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Initiated with cautionary report in March 2023, IDFCB almost at report’s price target

Our view – Bank has not utilised banking licence to evolve adequately

Asset Quality – Slippages rose materially on sequential basis from already elevated levels, with microfinance being the key culprit: Gross NPA additions amounted to Rs 20.3bn for 2QFY25, translating to an annualized slippage ratio of 3.83% for the quarter, up by 60bps QoQ. Gross NPA additions had amounted to Rs 16.57bn during 1QFY25. The net slippages increased by Rs 2.1bn QOQ, of which 40% was contributed by microfinance. Provisions were Rs 17.3bn, up by 74% QoQ and 228% YoY, translating to calculated annualised credit cost of 326bps. The excess provision made during the quarter was Rs 5.68bn. For the full year, including excess provision, the total credit cost is guided to be 225 bps.

Net Interest Margin – NIM declined marginally on sequential basis as bank focused on a lower incremental CD ratio: NIM at 6.18% was down -4bps/-14bps QoQ/YoY. Cost of funds was at 6.46% for 2QFY25, down by -1bp QoQ. Cost of funds has been stable and management expects it to come down in FY26. The loan to deposit ratio was around 97.7% as of September 2024. The incremental loan to deposit ratio was around 78% for 2QFY25.

Balance sheet growth – High balance sheet growth outcomes continued like they have since long: Advances grew 6.2%/22.9% QoQ/YoY while management stated that there is no reason why the bank will not grow 20% next year also. Total customer deposits are up 32.4% YoY to Rs 2,180 bn as the bank, in a sense, is forced to moderate its suboptimally elevated LDR.

We maintain a less-than-bullish ‘ADD’ rating on IDFCB with a revised price target of Rs 74: We value the bank at 1.4x FY26 P/BV for an FY25/26/27E RoE profile of 6.9%/13.8/15.7%. We had initiated IDFCB with a cautionary report dated March 2023 and reiterated our cautious stance in another report dated April 2024. 

(See Comprehensive con call takeaways on page 2 for significant incremental colour.)

Result Highlights (See “Our View” above for elaboration and insight)

* Opex control: Total cost to income ratio at 69.9% was down by -30/-204bps QoQ/YoY and the Cost to assets was at 5.8% down by -7/-22bps QoQ/YoY

* Fee income: Core fee income to average assets was at 2.1%, down -5/-7bps QoQ/YoY.

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