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Elevated credit cost drags down earnings 

Cost-to-income ratio eases marginally 

*  IDFC First Bank (IDFCFB) reported a 1QFY25 PAT of INR6.8b (-11% YoY, in line) dragged down by elevated provisions.  

*  NII grew 25% YoY to INR46.9b (in line), while margin contracted 13bp QoQ to 6.22%.  

* Opex grew 21% YoY to INR44.3b (5% better than MOFSLe). C/I ratio thus eased to 70.2%.

*  Net advances rose 21% YoY/4.1% QoQ. Deposit growth was also healthy at 36% YoY/4.5% QoQ, with CASA mix moderating 60bp QoQ to 46.6%.

* We cut our earnings by 11%/5% for FY25E/26E, and estimate an FY26 RoA/RoE of 1.1%/12.0%. Reiterate Neutral with a revised TP of INR83 (premised on 1.5x FY26E ABV). 

NIM contracts 13bp QoQ; near-term asset quality stress to persist  

*  IDFCFB reported a 1QFY25 PAT of INR6.8b (-11% YoY, in line) dragged down by elevated provisions.  

* NII grew 25% YoY to INR46.9b (in line), while margin contracted 13bp QoQ to 6.22% Provisions jumped 109% YoY to INR9.9bb (20% above MOFSLe).

*  Other income grew 15% YoY to INR16.2b (4% miss). Opex grew 21% YoY to INR44.3b (5% better than MOSLe). C/I ratio thus eased to 70.2%. PPoP grew 25% YoY to INR18.8b (8% beat). Management expects a C/I ratio of ~65% by FY27.

*  On the business front, gross advances grew 22% YoY/4.2% QoQ, led by 29% YoY growth in retail finance. Rural book rose 2.7% QoQ (+18.2% YoY). Within retail, growth was led by housing (+10.5% QoQ) and cards (+7.1% QoQ). The share of consumer & rural finance was ~72% as of 1QFY25.

* Deposit growth remained healthy at 36% YoY/4.5% QoQ, with CASA mix contracting 60bp QoQ to 46.6%. CD ratio moderated 40bp QoQ to 96.6%.

*  GNPA ratio increased 2bp QoQ to 1.9%, while NNPA ratio improved 1bp QoQ to 0.59%. PCR ratio increased 59bp QoQ to 69.4%. SMA book increased to 1.01% led by elevated stress in the JLG portfolio. Restructured book declined to 0.26% of funded assets.

*  Credit cost increased to ~2.2% in 1QFY25, affected by high delinquencies in the JLG portfolio due to the Chennai floods. Management expects the impact of the JLG portfolio to be rangebound, as the portfolio forms ~6% of total loans. At the overall bank level, IDFCFB expects an additional credit cost impact of ~18-20bp for FY25, and thus it raised the credit cost guidance to ~1.85% from 1.65% earlier. 

Highlights from the management commentary

*  Including profits for 1QFY25 and taking into account the fresh equity capital of INR32b raised in the first week of Jul’24, total CRAR stood at 17.21%, with CET-1 ratio at 14.67%. The bank further benefitted by ~14bp in CET-1 due to the new investment guidelines. 

* Credit cost is expected at ~1.85% (including JLG book), and without JLG, it is expected to be ~1.65% going forward.

*  The C/I ratio of ~65% is expected in three years, as going forward, the pace of increase in branches will moderate. 

Valuation and view: Reiterate Neutral with revised TP of INR83 

IDFCFB reported a weak quarter (though in line), with elevated provisioning, while NIM contracted 13bp QoQ. Opex was lower than expected and this led to a slight improvement in the C/I ratio. On the business front, deposit traction continued to remain robust, while CASA mix moderated slightly and advances growth too remained healthy. We estimate the C/I ratio to moderate gradually to 67.7% by FY26E, while it may remain elevated in the near term, primarily due to the need to mobilize deposits at a healthy run rate. Credit cost increased sequentially due to elevated stress in the JLG portfolio. However, improvement in operating leverage, coupled with healthy loan growth and further replacement of high-cost borrowings will aid an improvement in underlying profitability. We cut our earnings by 11%/5% for FY25E/26E, and estimate an FY26 RoA/RoE of 1.1%/12.0%. Reiterate Neutral with a revised TP of INR83 (premised on 1.5x FY26E ABV). 

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