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Earnings set to gain pace; RoA to swing back to ~1.2% FCNR (B) deposits to strengthen liability franchise

* IDFC First Bank (IDFCFB) has delivered strong balance sheet growth, with advances and deposits registering a CAGR of 21% and 26%, respectively, in the past three years. Deposit growth has outpaced loan growth as the liability franchise has scaled up, with the CD ratio declining significantly to 94% from 108% in FY23.

* The ~73% leverage provided on the USD3.57b FCNR (B) mobilization (11% of deposits) could likely compress full-year NIMs by ~7-12bp (Exhibit 8); however, the shift to progressive SA pricing alongside TD rate cuts should offset NIM impact.

* Despite the near-term NIM drag, FCNR (B) mobilization, which is estimated to add ~1.5-4.4% to incremental NII, coupled with improving opex intensity, should translate into an estimated ~4.1-6.8% boost to FY27E earnings.

* The bank has strengthened its internal controls and governance processes and has recently lowered its credit cost guidance, underscoring strong asset quality trends. We estimate GNPA/NNPA to moderate to 1.4%/0.4% by FY28E.

* We estimate 42% PPoP CAGR over FY26-28E and C/I ratio at ~69%/65% for FY27/28, translating into RoA/RoE of 1.2%/11.9% by FY28E. We upgrade our rating to BUY from Neutral with a TP of INR105 (based on 1.6x FY28E ABV).

Loan book to post 21% CAGR over FY26-28E

IDFCFB continues to pursue a granular and diversified asset mix, with net advances growth of 20.8% YoY in 1QFY27. Growth has been broad-based, with wholesale loans growing 30% YoY and retail loans growing 21.5% YoY, led by vehicle finance (~26% YoY), consumer loans (~26% YoY) and gold loans (~103% YoY), as the focus shifts toward higher-quality borrowers. The bank continues to selectively moderate MFI exposure while maintaining a diversified retail asset mix. Going forward, management expects further market-share gains, with improving traction in gold loans, consumer loans and vehicle finance. We estimate ~21% loan CAGR over FY26-28E, taking the loan book beyond INR3.4t by FY27E, supported by a diversified asset mix and disciplined growth.

Strong FCNR (B) mobilization to aid growth momentum

IDFCFB has built a strong and granular liability franchise, with retail deposits now accounting for 80% of customer deposits vs. 27% at merger, aided by a 51% CASA ratio. Management focuses on branch-led as well as digital mobilization of CASA and retail deposits, which grew 20% YoY. We estimate 25% CAGR in deposits over FY26-28E, especially with healthy FCNR (B) deposit mobilization of USD3.57b (11% of total deposits), comfortably funding loan growth. Importantly, stable deposit growth of 1.1% QoQ in 4QFY26 and 5.9% QoQ in 1QFY27 highlights the resilience of the liability franchise and continued customer confidence in the bank after the fraud incident.

Valuation and view: Upgrade to BUY with TP of INR105

IDFCFB has made significant progress in strengthening its deposit franchise while sustaining robust loan growth and steadily de-risking the balance sheet. The bank is well positioned for a sustainable recovery in profitability, supported by healthy business growth, improvement in operating leverage and controlled credit cost. The bank has strengthened internal controls and governance processes and has lowered its credit cost guidance, underscoring strong asset quality trends. We estimate GNPA/NNPA to moderate to 1.4%/0.4% by FY28E. We estimate IDFCFB to deliver 42% PPoP CAGR over FY26-28E and C/I ratio to improve to ~69%/65% in FY27/28, translating into RoA/RoE of 1.2%/11.9% by FY28E. We upgrade our rating to BUY from Neutral with a TP of INR105 (based on 1.6x FY28E ABV).

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