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Retail slippage impacts PAT; maintains guidance…

About the stock: IDFC First Bank was formed by the merger of the erstwhile IDFC Bank and Capital First in 2018. Retailisation of its business has been key focus.

* Retail funded assets form 64% of gross funded assets

* Branch network is at 601 with 703 ATMs as on June 2021

Q1FY22 Results: Disappointing performance with elevated provisions.

* GNPA up 46 bps QoQ to 4.61% with restructured book at 2.1%

* Sharp rise in provisions (~3x QoQ to |1879 crore) led to loss of | 630 crore

* Steady operational show, NII up 25% YoY, NIMs up 42 bps QoQ to 5.51%

* Advances down 2.8% QoQ & up 9% YoY, deposit up 31% YoY, 3% QoQ.

What should investors do?

The IDFC First stock has given ~30% return in the past three years while the stock price has jumped ~2x in the past one year. Rise in stress remains a near term overhang but a gradual improvement in margin and operational performance is expected to aid return ratios.

* We retain our BUY rating on the stock

Target Price and Valuation: We value IDFC First Bank at ~1.6x FY23E ABV and arrive at a revised target price of | 60 per share (earlier | 65).

Key triggers for future price performance:

* On track for most parameters to achieve midterm guidance

* Granular liability base to help lower cost of funds thus aiding NIMs

* Elevated slippage to remain a near term overhang; expect faster recovery

* Investment in franchise undertaken; sweating of asset to improve efficiency.

Alternate Stock Idea: Apart from IDFC First, in our coverage we also like CSB Bank.

* CSB Bank has shown a meaningful transformation in its overall performance in the past few years and currently focuses on gold and SME loans

* BUY with a target price of | 380.

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