A lot has to fall in place for IDFC First Bank’s stock to rebound


Private-sector lender IDFC First Bank Ltd has put up a dismal show and seen its shares tank around 26% so far this calendar year. In contrast, the Nifty Bank index is up around 8%. 

The stock has been punished for a multitude of factors. Provisions have seen a linear increase from 528 crore in Q2FY24 to 1,732 crore in Q2FY25. An even more worrying aspect is that the jump in provisions was higher in absolute terms than the increase in net interest income (NII). The bank’s NII rose by 838 crore over this period to 4,788 crore in Q2FY25. 

The stock slid to a new 52-week low of 59.30 in October and has since recovered marginally to 64, but remains well below its 52-week high of 92.45 in December 2023.

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The bank’s strategy of building up retail liabilities has helped in terms of stable low-cost deposits and growth in fee income. But it has come at a high price as the cost to income ratio of retail liabilities stands at 184% as of H1FY25. 

As a result, operating costs remain high for the bank, which has a cost-to-income ratio of 69.9%. This could fall further as income grows. IDFC First has said it aims to reduce the ratio to 65% by FY27, but this would still be much higher than that of most other large private banks (around 50%).

The other sore spot is credit cost. Though net non-performing assets were curtailed to 0.5% at the end of Q2FY25, this was achieved after providing for a high credit cost, which has been rising steadily from 1.3% in Q2FY24 to 3.5% in Q2FY25. The good news is that, adjusted for the prudential provisioning on microfinance loans and a legacy toll road project in Mumbai, the credit cost would have been 1.8%. This means credit cost peaked at 2.2% in Q1FY25.

Silver linings

On the bright side, 21% loan growth and 31% deposit growth year-on-year in Q2FY25 were impressive. The bank’s net interest margin of over 6% for more than four quarters in row is certainly one of the highest in industry. It can be explained by the high yield on advances at 14%, with an increasing share of average current account savings accounts (CASA) or low-cost deposits, which stood at 46% of total deposits at the end of Q2FY25. 

The bank derived more than 90% of its other income from core fees and had almost no reliance on volatile trading gains in Q2FY25. Moreover, the fee income is highly sustainable because it largely comes from retail.

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However, some potential downside risks could delay the stock’s turnaround. Exposure to rural and small and medium enterprises (SME) finance, which accounts for 40% of the loan book, could be a concern. Though the book delivers a higher yield than corporate lending, it comes with higher risks as well, as these loans are more vulnerable to any slowdown in the economy. 

Going by the estimates of Motilal Oswal Financial Services, IDFC First’s return on assets and return on equity for FY26 are likely to be 1% and 11%, respectively. In light of this, the stock’s current valuation of 1.2 times book value based on FY26 estimates leaves little room for meaningful near-term upside.

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