IDFC First Bank Ltd. shares experienced a significant rally on Wednesday, rising by 5.15% to hit a high of Rs 89.58. This surge followed an upgrade from Motilal Oswal Financial Services (MOFSL), which changed its rating on the stock from 'Neutral' to 'Buy'. The brokerage highlighted the bank's improving profitability, robust balance sheet growth, and a strengthening deposit franchise as key drivers for its optimistic outlook.
MOFSL's Positive Outlook
Motilal Oswal noted that IDFC First Bank has made substantial strides in fortifying its deposit base while maintaining strong loan growth and systematically de-risking its balance sheet. The brokerage anticipates a sustainable recovery in the bank's profitability, bolstered by healthy business expansion, enhanced operating leverage, and well-managed credit costs.
MOFSL projects that IDFC First Bank will achieve a 42% Pre-Provision Operating Profit (PPoP) Compound Annual Growth Rate (CAGR) between FY26 and FY28. Concurrently, the bank's cost-to-income ratio is expected to improve notably, moderating to approximately 69% in FY27 and 65% in FY28. These improvements are forecasted to translate into a Return on Assets (RoA) of 1.2% and a Return on Equity (RoE) of 11.9% by FY28.
Financial Projections and Targets
MOFSL has established a target price of Rs 105 for IDFC First Bank, based on 1.6 times its estimated FY28 adjusted book value (ABV). This target suggests an upside potential of roughly 23% from the brokerage's reference price of Rs 85.
"The bank has strengthened internal controls and governance processes and has lowered its credit cost guidance, underscoring strong asset quality trends," MOFSL stated, estimating that Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) will decline to 1.4% and 0.4%, respectively, by FY28.
Over the past three years, the bank's advances and deposits have demonstrated impressive CAGRs of 21% and 26%, respectively. Deposit growth has outpaced loan growth, leading to a reduction in the credit-deposit ratio from 108% in FY23 to 94% currently.
Looking ahead, MOFSL expects IDFC First Bank's loan book to grow at around a 21% CAGR from FY26 to FY28, surpassing Rs 3.4 lakh crore by FY27. In the first quarter of FY27, net advances grew by 20.8% year-on-year, with wholesale loans increasing by 30% and retail loans by 21.5%. Specific segments like vehicle finance and consumer loans each grew by approximately 26%, while gold loans saw a significant 103% surge.
Strategic Initiatives and Future Growth
Retail deposits now constitute 80% of IDFC First Bank's customer deposits, a substantial increase from 27% at the time of its merger, with the CASA ratio standing at 51%. MOFSL projects deposit growth at a 25% CAGR over FY26-28, supported by ongoing retail deposit mobilization and the recent $3.57 billion FCNR(B) deposit mobilization, which accounts for about 11% of total deposits.
While the FCNR(B) mobilization might exert some near-term pressure on Net Interest Margins (NIMs), MOFSL anticipates it will provide a boost to earnings, potentially adding 1.5%-4.4% to incremental Net Interest Income (NII) and increasing FY27 earnings by 4.1%-6.8%, depending on deployment strategies. The bank has also raised its FY27 NIM guidance by 5 basis points to 5.8%, expecting progressive savings-account pricing and lower term-deposit rates to offset potential impacts.
Operating leverage remains a critical factor in MOFSL's assessment. Management aims for an annual improvement of around 350 basis points in the cost-to-income ratio, targeting a reduction to 60% in the coming years from the current 71%. MOFSL forecasts this ratio to moderate to 69% in FY27 and 65% in FY28, indicating strong operational efficiency gains.