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Readying to walk the talk

We met with MD and CEO V Vaidyanathan of IDFC First Bank, to discuss the bank’s long-term growth and asset-quality outlook, its strategy to tame the cost-to-income ratio, and rationale to tie-up the huge investments from Warburg and ADIA. KTAs:

Warburg/ADIA investment to fuel growth without near-term dilution risk

IDFC First aims to sustain ~20% credit growth and double its loan book within 4-5 years, with no dilution risk (an irritant otherwise) till FY28, supported by Warburg and ADIA’s capital infusion (boosting CET-1 by 2.6%). The bank enjoys one of the best CASA ratios in the industry at 48%, though focus will be on lowering SA costs to improve the economic value of its otherwise high CASA and inch-up sub-optimal CA ratio (now at ~7%); this should provide the bank an option to reduce the portfolio risk without sacrificing margin. That said, NIM may contract in 2QFY26 from the repo cut transmission due to a lagged effect, albeit should recover in H2FY26 to ~5.8%.

Plans to sweat retail digital stack, sourcing/collection model to tame C/I ratio

The bank’s opex remains elevated (C/I at 69-72%, C/A at 5.4-5.9%), given the heavy retail tech investment (reflecting in its ‘best app’ rating among banks at 4.9) and business sourcing cost. The card business achieved breakeven at the operating level in FY25 and is expected to contribute positively from FY26E onwards. The bank has also reduced its call-center staff given tech interventions, and plans to reduce dependence on DSAs for business sourcing through increased contribution by its own phygital network. That said, it does not plan to cut corners on the tech front and would gradually develop the enterprise tech stack; this should help mobilize enterprise business/fee and even CA deposits. Overall, it expects opex growth at ~12% in FY26E, to trail loan growth of ~20%, driving operating leverage (C/I expected to decline to ~65% by FY28E) and thus an RoA recovery.

MFI recovery to accelerate from H2FY26; BL, M-LAP risk to be contained

The bank expects MFI stress to ease post-3QFY26, with the book fully insured and new disbursements largely under government cover. High-frequency indicators (cheque bounces, DPD recoveries) remain stable in Jul-Aug’25. Unsecured BL (~4% of loans) and LAP need closer monitoring, in our view, though contained. The bank holds Rs3.2bn contingent provisions on the SMA book. Credit costs may stay elevated in Q2FY26, albeit should moderate to ~2.2% in FY26E and to ~1.6-1.8% over FY27-28E.

Set for a sustainable RoA recovery after early misses

Sticky opex and MFI/Card stress dragged RoA/RoE to a low of 0.5%/4% in FY25, thereby missing guidance. However, we expect the bank to turn the corner H2FY26 onward, as operating leverage improves, credit cost eases, and the high burn card business turns profitable, thus driving up RoA/RoE to ~1.3%/13% by FY28E. Recent investments by Warburg and ADIA (~Rs75bn) should provide long-term growth capital till FY28E, thus easing frequent dilution concerns. We retain ADD on the stock, with unchanged TP of Rs80 (1.3x Sep-27E ABV).

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