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Rising execution leading to more consistent delivery; We see amongst highest loan and PAT growth for FY23-25E

IDFC First Bank (IDFCFB) has once again reported strong quarterly earnings in Q1FY24 with PAT at INR 7.65bn, (up 61% YoY; in line with our estimates) driven by strong loan growth and moderating cost-income leading to rising core RoA, while net NPAs are down QoQ for the 8th consecutive quarter. The bank has delivered over 1% RoA and >24% YoY loan growth for the 4th consecutive quarter, suggesting strong execution. Within our coverage universe, it is likely to have one of the highest loan and PAT growth for FY23-25E. The bank also has strong liability franchise, strong incremental unit economics and MD & CEO longevity – which gives strong option value, in our view, in the medium term. We see RoA rising to 1.2/1.3% for FY24E/25E vs 1.1% in FY23. We raise our target price to INR 95 (vs INR 80 earlier), valuing the stock at ~2.0x FY25 ABV (earlier: 1.8x) and upgrade the stock to ADD from Hold. Despite relatively lower RoA vs peer banks, our target multiple is comparable as we highlight that IDFCFB has one of the highest loan and PAT growth along with MD & CEO longevity.

Gross loan strong at 7% QoQ and 25% YoY, amongst highest vs peers

IDFCFB reported yet another strong quarter with 7% QoQ and 25% YoY growth in AUM. This is the 6 th consecutive quarter of ~5% QoQ AUM growth. Loan growth was broad-based with consumer finance, rural, SME, retail, book growing in 7-9% QoQ range while infrastructure book continues to run-down (down 19% QoQ; now reduced to 2.2% of overall). The bank has diversified its loan book across more than 20 business lines. Around 28% of funded assets are backed by mortgage, where the bank sees immense opportunity for organised lenders. It has issued 1.7mn+ credit cards since launch in January 2021 and has an o/s loan book of INR 38.9bn (up 68% YoY and 11% QoQ). We have revised our growth estimates slightly and now expect loan growth at ~25% CAGR for FY24-25E. We see IDFCFB as one of the fastest growing banks in our coverage universe.

Deposits growth is even stronger; CASA down but strong at >45%

Customer deposits increased strongly at 44% YoY to INR 1.48trn. However, there is 43% YoY decline in certificate of deposits and thus overall deposits rise was contained at 36% YoY and 7% QoQ. CASA ratio was moderate at 46.5% vs 49.8% QoQ, as incrementally the bank raised more TD than CASA deposits. However, average daily CASA balance for IDFCFB grew 30% YoY. Around 77% of customer deposits is retail in nature suggesting granularity and sustainability of deposit base. While the cost of SA for IDFCFB at 5.6% is relatively higher, it is still much lower than legacy long-term borrowings (at 8- 9%).

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