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Asset quality continues to improve

* IDFC First Bank (IDFCFB) reported a PAT of INR8b (25% beat, +134% YoY) in 4QFY23, boosted by trading gains of INR2.2b. NII grew by 35% YoY, with margins expanding 5bp QoQ to 6.41%.

* Business growth remained strong as the loan book was driven by healthy growth in Commercial Finance retail loans. The wholesale book declined 6% YoY. Deposits grew at a healthy 37% YoY, with CASA deposits up 8% QoQ. Thus, the CASA ratio stood strong at ~50%.

* IDFCFB is entering a phase of strong loan growth as the drag from the wholesale book continues to moderate. This will be aided by a strong pickup in profitability due to the replacement of high-cost borrowings, better cost trends and controlled credit costs. We thus estimate a 31% earnings CAGR over FY23-25 and RoA/RoE of 1.3%/13.5% in FY25. Maintain BUY.

Margin expands 5bp QoQ to 6.41%

* IDFCFB reported a PAT of INR8.0b (+134% YoY; 25% beat) in 4QFY23, boosted by treasury gains of INR2.2b and healthy NII and fee income. For FY23, PAT grew sharply to INR24.4b v/s INR1.5b in FY22.

* NII grew 35% YoY to INR36b (3% beat), driven by strong loan growth (+29% YoY) and 5bp QoQ expansion in margin to 6.41%. The bank expects margin to remain stable as it seeks to utilize the benefits of lower CoF by running down the legacy high-cost borrowings.

* Other income grew 68% YoY, with strong growth in core fee income (+40% YoY) and strong treasury income. Opex grew 29% YoY, with the C/I ratio moderating to 68.8%. The bank expects operating leverage to play out over the medium term. PPoP rose 89% YoY to INR15.6b. Core PPoP was at INR13b.4 in 4QFY23 (2.36% of average assets).

* On the business front, funded assets grew 24% YoY/6% QoQ, led by 34%/57% YoY growth in Retail/Commercial finance. The wholesale book declined by 6% YoY. Within retail, growth was led by housing (39% YoY), vehicle finance (53% YoY) and cards (74% YoY, low base). The share of retail and commercial finance increased to 79%.

* Deposits grew 37% YoY (+9% QoQ), with CASA deposits up 8% QoQ. The bank reported an average CASA ratio of 47.7% for 4QFY23, while the period-end CASA ratio stood at 49.8% (this was aided by CA deposits of INR21.3b received from large Government Banking client during the closing days of 4QFY23).

* Asset quality continues to improve, with GNPA/NNPA ratios declining by 45bp/17bp QoQ to 2.51%/0.86%. The PCR ratio was stable at ~66%. Further, the SMA book in retail/corporate stands controlled at 1.0% / 0.2% in 4QFY23. The restructuring book too declined to 0.6% of funded assets v/s 0.9% in 3QFY23.

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