IDFC First Bank shares rise 5% as MOFSL upgrades rating; check target price

IDFC First Bank Ltd shares rose 5% on Wednesday after Motilal Oswal Financial Services (MOFSL) upgraded the stock's rating to 'Buy' from 'Neutral', citing improving profitability, strong balance-sheet growth and a strengthening deposit franchise.

The brokerage said IDFC First Bank has made significant progress in strengthening its deposit franchise while sustaining robust loan growth and steadily de-risking its balance sheet. MOFSL expects a sustainable recovery in profitability, supported by healthy business growth, improving operating leverage and controlled credit costs.

IDFC First Bank shares rose 5.15% on Wednesday, hitting a high of Rs 89.58, compared with the previous close of Rs 85.19. The stock opened at Rs 85.61 and touched a low of Rs 85.37.

MOFSL has set a target price of Rs 105 for IDFC First Bank, based on 1.6 times its estimated FY28 adjusted book value (ABV). The target implies an upside of around 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 said. The brokerage estimates gross non-performing assets (GNPA) and net non-performing assets (NNPA) to moderate to 1.4% and 0.4%, respectively, by FY28E.

MOFSL estimates IDFC First Bank to deliver a 42% PPoP CAGR over FY26-28E, while its cost-to-income ratio is expected to improve to around 69% and 65% in FY27E and FY28E, respectively. This is expected to translate into a return on assets (RoA) of 1.2% and return on equity (RoE) of 11.9% by FY28E.

The bank's advances and deposits have registered CAGRs of 21% and 26%, respectively, over the past three years. Deposit growth has outpaced loan growth, with the credit-deposit ratio declining to 94% from 108% in FY23, according to MOFSL.

On the loan side, MOFSL expects IDFC First Bank's loan book to clock around 21% CAGR over FY26-28E, taking it beyond Rs 3.4 lakh crore by FY27E. In the first quarter of FY27, net advances grew 20.8% year-on-year, with wholesale loans rising 30% and retail loans increasing 21.5%. Vehicle finance and consumer loans grew around 26% each, while gold loans surged 103%.

The bank's retail deposits now account for 80% of customer deposits, compared with 27% at the time of the merger, while its CASA ratio stands at 51%. MOFSL estimates deposits to grow at a 25% CAGR over FY26-28E, supported by retail deposits and the mobilisation of $3.57 billion in FCNR(B) deposits, equivalent to around 11% of total deposits.

The brokerage expects the FCNR(B) mobilisation to provide a near-term boost to earnings despite some pressure on net interest margins (NIMs). It estimates that the deposits could add 1.5%-4.4% to incremental NII and potentially boost FY27E earnings by 4.1%-6.8%, depending on deployment.

MOFSL noted that the FCNR(B) mobilisation could lower full-year NIMs by around 7-12 basis points, although progressive savings-account pricing and lower term-deposit rates should help offset the impact. The bank has also raised its FY27 NIM guidance by 5 basis points to 5.8%.

Operating leverage is another key factor in the brokerage's outlook. Management is targeting an annual improvement of around 350 basis points in the cost-to-income ratio, with an ambition to bring it down to 60% over the next few years from around 71% currently. MOFSL expects the ratio to moderate to 69%/65% in FY27E/FY28E.