Two mid-sized private banks are trying to move past very different challenges. IDFC First Bank is coming out of a period of microfinance stress and heavy investment in its retail franchise. Yes Bank, meanwhile, is rebuilding profitability after years of balance-sheet clean-up.
Which bank offers the better risk-reward?
Goldman Sachs has initiated coverage on both stocks. The brokerage house has a ‘Neutral’ rating on IDFC First Bank with a 12-month target price of Rs 92, while Yes Bank has been assigned a ‘Sell’ rating with a target of Rs 22.
Let’s take a look at how quickly each bank can improve profitability and what could hold that recovery back.
IDFC First Bank: Can retail banking finally deliver?
IDFC First Bank has spent the past few years changing the structure of its business.
The bank has moved away from its earlier infrastructure-heavy loan book towards retail banking. Retail loans now account for more than 80% of its balance sheet. Retail deposits also make up around 80% of total customer deposits.
Its current account savings account (CASA) ratio remains close to 50%.
Goldman Sachs believes the biggest debate around the stock is its cost-to-income ratio. The ratio stood at 76% in FY26.
The brokerage house expects this ratio to improve to around 65% by FY29. But it believes further improvement could take time because of high sourcing costs and the long period required for retail liabilities to become profitable.
IDFC First Bank: Factors that could support profitability
IDFC First Bank’s return on assets (RoA) fell to around 0.4% in FY26 after stress in the microfinance institution (MFI) portfolio and a one-time fraud incident.
Goldman Sachs expects credit costs to moderate from 2.2% in FY26 to 1.6% in FY27. It expects RoA to rise to 1% in FY27 and 1.1% by FY29.
The bank could also benefit from recoveries. It received a Rs 5.2 billion claim from the Credit Guarantee Fund for Micro Units (CGFMU) in the June 2026 quarter.
Goldman Sachs expects loan growth of around 20% year-on-year and core pre-provision operating profit (PPoP) to grow at a 35% compound annual growth rate.
Yes Bank: Turnaround, but how much further?
Yes Bank’s recovery path is different. The lender has made progress in rebuilding deposits and shifting towards retail and small and medium enterprise (SME) lending. But Goldman Sachs sees a tougher road ahead for profitability.
Large private banks and state-owned banks have become more aggressive on deposits as the asset-quality cycle has improved. That could make it harder for Yes Bank to expand margins.
The bank’s CASA ratio is also facing pressure. Goldman expects Yes Bank’s RoA to remain around 1%-1.1% through FY29 once the benefit from legacy loan recoveries fades.
Can Yes Bank sustain its recovery?
Yes Bank has benefited from recoveries from older non-performing loans. These contributed around 30-40 basis points to assets on a pre-tax basis over the past three years.
But that tailwind is expected to weaken after FY27.
So, can Yes Bank generate stronger profits without relying on these recoveries? Goldman Sachs points to Yes Bank’s Common Equity Tier 1 (CET1) ratio of around 14%, below the levels maintained by several leading private banks.
There is another concern still on the table. Litigation over the write-off of Rs 84 billion of Additional Tier 1 (AT1) bonds in the 2020 restructuring remains pending before the Supreme Court of India.
IDFC First Bank vs Yes Bank: The margin profile
As per the latest quarterly earnings, Yes Bank delivered NIM at 2.7% Vs 2.5% in Q1FY26. Sequentially too the margins have demonstrated significant stability. In Q4FY26, the bank had delivered similar margins at 2.7% in Q4FY26.
Speaking after the Q1 earnings, Vinay M. Tonse, Managing Director & CEO, Yes Bank highlighted that “We delivered higher core earnings even as gains from Security Receipts and treasury fell sharply – clear evidence that the underlying franchise is strengthening. Margins held steady at 2.7%, cost-to-income improved further, and asset quality strengthened as slippage eased.”
The margin picture for IDFC First Bank meanwhile saw significant improvement. Its Net Interest Margin (NIM) came in at 5.96% in Q1 FY27 from 5.71% in Q1 FY26, up 25 bps. On QOQ, basis it was up by 3 bps.
Commenting on the margin improvement after the Q1 results, V Vaidyanathan, MD and CEO stated that “We are happy to share that our asset quality continues to improve with Gross NPA of 1.51% and net NPA of 0.44%. We created a provision of Rs. 515 crore on a prudent basis towards any possible impact of monsoon or fuel prices volatility in the rest of the year. Finally, we believe the benefits of investments we have been making in building the bank have started playing out in operating leverage improving our PAT to Rs. 1,075 crore in Q1FY27. ROA crossed 1%.”
IDFC First Bank vs Yes Bank: What analysts prefer
Antu Eapen Thomas, Senior Research Analyst, Geojit Investments, said, “IDFC First Bank remains our preferred pick, given its structurally stronger margin profile, granular retail franchise, and more sustainable profitability outlook.”
He added, “While Yes Bank is currently undergoing a turnaround, the improvement is partly driven by recovery from a low base and ongoing balance-sheet normalization.”
According to Thomas, Yes Bank needs sustained margin expansion and better return ratios before investors can expect a meaningful re-rating.
He said, “We believe any meaningful re-rating for Yes Bank would require sustained margin expansion through resolution of the PSL shortfall and associated RIDF drag, alongside continued improvement in return ratios.”
According to Goldman Sachs, IDFC First Bank’s target price of Rs 92 implies around 8.5% upside from the current market price, while Yes Bank’s target price of Rs 22 indicates around 2.1% downside from its current price of Rs 22.48.
IDFC First Bank vs Yes Bank: What’s next for investors
Overall, a detailed analysis highlights two distinctly different growth charts for Yes Bank and IDFC First Bank. Analysts believe that any meaningful re-rating for Yes Bank would need sustained margin expansion. On the other hand for IDFC First Bank, they see the bank’s margin profile to be structurally stronger and the outlook stronger.
Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.