Domestic brokerage house Motilal Oswal (MOSL) has initiated coverage on banking stock IDFC First Bank with a target price of ₹70, indicating an upside of 25 percent from the current market price. This comes even after the stock has surged nearly 80 percent since July 2022.
The scrip has been giving positive returns continuously for the last 4 months, since July after being in the red for the first 6 months of the current calendar year. Between January to June, the stock shed 33 percent, however, it started recovering in July and has surged nearly 80 percent since then.
The stock has added 12 percent in October so far and had given strong returns of 31 percent and 19 percent in August and July, respectively. In September as well, it was in the green, but up just 1 percent.
Before rebounding in July, the scrip had lost over 13 percent in June and 8 percent in May.
Overall in 2022 YTD, the stock has jumped 16 percent.
Peer comparison
The stock has risen 13 percent in the last 1 year as against a 1.5 percent rise in the Nifty Bank index. Among peers, 3 lenders outperformed IDFC First Bank in this period. Bank of Baroda rose the most in the last 1 year, up 56 percent followed by Federal Bank, up 43 percent and ICICI Bank, up 19 percent.
However, Bandhan Bank was the worst performing lender, down 15 percent, followed by HDFC Bank, down 14 percent, Punjab National Bank, down 12.5 percent and Kotak Bank, down 8 percent.
Investment Rationale
As per MOSL, IDFC First Bank has strengthened its balance sheet over the past few years as it consciously increased the mix of retail business. The bank reported 5 times growth in retail deposits over the past three years and simultaneously improved CASA mix to 50 percent, noted the brokerage.
Further, the retail loan book posted an impressive 31 percent CAGR over FY19-22, it added.
"The bank is entering a phase of strong loan growth as the drag from wholesale book moderates. This will be aided by strong growth in profitability due to the replacement of high-cost borrowings, better cost trends and controlled credit costs," said MOSL.
It also pointed out that the lender is well-positioned to benefit from a gradual run-down of its high-cost legacy borrowings over FY23-26E and replace them with deposits. 77 percent of such bonds will be refinanced by FY25E and this will potentially add ₹750-800 crore to its NII in due course, stated the brokerage.
The bank has also progressed fairly well on the liabilities front and scaled up retail liabilities at an impressive 73 percent CAGR during FY19-22. Thus, the share of retail deposits has increased to 67 percent in Q1FY23 from 19 percent in FY19, noted the brokerage.
To fortify its presence as a retail franchise, the bank has made investments in expanding its branch network and digital capabilities, and widening product offerings as well as increasing in employee count, the brokerage pointed out. However, this has led to a significant increase in opex and hence its cost metrics were elevated and not comparable with peers, it added. But, as some of these challenges ebb over the next few years, MOSL expects the cost-income ratio to trend down gradually. Repayment of high-cost legacy borrowings will also benefit the same, it said.
Commenting on asset quality, the brokerage noted that the worst of the asset quality pain is behind as the retail portfolio has been reasonably stress tested during COVID-19, while all possible stressed assets in wholesale have been recognized and well provided for.
"IDFC First Bank’s asset quality is likely to be robust with its incremental focus on building a granular, retail portfolio where it has sharp underwriting expertise. It is gradually heading back towards its long-term trend of 2 percent GNPA and 1 percent NNPA in retail and commercial finance books (74 percent of overall loans). The restructured book stands controlled at 1.3 percent in 1QFY23," informed the brokerage.
Valuation and Outlook
IDFC First Bank is entering a phase of strong loan growth as the drag from wholesale book moderates and MOSL estimates loans to report 21 percent CAGR during FY22-25E.
"It has invested well in digital capabilities, branch and product expansion and has a presence across retail products. Cost ratios are elevated but will moderate as scale benefits come into effect, while the retirement of high-cost borrowings will aid NII growth. We estimate 35 percent CAGR in PPoP during FY22-25E while controlled credit costs will drive 199 percent CAGR in PAT over a similar period," predicted the brokerage.
It also estimates RoA/RoE to reach 1.3 percent/13.9 percent in FY25E, respectively.
However, key risks to these estimates include theslowdown in deposit growth momentum, higher cost-to-income ratio, and headwinds in retail asset quality, cautioned MOSL.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.