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Our view – Credit cost guidance continues to be revised higher

Asset Quality – Slippages deteriorated sequentially mainly due to the MFI book causing management to raise credit cost guidance yet again: Gross NPA additions amounted to Rs 16.57bn for 1QFY25, translating to an annualized slippage ratio of 3.3% for the quarter, up by 49bps QoQ. Gross NPA additions had amounted to Rs 13.47bn during 4QFY24. The major reason for the increase in slippages was the stress on the microfinance book, which was adversely impacted by floods in Tamil Nadu region and lower collections in the overall book due to heatwave and elections. The total calculated credit cost for 1Q was at 197bps, up by 46bps QoQ and 79bps YoY. The management has upped their credit cost the guidance for FY25 from 165bps to 185bps.

Net Interest Margin – Margin declined sequentially due to investment book drag and higher cost of funds: NIM at 6.22% was down -13bps/-11bps QoQ/YoY, sequentially lower as the bank was carrying higher investment book in the form of T-Bills which had a negative impact of -8bps and the balance impact was due to increase in cost of funds. Cost of funds was at 6.47% for 1QFY25, up by 4bps QoQ. The loan to deposit ratio was around 98.1% whereas the incremental loan to deposit ratio was around 72.1%. The management has guided that the bank would achieve a loan to deposit ratio of 92-93% by the end of FY25.

Balance sheet growth – Strong advances and deposits growth momentum was sustained: Advances grew 4.2%/22.0% QoQ/YoY, driven sequentially by various segments of Consumer Finance. Total customer deposits are up 37.8% YoY to Rs 2,046 bn and CASA deposits were up 36.1% YoY.

We maintain a less-than-bullish ‘ADD’ rating on IDFCB with a revised price target of Rs 85: We value the bank at 1.5x FY26 P/BV for an FY25E/26E RoE profile of 10.9%/13.6%.

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

* Opex control: Total cost to income ratio at 70.2% was down by -258/-73bps QoQ/YoY and the Cost to assets was at 5.9% down by -40/-11bps QoQ/YoY

*  Fee income: Core fee income to average assets was at 2.1%, down -16/-8bps QoQ/YoY.

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