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Higher contingent provisions dent earnings

IDFCB reported ~73% earnings miss with PAT at Rs2bn/0.6% RoA, primarily due to higher contingent provisioning for MFI (Rs3.5bn), one-off Maharashtra toll account (Rs2.5bn), and some provisioning increase due to shoring up of specific PCR to 75% from 69% in 1Q. Excluding the additional provisions, the APAT would be Rs6.3bn. Credit growth was healthy at 23% YoY/6% QoQ, but margins contracted a bit due to softer loan yields/rising CoF. Despite higher delinquencies from MFI portfolio, the bank’s GNPA ratio remained largely flat QoQ at 1.92% due to higher write-offs. MFI SMA pool has inched up QoQ to 2.5% of loans from 1.7% in 1Q, and could therefore keep NPAs elevated, but LLP should be contained due to consumption of contingent provisions. IDFCB completed its merger with IDFC Ltd in Oct-24, resulting in a capital accretion of Rs6.2bn. We cut our earnings estimates for FY25-27 by 10-34% factoring in higher LLP and so also RoA to remain range-bound at 0.9-1.1%. We retain ADD with a TP at Rs65 (1.1x Sep-26E ABV).

Healthy growth, but margins contract

IDFCB posted relatively better credit growth at 23% YoY/6% QoQ on the back of some pick-up seen in the SME (13% QoQ)/corporate (10% QoQ) segment. Within retail – VF, HL, and consumer loans further drive business growth. Deposit growth too was healthy at 31% YoY/6.7% QoQ on account of strong traction seen in CASA (up 12% QoQ), leading to a 228bps QoQ improvement in CASA ratio to 48.9%, which led to some moderation in CoDs by 9bps to 6.4%. However, NIMs slipped QoQ by 4bps to 4.2%, primarily due to softer loan yields which were led by slight change in portfolio mix, interest reversal, and higher CoF. However, the opex was relatively stable with C/I ratio at 69% in 2Q (vs 70% in Q1). Management expects C/I ratio to fall to ~65% by FY27E, while for high-cost credit card business, the C/I ratio is expected come down to 75% by FY27E (vs 99% currently).

Higher LLP due to contingent provisions on MFI, toll accounts

Despite higher stress in the MFI-JLG book, GNPA ratio was relatively flat at 1.9% of loans due to higher write-offs. However, the bank created prudent provisions of Rs5.7bn including Rs3.2bn in the MFI business (due to persistent stress in MFI industry) and Rs2.5bn in one Maharashtra-based toll account (due to recent waiver of toll fees at Mumbai entry points). Ex-provision in MFI portfolio and without additional provision buffer created on the legacy toll account, the quarterly annualized credit cost for the loan book for Q2FY25 stood at 1.8%. Credit cost for FY25 is expected to be 225bps out of which ~40-45bps is for the MFI book, ~10-11bps for the toll account, and 170bps is for other segments.

Retain ADD, but reduce TP to Rs65

Factoring in continued earning miss in 2Q and rising stress leading to higher LLP, we cut our earnings estimates for FY25-27 by 10-34% and expect RoA to remain contained around 0.9-1.1%. We retain ADD with reduced TP of Rs65 based on 1.1x Sep-26E ABV, from the earlier Rs85. Key risks: Macro slowdown further hurting growth/asset quality, delay in opex improvement, and KMP attrition.

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