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Higher provisions dent earnings; cost ratios stay elevated

Liability franchise growing steadily

* IDFC First Bank (IDFCFB) reported 3QFY24 PAT of INR7.2b (up 18.4% YoY, 8% miss) due to higher provisions and opex.

* NII grew 30.5% YoY, led by healthy loan growth and improvement in margins (up 10bp QoQ at 6.42%). Other income grew 31.6% YoY to INR15.2b. Opex grew 33.5% YoY to INR42.4b, resulting in a 115bp QoQ increase in the C/I ratio to 73.1%.

* Loan book (incl. credit subs) grew 27%YoY/4.2% QoQ. Deposit growth was robust at 37% YoY, with CASA mix increasing 40bp QoQ to 46.8%.

* We estimate the bank to deliver a ~30% earnings CAGR over FY24-26, with RoA/RoE of 1.3%/13.5% in FY26. Maintain Neutral with a revised TP of INR85.

Margins improve 10bp QoQ; Asset quality ratios stable

* IDFCFB reported 3QFY24 PAT of INR7.2b (up 18.4% YoY; 8% miss), led by higher provisions and operating expenses. Provisions increased by 45.4% YoY to INR6.5b (17% higher than our estimate).

* NII grew 30.5% YoY to INR42.9b (in line), driven by healthy loan growth (up 27% YoY) and improved margins at 6.42% (up 10bp QoQ). The bank expects the margins to remain stable and has introduced Guidance 2.0 with an RoA target of 1.9-2.0% by FY29.

* Other income grew 32% YoY with steady 31% YoY growth in core fees. Opex grew 33.5% YoY, with C/I ratio staying elevated at 73.1%. PPoP rose 24% YoY to INR15.6b (in line).

* On the business front, gross loans and advances grew 24.5% YoY/3.4% QoQ, led by 47.4%/29.3% YoY growth in Rural/Retail finance. The SME & Corporate book also grew 15.6% YoY. Within retail, growth was led by housing (19% YoY), vehicle finance (31% YoY), consumer loan (37.6% YoY) and cards (57% YoY). The share of consumer and rural finance stood at 71% as on 3QFY24.

* Deposit grew 37% YoY (up 6.6% QoQ), along with healthy growth in CASA deposits. CASA ratio thus improved 40bp QoQ to 46.8%.

* Asset quality remained stable, with GNPA ratio declining by 7bp QoQ to 2.0% and NNPA ratio remaining unchanged at 0.68%. PCR moderated slightly to ~67%. SMA book rose marginally to 0.85% (0.77% in 2QFY24), while restructured book declined to 0.35% of funded assets in 3QFY24.

Highlights from the management commentary

* IDFCB has unveiled Guidance 2.0, under which it targets a 24.8% CAGR in deposits and 20.3% CAGR in loans over FY24-29.

* The bank has guided for 1.9-2.0% RoA and 17-18% RoE by FY29. 21 January 2024 3QFY24 Results Update | Sector: Financials IDFC First Bank 23 January 2024 25

* Cost-income ratio is higher at 73.1%, as the bank is in the expansion phase. The drag is mainly coming from the liability side of the book and the bank expects it improve successively from FY25-end.

* In credit cards, the bank expects to break-even by FY25 and report profit by FY26.

Valuation and view

IDFCFB delivered a mixed quarter, with a miss in earnings (due to higher provisions) and improvements in margins sequentially. Deposit traction remained robust, while CASA mix improved sequentially, defying the systemic trend. RoA stood at 1.16% as high opex remained a drag. We believe that the C/I ratio may remain elevated in the near term, mainly due to the need for deposit mobilization at a healthy run rate and continued investments in business, technology, and branches. We estimate margins to remain stable, benefiting from steady loan growth, limited deposit re-pricing, and further replacement of high-cost borrowings in FY25. We estimate the bank to deliver a ~30% earnings CAGR over FY24-26, with RoA/RoE of 1.3%/13.5% in FY26. Maintain Neutral with a revised TP of INR85 (1.6x Sep’25E ABV).

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