Investors have been increasingly looking for options beyond the well-known private sector banks like HDFC Bank, Axis Bank and Kotak Mahindra Bank, given the high valuations they trade at. And mid-cap banks like Federal Bank and IDFC First Bank are increasingly on the radar given the growth prospects and reasonable valuations.
IDFC First Bank at Rs 69 on Monday has gained nearly 19.5 % over the 6 months compared to a 10 % rise in the Sensex during this time period. Federal Bank, at Rs 191.7 on Monday has gained nearly 7.6 % over the past 6 months.
Rekha Jhunjhunwala, widow of the legendary investor, Rakesh Jhunjhunwala, held a 1.48 % stake in Federal Bank at the end of the June 2025 quarter.
Federal Bank trades at a P/E of nearly 12 times estimated standalone FY 26 earnings while IDFC First Bank trades at 22 times estimated standalone FY 26 earnings.
In contrast, IndusInd Bank trades at about 27 times estimated consolidated FY 26 earnings, and Kotak Mahindra trades at more than 30 times estimated standalone FY 26 earnings.
Performance in the June 2025 quarter
For a key operational parameter, Net Interest Margin (NIM), for Federal Bank it was 2.94% in the June 2025 quarter vis-a-vis 3.16 % a year earlier. And for IDFC First Bank, its NIM was 5.7% in the June 2025 quarter vis-a-vis 6.22 % a year earlier.
Larger rival, Kotak Mahindra Bank’s NIM was 4.65 % in the June 2025 quarter vis-à-vis 5% a year earlier.
The central bank had cut repo rates in its meeting in early June 2025, and while interest rates on bank loans / credit facilities have come down, interest rates on deposits with the bank come down with a lag.
Meanwhile, Federal Bank grew its loan portfolio by 9% y-o-y to Rs 2.45 lakh crore in the June 2025 quarter. And IDFC First Bank’s loan portfolio grew by 20.3% y-o-y to Rs 2.43 lakh crore in the June 2025 quarter led by strong growth in vehicle loans and consumer loans.
Kotak Mahindra Banks advances grew 14 % y-o-y to Rs 4.4 lakh crore in the June 2025 quarter
However, Federal Bank has made a provision of Rs 400 crore in the June 2025 quarter, a rise of 177 % on a y-o-y basis. The above rise in provisions is understood to be largely related to Federal Bank’s micro-finance credit.
And Federal Bank’s % of net NPAs was 0.48 % in the June 2025 quarter vis-a-vis 0.6% a year earlier. Nevertheless, higher provisioning resulted in Federal Bank’s net profit declining nearly 14.5 % y-o-y to Rs 861.75 crore in the June 2025 quarter.
Similarly, IDFC First Bank’s provisioning at Rs 1,659.1 crore in the June 2025 quarter rose nearly 66.9% y-o-y. The rise in provisioning for IDFC First Bank is understood to be related to its micro financing loan book.
And for IDFC First Bank, its % of net NPAs to net advances was 0.55 % in the June 2025 quarter vis-à-vis 0.59% a year earlier. However, high provisioning led to IDFC First Bank’s standalone net profit declining nearly 32 % y-o-y to Rs 462.6 crore in the June 2025 quarter.
In the case of another key operational parameters, return on assets, for Federal Bank it was 0.25 % in the June 2025 quarter and on annualising this ratio it would be an estimated 1% for FY26. And for IDFC First Bank, its return on assets (annualised) was 0.53 % in the June 2025 quarter.
Kotak Mahindra Bank’s return on assets (average) not annualized was 0.48 % in the June 2025 quarter. On an annualized basis, it would be nearly 1.92 % for the full financial year
However, IDFC First Bank is a comparatively new bank, barely seven years old, and its cost-to-income ratio was 68.7% in the June 2025 quarter vis-a-vis 70.5% a year earlier. Over the next few years the cost-to-income ratio for IDFC Bank is expected to come down quite a bit and this would help to improve its return on assets.
And Federal Bank, which has been in operation for more than nine decades, has a cost-to- income ratio of 54.9% in the June 2025 quarter vis-a-vis 53.2% a year earlier.
Growth outlook and valuations
IDFC First Bank in August 2025 has raised Rs 2,623 crore from Platinum Invictus B 2025 RSC, an affiliate company of Warburg Pincus LLC.
The RBI has taken several steps to boost lending in the broader banking system.
Investors will be closely monitoring Federal Bank, IDFC First Bank and other leading banks for their ability to protect their NIMs as well as other operational parameters at a time when there is enhanced global trade tensions and geopolitical risks.
Disclaimer
Amriteshwar Mathur is a financial journalist with over 20 years of experience.
Disclosure: The writer and his family have no shareholding in any of the stocks mentioned in the article.
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