IDFC First Bank shares: UBS downgrades stock, cites three key factors

Global brokerage UBS has downgraded its rating on IDFC First Bank to "sell" from "neutral" and reduced its target price to Rs 75 from Rs 80, implying a downside of 6.2% from its previous closing price of Rs 80.11 per share. The downgrade reflects concerns over expensive valuations and only modest prospects for improved Return on Assets (RoA) and improvement in its credit costs,

At 1:29 pm, IDFC First Bank shares traded 0.5% lower at Rs 79.1 compared to the previous close of Rs 980.11. Despite this, the stock has gained 24.2% so far this year.

UBS estimates a cost-to-income ratio of around 67% for FY27 and 64% for FY28, forecasting roughly 1% RoA and 9% RoE by FY27, versus 1.1% in FY22-24.

As a result, the brokerage has trimmed earnings per share estimates to 8% and 5% for FY26 and FY27. Operating expenses and credit costs remain key risks. Since the September quarter, shares have gained 13% on improved asset quality prospects, but UBS expects unsecured loan asset quality to stabilise while non-MFI asset quality may remain sticky.

The analyst notes increased risk from business/SME loans for mid-size banks and has raised credit cost forecasts by 5 basis points, limiting significant improvement in credit cost.

UBS has factored in a 25 basis points repo rate cut and slower unsecured loan growth, likely keeping net interest margin (NIM) stable around 5.8% over FY26-28. The cost-to-income ratio is expected to stay elevated, keeping RoA between 0.9% and 1% by FY27. IDFC First Bank trades at 1.4 times its estimated price-to-book ratio for FY27, a 7% discount to Axis Bank, which UBS still considers expensive compared to peers with better RoE profiles.

UBS anticipates a gradual pick-up in unsecured loans, but below the 20% CAGR for FY26-28. Margins are expected to remain steady, with yield pressure offset by lower funding costs and a higher CASA ratio.

UBS's study indicates rising risk of business/SME loan delinquencies among mid-size banks, posing a downside risk as these loans comprise about 13% of IDFC First Bank's total. Credit costs may stay at 1.9% to 2% over FY27-28, with lower fee income and adjusted margin and opex assumptions.