The IDFC First Bank share price jumped nearly 3% in trade today after Motilal Oswal upgraded the stock to Buy with a target of Rs 105 per share. This implies nearly 20% upside from the closing rate on September 23.
According to Motilal Oswal, IDFC First Bank has made significant progress in strengthening its deposit franchise while sustaining robust loan growth and steadily de-risking the balance sheet. They believe that the bank is well positioned for a sustainable recovery in profitability, supported by healthy business growth, improvement in operating leverage and controlled credit cost.
IDFC First Bank: Motilal Oswal expects NPAs to moderate
Motilal Oswal pointed out that the “bank has strengthened internal controls and governance processes and has lowered its credit cost guidance, underscoring strong asset quality trends.” They estimate that the net NPAs are likely to moderate to 0.4% by FY28.
IDFC First Bank: Earnings buoyancy likely to return
One of the key reasons Motilal Oswal upgraded IDFC First Bank is because they expect the earnings buoyancy to return. Though IDFC First Bank earnings have been constrained in the past two years “by the twin impact of the MFI stress cycle and the deposit fraud incident, masking the underlying improvement in the core franchise,” they believe most of the headwinds have been dealt with already.
Elevated MFI provisions pushed credit costs to 3% in FY25/FY26. But now the Micro Finance Book has been reduced to Rs 6,700 crore from Rs 13,340 crore in FY24. The fraud-related impact fully recognised, “the key earnings overhangs are steadily fading,” the brokerage added.
They pointed out that “going forward, stable NIMs, 21% loan growth, strong fee income traction and emerging operating leverage should drive a meaningful recovery in profitability. We believe IDFC First Bank is transitioning from a balance-sheet repair phase to a period of consistent earnings compounding.”
FCNR (B) mobilization: Motilal Oswal sees 4-7% boost for FY27 EPS
Another key factor that’s driving Motilal Oswal’s optimism is the possible impact of the FCNR (B) mobilisation and how it might impact EPS trajectory. According to them, the “73% leverage provided on the $3.57 bn FCNR (B) mobilisation (11% of deposits) could lower full-year NIMs by 7-12 bps, depending on the proportion of deployment and retirement of high-cost deposits.”
However, they pointed out that the “bank has recently shifted from a flat SA rate system to a progressive SA rate and reduced peak TD rates by 15bp, will help control funding costs.”
According to the brokerage house, “in the medium term, an improving asset mix toward higher-yielding, better-quality assets should support NIM stability. Overall, management expects NIM stabilisation to be driven increasingly by franchise-led initiatives rather than short-term cost measures.”
IDFC First Bank has raised its NIM guidance by 5 bp to 5.8% for FY27.
Motilal Oswal pointed out that “despite the near-term NIM drag, FCNR (B) mobilization could boost NII and EPS by 4- 7% for full year FY2E. The magnitude of the benefit depends on the deployment mix.”
“Full deployment of FCNR (B) deposits into higher-yielding assets offers the maximum upside of 4.4% to NII and 6.8% to EPS, while using a larger portion to retire higher-cost wholesale liabilities lowers the incremental earnings benefit,” they added.
Conversely, the brokerage house calculated that “full deployment leads to the maximum estimated NIM drag of 12bp as balance sheet swells, highlighting the trade-off between absolute earnings accretion and margin dilution.”
Conclusion
Motilal Oswal’s upgrade points to the fading earnings risk for IDFC First Bank. They believe the boost from the FCNR (B) mobilisation coupled with the tightening of the internal controls and governance processes will help the bank in improving the earnings trajectory. The Micro finance book being halved is also seen as a factor that will cut down stress on the books.
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