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Strong operating performance to be maintained

IDFC First Bank, founded by the merger of erstwhile IDFC Bank and erstwhile Capital First on December 18, 2018. At present, the bank’s total number of branches stands at 651, with a total funded assets of Rs.1,37,663cr.

• Net Interest Income (NII) reported a growth of 26% on a YoY basis with strong business growth while Net Interest Margin (NIM) stood at 5.89% in Q1FY23.

• Bank has been successful in shifting its advance mix with retail focus and has made a considerable reduction in its corporate/ infrastructure book.

• Asset quality improved with GNPA/NNPA at 3.36%/1.30% compared to 3.70%/1.53% during previous quarter. Provision Coverage Ratio (PCR) improved to 72.2%.

• Management has provided credit cost guidance of 1.5% for FY23. Collection efficiency has surpassed pre-covid levels.

• We value the bank at 1.4x Adj. BVPS of FY24E with a target price of Rs.51 and maintain our Buy rating.

Strong performance aided by business growth and lower provisioning

In Q1FY23, Net Interest Income (NII) reported growth of 26% on a YoY basis and 3% sequentially aided by business growth. Interest income grew by 20% YoY and 2.1% QoQ, while interest expense grew by 14% YoY/4% QoQ. Reported Net Interest Margin stood at 5.89% compared to 5.96% during the previous quarter. Cost of funds are expected to decline further in upcoming quarters as high cost legacy borrowings are being substituted with low cost deposits after its maturity. As on Q1FY23, the total high cost legacy borrowing stood at Rs.22,406cr compared to Rs.27,936cr in Q1FY22. Provision for the quarter stood at Rs.308.0cr compared to Rs.369.4cr, a sequential decline of 16.6%. Of the total advance book, only 37% is external benchmark linked, while 63% are fixed in nature. This will add pressure on NIM expansion. With reduced provisioning during the quarter, the bank reported PAT of Rs.474.3cr compared to Rs.342.7cr in Q4FY22 and net loss of Rs.630.0cr in Q1FY22. Management expects NIM to be maintained at 6%, while credit cost is expected to decline to 1.5% during FY23 compared to 2.5% in FY22 leading to lower provisioning.

Strong growth in key business figures

Gross Funded Asset of the bank grew by 21% YoY to Rs.1,37,663cr during the quarter with retail loan book growing at 40% YoY to Rs.90,630cr. However, the wholesale funded asset book declined by 9% YoY. Management is expecting the loan book to grow at more than 20% going forward. Deposit of the bank grew by 21% YoY to Rs.1,02,868cr with CASA book growing at 22%. CASA ratio of the bank stood at 50.0% compared to 48.44% in previous quarter and 50.86% a year ago. Capital Adequacy of the bank stands at 15.77%.

Improvement in asset quality

During this quarter, corporate segment witnessed elevated slippage as one large retail group slipped into NPA from restructured book, however, it is fully provisioned. GNPA/NNPA of the segment stands at 3.67%/0.20%. On the overall loan book, asset quality has shown significant improvement. GNPA of the bank improved 34bps on a sequential basis to 3.36%, while NNPA stood at 1.30% showing an improvement of 23bps. Overall Provision Coverage Ratio stands at 72.2% and collection efficiency at 99.4% as on June 2022.

Outlook & Valuation

Bank has shown improvement in key business figures including business growth, margins and lending mix which is positive for the long term. Declining impact of legacy borrowings will help in expanding the margins, however, higher mix of fixed loan book will slow down its pace. Management expects advances to grow at more than 20% with credit cost declining to 1.5%. With expected improvement in profitability, we value the stock at 1.4x FY24 Adj. BVPS to arrive at a target price of Rs.51 and maintain our Buy rating.

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