Chairman Message to Shareholders - 2018
We are proud that over the last eight years, we have built a Company ground up with greenfield research,developed a deep understanding of the consumer, and gained in valuable experience across credit cycles.
It is a great pleasure and privilege to share with you the performance highlights of FY 2017-18 and outline the strategic direction of our journey going ahead. Capital First continued to grow strongly across all parameters in FY 2017-18.
- The AUM has grown 36% from 19,824 Crore (US$ 3.05 billion) to 26,997 Crore (US$ 4.15 billion).
- The NII has grown 53% from 1,301 Crore (US$ 200 million) to 1,987 Crore (US$ 306 million).
- Fee & Other Income grew 30% from 339 Crore (US$ 52 million) to 443 Crore (US$ 68 million).
- The Total Income has grown 48% from 1,640 Crore (US$ 252 million) to 2,430 Crore (US$ 374 million).
- The PAT has grown 37% from 239 Crore (US$ 37 million) to 327 Crore (US$ 50 million).
We are proud that over the last eight years, we have built a Company ground up with greenfield research, developed a deep understanding of the consumer, and gained invaluable experience across credit cycles. We have built a strong professional and value-driven institution with great corporate governance and are ready to capitalize on the new opportunities in the Indian Financial Services space.
The CAGR growth for Capital First since inception are off the charts. A Five Year CAGR is more representative of the latest trends, and shows a strong compounding performance at the Company. Between FY13 and FY18:
- The AUM has grown at a Five Year CAGR of 29% from 7,510 Crore (US$ 1.16 billion) to 26,997 Crore (US$ 4.15 billion)
- The NII has grown at a Five Year CAGR of 48% from 280 Crore (US$ 43 million) to 1,987 Crore (US$ 306 million)
- The Total Income has grown at a Five Year CAGR of 47% from 358 Crore (US$ 55 million) to 2,430 Crore (US$ 374 million)
- The PAT has grown at a Five Year CAGR of 39% from 63 Crore (US$ 10 million) to 327 Crore (US$ 50 million)
We are particularly happy to share with you that the Company has maintained high asset quality consistently over its lifetime. We are happy to report that our Gross and Net NPA remained continuously low at around 1.7% and 1% (90 DPD) respectively for the entire period indicating the quality of the underlying portfolio. In fact our portfolio has been stress tested in periods of tight liquidity conditions (FY 2010-14, build-up stage of Company), high inflation (~8-10%, FY 2010-14, build-up stage), declining GDP growth (quarterly GDP growth reduced from 9% to 4.5% FY 2010-14), demonetisation (FY16) and GST (FY17). During all these events, our portfolio quality remained stable.
Usually, retail portfolios take about 4-5 years of seasoning to reflect the true quality. Statistically and analytically speaking, our portfolio has seasoned appropriately and we see no reason why such asset quality will not be maintained in the future. In fact, we expect asset quality to only improve in the years to come. We never availed of the temporary NPA reporting dispensations the RBI offered during such macro changes. The robust credit culture, credit underwriting, and monitoring systems that we set up along the way was important in this achievement. We comfortably migrated to the 90 DPD NPA recognition norm smoothly without any adverse impact.
We also continuously improved Return on Equity. Our return on equity increased from 4.93% in FY13, to 8.33% in FY14, to 10.14% in FY16, to 11.93% in FY17, and 13.31% in FY18 despite investments in businesses during the period. In fact, when seen on a quarterly basis, our return on equity continuously increased from 2.28% in Q1FY14 to close to 15% in Q4FY18. We are confident of crossing 18%-20% ROE soon which would be among the best in the industry. We have a strong potential for a steady future growth. A large consumer and MSME financing company growing upwards of 25% with a high return on equity and excellent corporate governance is incredibly valuable and we are proud to have built such an entity.
We have built a strong and motivated organisation that is greatly committed to our cause. As a result of such transformation, the market capitalisation of Capital First consistently rose since the Management Buyout from 781 Crore (US$ 120 million) on March 31, 2012, to 1,152 Crore (US$ 177 million) on March 31, 2013, to 1,478 Crore (US$ 227 million) on March 31, 2014, to 3,634 Crore (US$ 559 million) on March 31, 2015, to 3,937 Crore (US$ 606 million) on March 31, 2016, and to 7,628 Crore (US$ 1,174 million) on March 31, 2017, 8,000 Crore (US$ 1,231 million) in January 2018, representing a CAGR of 60%, and a 10-fold increase in market cap in under six years.
Post the announcement of the merger of Capital First with IDFC Bank, we recognize that the market cap reduced to 6,118 crore (US$ 941 million) as of March 31, 2018. Investors have many questions on their mind as they anticipate too many challenges. Some are obvious, and some may come up along the way. I don’t deny these challenges. But, I believe we can deal with them. We are extremely excited as we have a unique opportunity to create a leading universal bank with a strong retail presence. We can create a bank that is technologically sophisticated, profitable and most importantly, will be of great service to the society.
To understand the evolving model post-merger, picture Capital First, as a large, dynamic, entrepreneurial company with a phenomenal lending machine, growing upwards of 25%, excellent asset quality, a diversified loan book, high return on equity, and large opportunities in India. Now place this model on a banking platform with even lower funding cost and perennial source of retail borrowings. Now, couple this model with the numerous strengths that IDFC Bank brings to the table, and together we can create a highly successful bank over time.
A banking platform provides two significant benefits: the funding cost is lowered, and more importantly, the source of funds becomes diversified and effectively perennial. The other benefit is the product range we can offer to our customers, such as Credit Cards, Overdraft Facility, Letters of Credit, Bank Guarantees, Salary Accounts and the like increase meaningfully. The possibilities are endless.
It has always been my dream to create a bank that will finance millions of small entrepreneurs, and touch the lives of millions of people in a positive way. Now we have the ability to do that on a large platform.
When I read the reports that India will be a US$ 5 trillion economy by FY25, or that consumption in India will double to US$ 3 trillion by FY25, or that investment spending will be on the scale 3X to US$ 1.8 trillion by FY25, I get inspired. When I read about the growth in airports, rural electrification, affordable housing, formalisation, digitisation and such initiatives, I get inspired. I believe an unbelievable era of prosperity lies before us.
Now a note to the employees reading this report. To those of you who read or think about challenges we will face, I would like to point out to you that we are our own inspiration. When we started Capital First, we had every challenge lined up against us. Our Company was in its infancy. Our gross NPA was 5.28%, our net NPA was 3.78%, banks’ funding lines were choked for a variety of reasons. The Company had posted losses of 28.75 Crore (US$ 4.42 million) in FY08 and 32.11 Crore (US$ 4.93 million) in FY09. In fact, the Company had to pledge its physical property to raise loans. Funds were being raised at 14.5%. In addition to this, between FY 2010-14, the economy was slowing down, inflation was rising, interest rates were rising, and liquidity was tightening. But we came through it as all of you worked harder. We built the business brick by brick, with diligence and ethics, and the results are there for all to see.
Compared to our last round, on this occasion, growth will be on a banking platform with fund-raising capabilities, favourable macroeconomic conditions and an evolved and already profitable model that has been honed over the years. We have a growing ecosystem, a fast-growing economy, a transformative government, and a supportive regulator.
I believe everything is achievable with the right spirit, hard work, energy, commitment, honesty, the right platform and the right strategy.
If there is one thing I would like you to be swayed by, it is the incredible opportunities ahead. Growth is life, and with growth, everyone will have great opportunities. You have been wonderful partners in this progress and have worked night and day since its start-up stage. It is not the time to be fidgety or concerned; instead, it is the time to be more motivated.
To my colleague Directors, I express my thanks to you for your constant guidance and encouragement. Thank you, shareholders, for your unstinted support over the years.