“IDFC First Bank has built a well-rounded platform, arguably among the most improved deposit franchises. Operational efficiencies will take place from H2FY25, and over FY24-27 strong deposit growth will help loan growth, which should help 28 percent EPS CAGR even as credit. costs rise. Improve ROA (up to 1.5 percent) and ROE (up to 14 percent) will help revaluation. Fall in rates should help it more than peers. The ability to raise capital will be key. We initiate coverage with a Buy rating and PT. of ₹100,” the brokerage said.
It also noted that the lender’s strong earnings growth and improvement in profitability should prompt a re-rating as valuations are reasonable at 1.5x FY25 adj PB. In addition, IDFC First Bank’s ability to raise capital will be a key enabler as CET1 CAR is relatively lower at 14 percent, ROE is lower and loan growth is higher. Jefferies also anticipates two capital increases in FY25 and FY27.
Stock Price Trend
IDFC First Bank shares have jumped more than 52 percent in the last year, but have lost 5 percent in 2024 YTD, giving negative returns in 3 of the 4 months so far this year.
It has gained 12 percent in April so far after a 7 percent drop in March, 4 percent in February and 5 percent in January 2024.
Currently, the supply is more than 16 percent away from its record high ₹100.74, hit on September 5, 2023. Meanwhile, it advanced 58 percent from its 52-week low of ₹53.35, hit April 12, 2023.
Investment Rationale
Full suite banking and most enhanced deposit franchise: The brokerage pointed out that IDFC First Bank has built an end-to-end banking platform that straddles a wide range of customers and products along with robust technology platforms and competitive rates. It has a strong recognition among urban customers, which helped it mobilize ₹50,000 crore in retail deposits between March 2021 and December 2023 (30 percent CAGR), and is among the fastest growing banks in the sector, Jefferies further said. On lending, IDFC First has expanded its presence in retail, rural and SME segments, while diversifying corporate books outside of infrastructure loans.
Expected 28 percent CAGR in deposits supporting 22 percent in loans: Jefferies projects that IDFCFB’s deposit mobilization will remain robust, with a 28 percent CAGR in deposits expected over FY24-27, helping growth and facilitating the repayment of bonds of the former IDFC Limited. The brokerage anticipates a reduction in cost pressures as high-cost bonds decline from ₹13,600 crore currently to only ₹300 crore by March 2026. The offloading of these bonds should enable the bank to lower deposit rates from FY27 onwards. Although credit growth is expected to moderate from the current 25 per cent (as of Q3FY24), it is still expected to maintain a healthy 22 per cent CAGR over FY24-27, driven by retail, rural and SME loans. Jefferies also forecasts the Loan to Deposit (LDR) ratio to decline from 102 percent to 90 percent by FY25 and further to 84 percent by FY27.
Levers to earn growth and profitability from 2HFY25: The brokerage anticipates an improvement in earnings trajectory from the second half of FY25 due to operational efficiencies, absorption of FLDG costs, repayment of high-cost liabilities and the flattening of the credit card platform. During FY24-27, it identifies multiple drivers for earnings growth, including asset growth, potential margin expansion of more than 20 basis points, a 10 basis point increase in the fee-to-value ratio, and a significant decrease in the cost-income ratio. by 700 basis points to 66 percent. Additionally, the brokerage accounts for an increase in credit costs from 1.3 percent in FY24 to 1.8 percent in FY27, reflecting the higher share of retail loans and normalization of the credit cycle. These factors could facilitate a 28 percent EPS CAGR, a 30 basis point expansion in ROA to 1.5 percent, and a 300 basis point increase in ROE to 14 percent.
Upside and Downside Scenarios
Above: In this scenario, the brokerage has a target price of ₹109, which implies a 29 percent increase. It assumes: loan CAGR of 24 percent (over FY24E-27E); NIMs around 6.6 percent (average FY24E-27E); and GNPA at 1.8 percent and NNPA at 0.5 percent in FY25E.
Disadvantage: In this scenario, Jefferies has a target price of ₹71, indicating a 16 percent disadvantage. It assumes: Loan CAGR of 20 percent (over FY24E-27E); NIMs of around 6.2 percent (on average FY24E-27E); and GNPA of 2.2 percent and NNPA at 0.9 percent in FY25E.
View
Jefferies has a positive view on IDFC First Bank, citing several factors supporting its outlook. The bank is expected to continue robust deposit growth, leading to a higher share of lower cost deposits in its overall financial structure. Additionally, the stronger growth anticipated in rural, retail and SME segments is expected to strengthen returns and drive margin expansion. Economies of scale are expected to materialize over the next few years, contributing to a lower cost-to-income ratio as past investments, particularly in areas such as credit cards, begin to yield results. Additionally, the bank’s successful track record of managing retail asset quality across economic cycles is highlighted as a key strength that is expected to help control credit costs effectively.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 10 Apr 2024, 18:31 IST