I was talking about you and me on screen, my old friend was back.
V Vaidyanathan: Of course, there are really old friends. And we are on the other side, yes. But I can also say they made a fresh call. They once again studied that they saw the long-term outlook and the quality of the franchise we built and felt they could make a lot of money. So, hopefully, I say, hopefully, that’s how it started.
When they’re investing, they look at the brand, look at the franchise, look at the ratings, look at the growth, look at the NPA. And when the promoter is raising capital, he says, do I need money to grow, do I need money to clean up my membership fees, or am I collecting money because it is available? So let us understand the inner story. Tier I Capital is not required, but I’ve raised Tier I Capital. Why did you develop Tier I Capital? Is there an urgent need for that, this is an indicator for us who say growth is coming.
V Vaidyanathan: Growth is coming.Defines our growth.
V Vaidyanathan: The problem is that over the past five years, our loan books have grown from 1,04,000 chlors to about 2.4 larks, five years, just over doubled. Now we think we need to grow in a stable way, like a large, big bank, like a large bank, like a large bank, we are like a middle tier bank of size, so we need to grow at about 20%. You need to be comfortable to grow at this rate. This growth requires capital. So you can think of it like growth capital.
So how much of this will increase your capital validity ratio and what dilution will it lead to?
V Vaidyanathan: This will increase our capital. It will take us close to 19%, it really puts us in a very strong position. Before answering the second question, you need to add one point.
There are so many of this tariff war, which is currently taking place in us, China, the world, other geopolitical events, wars and more. Therefore, it is very safe to sit on a lot of capital. We can build great banks. That’s one of my basic reasons why we raise this capital, with a dilution of 15%.
When you raise capital, it’s a 15% dilution. However, it will compress your return ratio, as it will be the period before you begin to unfold. So, what about the return on capital and return on capital due to your lower return rate, especially this dilution?
V Vaidyanathan: First, say you’re raising this on the book premium. Therefore, it is important to note that the value of the book value per share actually increases by around 2.3%. Currently, EPS is, of course, down 15%. The dilution is 15%, so it’s very easy.
But honestly, we shouldn’t see it that way. It also doesn’t deny that it is, but the way we see it is, is that we are building our future banks.
So I would like to take 10 seconds to explain it in the sense that I want to explain one basic point to you that many investors don’t normally understand.
Please note that early stage banks do not have a stock return ratio and do not have a good stock return ratio. These banks start from scratch. Growth is necessary. You don’t have a stock return ratio.
You need to dilute. But the good news is that there have been many advances in return for fairness over the past five years. Over the next five years, we will make more progress in return for fairness. So, at one stage, we really believe that this bank will become independent with capital, and that will be a very important moment for the bank.
Capital has come to you during the last two quarters of tough times. MFI, you’ve also taken many frontend amortization. So when investors come in, is the first question from investors the worst in terms of asset quality and MFI writing back? So, how did you answer this question?
V Vaidyanathan: Yes, I said yes to them. I told you exactly what I said in the street. In fact, when I was calling analysts after the results in the third quarter, I said that Q4 would be at the peak of credit costs due to MFI. I said it should come down every quarter, quarter, quarter, quarter, and quarter, and if the regulations drop, putt should go up. That’s exactly what I said on the street, exactly what I said to them.
And I told them beyond that, I gave them a long-term picture. I gave them photos of what the story should look like four years from now, gave them a plan, dedicated their photos, told them what the bank would look like, persuaded them to invest in them.
Let’s talk in light of what’s happening in the world. It’s not easy to win a capital of 7,500 crores. It was difficult. And in fact, investors told me that the odds are like 1/100. I’m so glad that we have got a kind of capital.
Capital was not available on TAP and managed to acquire capital on the balance sheet at 7,500 crores. I think this is great. However, this dilution also affects your personal retention. Your personal retention will collapse. Is that okay, or will you put in the money?
V Vaidyanathan: No, I’m not putting in any money. The problem is that all first generation people who create any entity should know that dilute. I think I’m really building an institution for the future. If you think about institutions like HDFC Bank ICICI Bank, these truly iconic institutions, how were they created? If I went back 25 years ago, what would ICICI Bank be? They were probably like a balance sheet of thousands of lua. Today, it has grown by becoming a stable bank or HDFC bank, like a loan book of Rs 25-300,000. So this all happens when you create it. So I think about building an institution in the long run and keeping all the measures taken at the bank in mind.
Through this timeline here and in April 2021, this raised 3000 with QIP right after Covid. And the next two years and three years, it was the year of IDFC Bank’s bumper growth, as you raise capital. If my maths are correct, this raised twice as much capital as I nurtured in 2021. So, this means we are better than the growth of bumpers or the industry average growth, as this is a lot of capital. It’s twice as many as I grew in 2021.
V Vaidyanathan: See, the simple answer is, of course, you plan for growth, but of course it’s more than growth. Hopefully after this massive capital, everyone will believe they have not been in the market for a while.
They have no intention. Gives confidence to rating agencies. We’re already twice as positive. We have the ambition to become a triple-A. I’m telling you, I mark my words, my eyes are there and we want to get there. So we run the institution. The engine must be like the perfect gas in the tank at any time.
But please tell me, what do you want to expand this money? What is the focus area?
V Vaidyanathan: Let’s just say there are two big things before a bank that all investors should know. There are three businesses. Our lending books are extremely informative.
We have an operating profit of 4.3%. In other words, it is the type of profit that is being made on the asset side. It’s really good and covers credit costs. It is very profitable and very profitable. Five years is extremely beneficial. Secondly, we are a new bank, so we have a liability business. We have close to 1,000 branches, and 1,100 ATMs, people, technology, everything is here.
Asset Management, Cash Management, Trade, FX, NRI Business, Checking Accounts, all the businesses deployed in this bank. Everything that costs money. So, as banks progress, some of these businesses are now at a loss stage and are heading towards profitability. That’s this second purpose.
But I’d like to tell people that some people may be worried that you’re growing so much capital, looking. We are now raising funds for the fifth year in a row. I don’t deny that.
I’m raising it. It’s a new bank. I just want to share this with everyone and their new bank. If you consider all the banks that are raising funds in five, six, three years, they have been there for 25, 30 years, so I want to say that again to you.
After the merger, we were there for three, five, six years. So it’s a new bank. We are raising funds. Nowadays, there is a greater size and profitability, which means that it will make it less frequent to the market. So let’s say at least two and a half years or something like that. We don’t even look at the market.
But please tell me how you can use this capital to grow the MFI or unsecured side of your book.
V Vaidyanathan: no. In fact, it slows down with MFI books. You can make a mistake once, not the second time. So it feels really bad to have gotten the MFI wrong in the sense that we had already been doing very well for 78 years, but the industry issues that happened were we at the centre of that too, and we lost our money. So let us say we lost money this year. We’ve made money for the fifth year in a row, and yet, yet, we don’t grow MFI books in that sense, but all other businesses are growing. Our small businesses are growing.
Our company is growing. Retail is growing very strongly. The gold loan business is growing. Frankly, we are all involved in the growth business, not over five years. We have woken up for 10, 15, and 20 years and continue to grow.
Your nims are solid. And one of the reasons your NIM is solid, although I don’t use the word risk, you’ve been exposed to MFI space, a high margin business. It’s easy to go to MFIs that don’t guarantee the quality of trust.
V Vaidyanathan: So the problem is that MFI is one of the components that is slowing down. We have to say, I have to say, because it is more cycling tendency. But let’s give you one explanation of MFI. Try not to feel that why you did it or why you are not irresponsible about it. The MFI business helped to meet priority sector loans for weaker sectors. Otherwise it would be very difficult to meet. Paying is a big price to avoid meeting your preferred sector loan. Remember, we had a DFI converted to a bank. There was no priority sector, so I had it.
It also helped me to meet comprehensive banks. That was also very profitable, so that’s true. But even so, we are slowing down for the reasons we discussed. But it’s just one component. But the rest of the business is all very profitable. There is a strong nim. Of course, there is moderation.
Let’s call it 6 today. Maybe we’ll be 5.9 or something like that, maybe 5.8. We have expertise, but remember one thing. The quality of our assets is truly amazing by any standard. Our gloss NPA is always less than 2. Net NPAs are always less than 1. The credit cost is around 1.8.
So these are solid numbers for banks with NIMs like us. So we have a good franchise. It’s like you have a good molecule, that’s what we have, we need to scale it, this capital helps us scale it.
