Following the June quarter earnings, shares of IDFC First Bank on Monday gained up to 1 percent to trade at Rs 84.65 apiece on the NSE. The private sector bank reported Q1FY24 PAT (profit after tax) of Rs 770 crore, 6 percent beat, up 61 percent year-on-year (YoY), boosted by robust fee income and lower provisions. Earnings are strong, backed by healthy loan growth, robust fees and contained credit cost.

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The net interest income (NII) surged 36 percent YoY, while margins moderated 8 basis point quarter-on-quarter (QoQ) to 6.33 percent.

Business growth remained strong as the loan book was driven by healthy growth in commercial finance and retail loans. The wholesale book was

flat YoY. Deposits grew at a healthy 36 percent YoY, with current and savings accounts (CASA) deposits flat QoQ. Thus, CASA ratio moderated to 46.5 percent in Q1 of the current fiscal.

IDFC First Bank is well poised to deliver healthy loan growth as the drag from the wholesale book continues to moderate, analysts say. This will be aided by a strong pickup in profitability, due to the replacement of high-cost borrowings, better cost trends, and controlled credit costs.

The lender has invested well in digital capabilities, branch, and product expansion, and has presence across retail products. Cost ratios are elevated but will moderate as scale benefits come into effect, while the retirement of legacy high-cost borrowings will aid NII growth.

Key highlights from the management commentary —

According to analysts, the bank expects the credit card business to breakeven by FY25. About 24-25 percent of the credit card mix are revolvers.

The bank expects to reach 13-15 percent ROE (return on equity) by FY25 and 1.4-1.6 percent ROA (return on assets) by FY25.

The bank reported a credit cost of 1.2 percent in Q1 of FY24 versus a guidance of 1.5 percent.

CASA + TD less than 5 crore constitutes 81 percent of total deposits, while the retail deposit constitutes 77 percent of the total deposits and 23 percent is wholesale.

What brokerages recommend

Motilal Oswal has reiterated its 'Buy' rating on the counter with a target price of Rs 100, suggesting a potential upside of 19 percent from the current market levels.

According to Nuvama, IDFC's current RoA is 1.3 percent with an FY25 guidance of 1.6 percent. "We are building in lower RoA due to sticky opex and our view that fees and NIM have peaked. Banks with higher RoA and stronger franchises trade almost equal to IDFC's 1.8 times BV FY25E," it said, adding that the stock is fairly valued relative to its RoA.

Domestic brokerage house Emkay has recently initiated coverage on IDFC First Bank, given its super transformation from a predominantly wholesale bank saddled with higher NPAs to a diversified, strong and vibrant digital-oriented retail bank delivering higher RoA/RoE at 1.3-1.5 percent/12-15 percent over FY24-26E (despite building-in the capital raise) versus 0.3-1.1 percent/3-10 percent in FY21-23. "We retain BUY on IDFCB, with target of Rs 96," it said in a note.

IDFC First Bank stock has given multibagger returns to investors in the last one-year period. On a year-to-date basis, the stock has gained 38.43 percent, while it rallied 102.26 percent in the last one year.

First Published:Jul 31, 2023 11:03 AM IST