Old habits die hard. On Tuesday, IDFC First Bank Ltd completed yet another round of fundraising worth ₹2,623 crore, leading to more equity dilution and consequently value erosion for shareholders.
It allotted 437 million compulsorily convertible cumulative preference shares (CCPS) to Abu Dhabi Investment Authority’s subsidiary. Earlier in August, it allotted 812 million CCPS to an affiliate of Warburg Pincus.
As CCPS costing ₹60 apiece will be converted to equity shares, the number of equity shares from the two allotments will rise by 17% to 8.6 billion. The impact on book value (BV) will be minuscule as BV per share will rise to ₹53.6 from ₹52.8 as of June 2025.
IDFC’s maiden equity dilution, worth ₹2,000 crore, happened in June 2020. Due to frequent equity dilution, the number of equity shares has gone up substantially by almost 80% to 8.6 billion from FY21 to FY26.
Typically, lending businesses require equity capital to meet capital adequacy norms while growing their loan book. IDFC has seen loans grow at 22% (compound annual growth rate) in the last five years. But the cost of equity is higher than debt and has to be used judiciously.
Capital burn
So, how did the bank consume equity so fast?
Blame the legacy corporate loans. In its FY21 annual report, chief financial officer Sudhanshu Jain said these loans led to provisions and write-offs (known as credit costs) consuming about ₹2,000 crore of equity capital in the first couple of years. While the bank managed to tackle legacy loans and got a handle on provisions, a new problem emerged. From ₹1,660 crore in FY23, credit costs surged to ₹5,510 crore in FY25 due to non-performing assets (NPA) in microfinance loans. High credit costs led to net profit falling by nearly 50% year-on-year to ₹1,525 crore in FY25.
Effectively, capital was consumed for giving bad loans in microfinance, and accretion to net worth in the form of accumulated profit remained subdued. The worst of credit costs may not be over, as gross slippages increased sequentially to 4.1% in Q1FY26 from 3.7%. Also, some return ratios are poor. FY25 was likely the bottom in terms of profit and return on average assets (RoAA), said ICICI Securities.
It expects the bank’s net profit to surge 80% on-year to ₹2,743 crore in FY26. Even then, RoAA will be at a meagre 0.7%—lower than some public sector banks. In the last year, the stock has been down 3.5% versus 10% gains in the Nifty Bank index. A sharp upswing is unlikely as the stock is priced adequately at 1.3x adjusted BV for FY26.
