Jefferies initiates coverage on IDFC First Bank with a ‘buy’ – 3 reasons why
“IDFC First Bank has built a well-rounded platform, arguably among the most improved deposit franchises. Operational efficiencies will play out from H2FY25, and over FY24-27 strong deposit growth will aid loan growth that should aid 28 percent EPS CAGR even as credit costs rise. Improving ROA (to 1.5 percent) and ROE (to 14 percent) will aid rerating. A fall in rates should help it more than peers. The ability to raise capital will be key. We initiate coverage with a Buy rating and PT of ₹100,” said the brokerage.
It also noted that the lender’s strong earnings growth and improvement in profitability should drive a re-rating as valuations are reasonable at 1.5x FY25 adj PB. Furthermore, IDFC First Bank’s ability to raise capital will be a key enabler as CET1 CAR is relatively lower at 14 percent, ROE is lower and loan growth is higher. Jefferies also factors in two capital raises in FY25 and FY27.
Stock Price Trend
IDFC First Bank stock has jumped over 52 percent in the last one year but has lost 5 percent in 2024 YTD, giving negative returns in 3 of the 4 months so far this year.
It has gained 12 percent in April so far after a 7 percent fall in March, 4 percent in February and 5 percent in January 2024.
Currently, the stock is over 16 percent away from its record high of ₹100.74, hit on September 5, 2023. Meanwhile, it has advanced 58 percent from its 52-week low of ₹53.35, hit on April 12, 2023.
Investment Rationale
Full suite banking and most improved deposit franchise: The brokerage pointed out that IDFC First Bank has built an end-to-end banking platform that straddles a broad range of customers and products along with robust tech platforms and competitive rates. It has strong recognition among urban clients, which helped it mobilise over ₹50,000 crore in retail deposits between March 2021 and December 2023 (30 percent CAGR), and is among the fastest-growing banks in the sector, Jefferies further said. On the lending side, IDFC First has ramped up its presence in retail, rural and SME segments, while diversifying corporate books outside infrastructure loans.
Expected 28 percent CAGR in deposits aiding 22 percent in loans: Jefferies projects that IDFCFB’s deposit mobilisation will remain robust, with a 28 percent CAGR in deposits expected over FY24-27, aiding growth and facilitating the repayment of bonds from the former IDFC Limited. The brokerage anticipates a reduction in cost pressures as high-cost bonds decrease from ₹13,600 crore currently to just ₹300 crore by March 2026. The discharge of these bonds should enable the bank to lower deposit rates from FY27 onwards. Although credit growth is forecasted to moderate from the current 25 percent (as of Q3FY24), it is still expected to maintain a healthy 22 percent CAGR over FY24-27, driven by retail, rural, and SME loans. Jefferies also foresees the Loan to Deposit Ratio (LDR) decreasing from 102 percent to 90 percent by FY25 and further to 84 percent by FY27.
Levers to earning growth and profitability from 2HFY25: The brokerage anticipates an improvement in earnings trajectory from the second half of FY25 due to operational efficiencies, absorption of FLDG costs, repayment of high-cost liabilities, and the break-even of the credit card platform. Over FY24-27, it identifies multiple drivers for earnings growth, including asset growth, potential margin expansion of over 20 basis points, a 10 basis point increase in the fee-to-asset ratio, and a significant decrease in the cost-income ratio by 700 basis points to 66 percent. Additionally, the brokerage factors in a rise in credit costs from 1.3 percent in FY24 to 1.8 percent in FY27, reflecting the higher share of retail loans and normalisation of the credit cycle. These factors could facilitate a 28 percent EPS CAGR, a 30 basis point expansion in ROA to 1.5 percent, and a 300 basis point rise in ROE to 14 percent.
Upside and Downside Scenarios
Upside: In this scenario, the brokerage has a target price of ₹109, implying a 29 percent upside. It assumes: a loan CAGR of 24 percent (over FY24E-27E); NIMs around 6.6 percent (avg. FY24E-27E); and GNPA at 1.8 percent and NNPA at 0.5 percent in FY25E.
Downside: In this scenario, Jefferies has a target price of ₹71, indicating a 16 percent downside. It assumes: A loan CAGR of 20 percent (over FY24E-27E); NIMs of around 6.2 percent (avg. FY24E-27E); and GNPA of 2.2 percent and NNPA at 0.9 percent in FY25E.
View
Jefferies holds a positive view on IDFC First Bank, citing several factors supporting its outlook. The bank is expected to sustain robust deposit growth, leading to a higher share of lower-cost deposits in its overall funding structure. Additionally, the stronger growth anticipated in rural, retail, and SME segments is forecasted to bolster yields and drive margin expansion. Scale benefits are anticipated to materialise over the next few years, contributing to a lower cost-to-income ratio as past investments, particularly in areas like credit cards, begin to yield results. Moreover, the bank’s successful track record in managing retail asset quality across economic cycles is highlighted as a key strength, which is expected to help in controlling credit costs effectively.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!
Download The Mint News App to get Daily Market Updates.
Published: 10 Apr 2024, 06:31 PM IST
