that the operating profits of the bank have grown by 35 per cent as against loan book growth of 24 per cent. “So long as operating profit grows further than the growth of the loan book, then the bank is becoming increasingly profitable”, he added.

For IDFC FIRST Bank, deposits have been growing by over 40 per cent for the last many years. “We feel that it can sustain like this for a while. We need deposits for two reasons — Number one is growth and the other one is to fund the repayment of the ₹15,000 crore of legacy infrastructure bonds that the bank is holding (since pre-merger days of Capital First and IDFC merger of 2018). Now those bonds are coming for maturity,” he said. This is the reason why the bank is growing deposits by 44 per cent, otherwise there won’t be a need to grow at this level.

So going forward, the bank expects the need for deposits will come down in the next 2-3 years (post repayment of legacy infrastructure bonds) and will also permit the bank an opportunity to further reduce deposit interest rates.

Asked about the net interest margin, Vaidyanathan said that it would continue to hover around 6% plus and there will be no conscious effort to expand it. “We are not looking at expanding it. We are quite happy. This is a good number”, he said.

Other businesses

Vaidyanathan said that the bank is trying to build businesses other than retail credit, MSME credit, agri credit and corporate credit. 

“We are building our gold loan business. We are building the tractor financing business to meet PSL requirements. These are the businesses from a credit point of view,“ he said.

From a fee income point of view, the bank is building cash management and wealth management businesses, he said.