IDFC First Bank share price: Why MOFSL sees 16% upside on this private lender

Motilal Oswal Financial Services (MOFSL) has reiterated its ‘Neutral’ call on IDFC First Bank, maintaining a target price of Rs 80, which represents a potential 16 per cent upside from the current level of Rs 68.60.

The brokerage firm shared its view after an interaction with the bank’s leadership, where discussions revolved around growth prospects, asset quality and profitability. MOFSL noted steady progress across several key parameters but flagged near-term constraints that could weigh on earnings momentum.

IDFC First Bank recorded healthy loan growth, with advances rising 21 per cent year-on-year in the first quarter of FY26. The bank remains committed to granular expansion, focusing on Retail, MSME and secured portfolios while reducing exposure to its stressed microfinance book. Management highlighted that corporate disbursements are expected to remain healthy, albeit on a low base, as part of the diversification strategy. The bank reiterated its medium-term loan growth target of ~20 per cent, aided by product diversification and prudent underwriting, MOFSL said.

On the liability side, MOFSL said the bank has built a robust deposit franchise, with retail deposits now accounting for 80 per cent of customer deposits compared to 27 per cent at the time of the merger. Deposits grew by 26 per cent year-on-year in 1QFY26, with CASA deposits up 30 per cent and the CASA ratio at 48 per cent. Management continues to prioritize granular, branch-led and digital deposits over bulk money, reflected in LCR retail deposits rising from 12 per cent to ~61 per cent over five years. Investment in technology has played a vital role in driving customer acquisition and personalized services.

Net interest margins (NIMs) declined by 24 basis points quarter-on-quarter to 5.71 per cent in 1QFY26, mainly due to the shrinking MFI book, repo rate pass-through, and a higher wholesale mix. Management reiterated that NIMs will bottom out in 2Q, with a smaller decline, and recover to ~5.7 per cent from 3QFY26 onward as repricing benefits accrue. The bank also provided guidance for 4QFY26-exit margins of 5.8 per cent, it said.

The brokerage said the credit-deposit (CD) ratio improved, falling to 93.4 per cent in 1QFY26 from a peak of 137 per cent in December 2018. Management expects a CD ratio of ~90 per cent by year-end and late 80s in the coming years, a key milestone for sustainable growth. This shift has been achieved through strong mobilisation of retail deposits and repayment of legacy high-cost borrowings, with remaining maturities largely concluding in FY26.

Operating efficiency is a focus for management, who have targeted a cost-to-income (C/I) ratio closer to 65 per cent by 4QFY27, down from over 70 per cent in recent years. In 1QFY26, expenses grew by 11 per cent year-on-year, compared to business growth of 23 per cent, suggesting early operating leverage and profit improvement.

Fee income from credit cards—now at 3.8 million cards in force—and cash management is set to provide further uplift, while deposit repricing is expected to enhance profitability. The bank's digital-led deposit sourcing model and cross-selling capabilities should drive efficiency gains, with MOFSL projecting a 28 per cent CAGR in pre-provision operating profit (PPoP) for FY25–28 as the C/I ratio moderates towards 66 per cent/63 per cent in FY27/28.

From an asset quality perspective, performance remains resilient. Excluding the diminishing microfinance portfolio, retail, rural, and MSME gross NPA stood at 1.48 per cent in 1QFY26, while overall GNPA was 1.97 per cent, the latter affected primarily by microfinance stress and a one-off corporate account. Management reiterated that credit cost is expected to improve, with 2Q slippages likely to be sequentially lower, and the trend improving further in the coming quarters. Provision coverage ratio (PCR) remains healthy at 72 per cent, up 300 basis points year-on-year.

The bank forecasts normalised credit costs at approximately 1.8–1.9 per cent of advances for FY27–28, anticipating gradual improvement from the second half of FY26. The microfinance portfolio has already reduced to 3.3 per cent of total loans from 5.7 per cent a year ago, with improved SMA ratios and collection efficiency nearing 99 per cent.

MOFSL's view remains unchanged following the capital raise and outlined management strategies. The brokerage estimates loan and deposit CAGRs of about 20 per cent and 22 per cent for FY25–28, respectively, with the loan book forecast to surpass Rs3 lakh crore by FY27. The report notes: "With NIM guidance of ~5.8 per cent in 4QFY26, continued deposit momentum, and strong capital buffers (CRAR 15 per cent before capital raise; 17.6 per cent after the raise), the bank is positioned to deliver improved profitability metrics in the coming years, though elevated cost ratios and the provisioning drag from MFI remain near-term constraints on earnings."