IDFC First Bank shares jumped nearly 3% in trade following Motilal Oswal's upgrade from Neutral to Buy rating, with the brokerage setting a target price of ₹105 per share, implying nearly 20% upside from the closing rate on September 23. The upgrade reflects the bank's significant progress in strengthening its deposit franchise while sustaining robust loan growth and steadily de-risking the balance sheet. Motilal Oswal's revised valuation reflects the bank's substantial improvement in internal controls and governance processes, with the brokerage believing the bank is well positioned for a sustainable recovery in profitability.
As reported by Motilal Oswal, IDFC First Bank has demonstrated robust balance sheet expansion with advances and deposits registering a CAGR of 21% and 26% respectively over the past three years. The bank's liability franchise has scaled up significantly, with retail deposits now accounting for 80% of customer deposits vs. 27% at merger, aided by a 51% CASA ratio. The CD ratio has declined substantially to 94% from 108% in FY23, indicating improved capital efficiency and the bank's ability to maintain strong deposit mobilization while managing its funding profile effectively. Looking ahead, MOFSL expects IDFC First Bank's loan book to grow at around 21% CAGR from FY26 to FY28, surpassing ₹3.4 lakh crore by FY27.
According to the research report, the bank has mobilized USD 3.57 billion through FCNR (B), representing 11% of total deposits. The ~73% leverage provided on this FCNR (B) mobilization could potentially compress full-year NIMs by 7-12 basis points. However, the bank has recently shifted from a flat SA rate system to a progressive SA rate structure and reduced peak TD rates by 15bp, which will help control funding costs. The brokerage calculates that full deployment of FCNR (B) deposits into higher-yielding assets offers the maximum upside of 4.4% to NII and 6.8% to EPS, while using a larger portion to retire higher-cost wholesale liabilities lowers the incremental earnings benefit. Management expects NIM stabilization to be driven increasingly by franchise-led initiatives rather than short-term cost measures.
Motilal Oswal expects the earnings buoyancy to return after two years of constraints from the MFI stress cycle and deposit fraud incident. The Micro Finance Book has been reduced to ₹6,700 crore from ₹13,340 crore in FY24, with elevated MFI provisions pushing credit costs to 3% in FY25/FY26. The brokerage estimates that net NPAs are likely to moderate to 0.4% by FY28, reflecting the bank's improving asset quality trends. Going forward, stable NIMs, 21% loan growth, strong fee income traction and emerging operating leverage should drive a meaningful recovery in profitability. The bank has raised its FY27 NIM guidance by 5 basis points to 5.8%, expecting progressive savings-account pricing and lower term-deposit rates to offset potential FCNR impacts.
Motilal Oswal estimates that IDFC First Bank will deliver 42% pre-provision operating profit compound annual growth rate over FY26-28E, supported by healthy business growth and improvement in operating leverage. The bank's cost/income ratio is expected to improve to ~69%/65% in FY27/28, translating into RoA/RoE of 1.2%/11.9% by FY28E. Despite near-term NIM drag from FCNR (B) mobilization, the bank's FCNR (B) mobilization could boost NII and EPS by 4-7% for full year FY27E, with the magnitude of benefit depending on deployment mix. Management aims for annual improvement of around 350 basis points in the cost-to-income ratio, targeting a reduction to 60% in coming years from the current 71%. The brokerage believes IDFC First Bank is transitioning from a balance-sheet repair phase to a period of consistent earnings compounding.
