Add IDFC First Bank Ltd For Target Rs. 59 - Centrum Broking Ltd
IDFC First Bank has yet again delivered a strong performance in terms of advances and deposits, successfully attracting and retaining low-cost deposits better than its peers. However, the key challenges for the bank have been higher operating expenses or elevated credit cost, which we expect to improve only by FY27 and beyond. However, the bank’s ambitious RoE target continues to remain elusive, with Q4FY25 marking another setback. After peaking at over RoE of 13% in Q4FY23, quarterly RoE (calc.) print stood at 3.1% in Q4FY25, implying that FY25 RoE has fallen short of an already subdued FY24 number. As a result, we have marginally pruned our estimates for FY26, with the bank now expected to achieve RoE above the cost of equity only beyond FY27. In light of the weaker macroeconomic outlook and delays in meeting return targets, we maintain our REDUCE rating. We have revised our target price to Rs59 (previously Rs61), applying a 1x multiple to FY27E ABV.
Higher operating expenses impact profitability
IDFC First Bank reported NII of Rs47bn (~10% YoY, +0.1% QoQ), below our expectation of Rs52bn. Operating expenses came in higher at Rs50bn (+12% YoY, +1.8% QoQ), marginally below our estimate of Rs51bn, leading to CTI print of 73.6% (vs. 73.7% in Q3FY25 and our expectation of 72.7%). Non-interest income outperformed at Rs19.9bn (+15% YoY, +6.5% QoQ), PPoP inched up marginally at Rs17.9bn (+2% QoQ). Credit cost was higher at Rs14.5bn while PAT stood at Rs2.9bn (-59% YoY, -13% QoQ), below our estimate of Rs4.5bn.
Strong growth in net advances and deposits even in a tough macro environment
IDFC First Bank reported robust growth in its loan and deposit portfolios. Net advances expanded by 20% YoY, driven by a 21.3% YoY increase in Retail, Rural and MSME loans. On the deposit front, customer deposits grew by ~25% YoY, with retail deposits contributing 79%, ensuring a stable funding base. CASA deposits saw an impressive 24.8% YoY growth, maintaining a strong CASA ratio at 46.9%.
Asset quality continues to drag return profile
IDFC First Bank's annualized credit cost for Q4FY25 stood at 2.5% of AUM, driven by elevated MFI provisions while ex-MFI credit cost remained stable at 1.73%. The bank has not utlised MFI provision buffers of Rs315cr its carries during the quarter. Gross NPA increased marginally by 8bps QoQ to 1.87%, and net NPA rose by 7bps QoQ to 0.52%, with ex-MFI GNPA and NNPA remaining stable at 1.40% (improved by 6bps QoQ) and 0.56%, respectively. PCR declined to 72.36%, down 130bps QoQ. Total slippages reached Rs21.75bn (3.8%), with Rs4.37bn attributed to the MFI segment. Slippages fell by Rs0.17bn vs Q3FY25. The gross slippage for MFI increased to Rs572cr in Q4FY25 from Rs437cr in Q3FY25.
Desired return profile gets delayed to beyond FY27
IDFC First Bank has demonstrated a strong performance in growing advances and deposits, particularly excelling in attracting low-cost deposits and outpacing its peers. However, the bank continues to face challenges in managing high operating expenses and elevated credit cost, particularly in MFI. These factors are likely to delay the achievement of desired return profile until FY27 or later. Given this outlook, we maintain our conservative stance on the bank's valuation. We maintain our target multiple at 1.0x FY27 ABV. We have revised our target price to Rs59 (Rs61 previously). We believe that despite the positive momentum in deposits and advances, the delay in attaining sustainable returns justifies maintaining the REDUCE rating.
Valuations
In light of the weaker macroeconomic outlook and delays in meeting return targets, we maintain our REDUCE rating. We have revised our target price to Rs59 (previously Rs61), applying a 1x multiple to FY27E ABV
For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/
SEBI Registration No.:- INZ000205331
