Amidst all the hullabaloo in the banking and insurance sector due to IRDAI’s proposed commission limits and FCNR (B) deposits, Nuvama Institutional Equities remains positive on IDFC First Bank.
The brokerage has a ‘Buy’ rating on the stock with a target price of Rs 95 a piece, implying an upside of nearly 20% from the stock’s closing price on Tuesday. Nuvama said the bank’s 20% growth target remains achievable. IDFC First’s insurance impact remains manageable from an RoA standpoint, with the income drag to be largely offset by low-cost FCNR (B) funding and operating leverage.
Nuvama on IDFC First Bank: Credit card biz seen profitable
The lender’s management remains confident of sustaining more than 20% balance sheet growth over the next three years, supported by existing product franchises. Its FY27 net profit is expected at Rs 4,000 crores, Nuvama said. The bank expects incremental profitability to improve as front-loaded costs normalise, with the credit card business expected to turn profitable at the product level by next year.
“FCNR(B) funding has been raised at a blended cost of close to 6.9% versus 7.2–7.3% estimated domestic funding cost, resulting in Rs 200 crores annual interest cost savings over the next four years. Management expects the FCNR (B) funds to be fully deployed by Q4FY27, providing additional support to loan growth ,” Nuvama said.
Nuvama on IDFC First Bank: Insurance policy changes
The bank’s management expects the proposed changes by IRDAI to impact around 65% of its existing insurance income. However, this will be partly offset by higher interest income, low cost FCNR (B) funding and a shift towards more customer-friendly insurance products.
“The impact is therefore expected to be immaterial from a RoA standpoint,” Nuvama said.
Nuvama on IDFC First Bank : Asset quality
IDFC FIRST’s management is comfortable with asset quality despite potential macro risks from high oil prices, geopolitics, and El Nino. “ECL’s annualised net impact on RoA is expected at only ~5bp. MFI exposure has moderated to 2.3% of loans and is currently performing well. Credit card profitability is also expected to improve as the bank has already front-loaded associated costs,” the brokerage said.
The bank’s incremental RoA is expected to be marginally higher than the 0.92% reported, with the incremental cost to income at 56% compared to 71% at the stock level. “Management believes incremental C/I could improve further as income growth remains at least 500 bps ahead of opex growth, supporting RoA expansion to ~1.75%,” it said.
“Loan yields (calculated) to remain broadly stable at 14%, hence cost efficiency remains the key lever for incremental RoA improvement. The floating rate book should also benefit from repricing if rates move higher, providing some upside to margins,” the brokerage added.
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