Shares of IDFC First Bank have been witnessing decent traction for the last one year. The stock, however, has cooled off after hitting its 52-week high of ₹64.30 on BSE on December 15, 2022.
As of March 2 closing, the stock is down 14 percent from its 52-week high.
However, in the last one year, the stock is up 33 percent against a 20 percent gain in its sectoral index BSE Bankex.
The bank reported substantial numbers on most fronts including profitability, customer deposits, funded asset, capital adequacy, asset quality and net NPAs, in the December quarter of the current financial year (Q3FY23).
As reported by Mint, the bank's net profit for Q3FY23 climbed by 115 percent year-on-year (YoY) to ₹605 crore from ₹281 crore in Q3FY22 due to robust growth in core operating income.
The bank’s net interest income (NII) grew 27 percent YoY to ₹3,285 crore in the said quarter from ₹2,580 crore in the same quarter last year.
Core operating income (NII plus fees, excluding trading gains) grew 32 percent from ₹3,324 crore in Q3FY22 to ₹4,402 crore in Q3FY23.
The RoA (return on assets) (annualised) increased from 0.64 percent in Q3FY22 to 1.11 percent in Q3FY23, while the RoE (return on equity) (annualised) increased from 5.44 percent in Q3FY22 to 10.72 percent in Q3FY23.
The strong show may continue
Brokerage firms believe IDFC First Bank is well-placed to grow in the near future as it has been delivering on its guidance.
Brokerage firm Motilal Oswal Financial Services has a 'buy' call on the stock with a target price of ₹70, a 27 percent upside from the stock's March 2 closing of ₹55.16 on BSE.
The brokerage firm highlighted that IDFC First Bank is focusing on growing its loan book through retail and commercial loans, which form 77 percent of funded assets and saw a 31 percent CAGR (compound annual growth rate) over Dec’20-Dec’22.
"Since the drag from the wholesale book is moderating, we expect the bank to embark on a strong growth trajectory. We estimate a 25 percent CAGR in loans over FY23-25," said the brokerage firm.
The brokerage firm underscored that the bank has reported 5 times growth in retail deposits over the past three years and improved the CASA (current account and savings account) mix to 50 percent.
Motilal Oswal highlighted that during nine months of the financial year 2022-23 (9MFY23), traction in CASA and retail deposits remained healthy despite increased competition, thus demonstrating its ability to garner deposits to fund business growth.
It believes IDFC First Bank is well-positioned to benefit from a gradual run-down of its high-cost legacy borrowings over FY23-26E ( ₹22,400 crore at 8-9 percent cost) and replacing them with deposits (at nearly 5.6 percent cost).
"This is likely to support NII growth which coupled with improving operating leverage should aid overall earnings," said Motilal Oswal.
After the current preferential allotment of about ₹2,200 crore by its parent, their stake has increased to 40 percent from 36.4 percent. The book value has thus increased by 2-4 percent for FY23/24, while the Tier 1 ratio improved by nearly 130bp to 14.8 percent, Motilal Oswal said.
"We believe that the recent capital raise should help IDFC First Bank fund growth for at least one year, as the bank is growing its funded assets at a healthy pace of 25 percent. We estimate RoA (return on assets) to reach 1.3 percent and RoE (return on equity) to reach 14 percent by FY25," said the brokerage firm.
Brokerage firm ICICI Direct said IDFC First Bank stock is among its top picks for March. It has a target price of ₹70 on the stock.
ICICI Direct pointed out that IDFC First Bank has been delivering well on its guidance across parameters.
"The bank is well ahead of its target with retail/commercial book at ₹1.1 lakh crore (nearly 75 percent of the funded asset) and CASA deposits at nearly 51.3 percent (earlier target of 30 percent)," ICICI Direct said.
"With balance sheet restructuring largely done, pedalling growth with the entry in the new segment (digital, gold, personal loans and credit cards) is in focus. Rising retail mix, focus towards high yield segment and replacement of high-cost borrowings with relatively lower cost deposits to enable steady margin at nearly 6 percent," the brokerage firm added.
ICICI Direct believes the improvement in GNPA (gross non-performing assets) at 3.18 percent coupled with adequate provision buffer on legacy infrastructure exposure provides confidence on credit cost remaining at about 1.5-1.7 percent in FY23-24E.
However, the brokerage firm added that the key variable to drive further improvement in return ratios is the improvement in the CI ratio (cost income ratio) from the current 73.3 percent to the targeted 55 percent in FY25E.
Strong retail execution, steady credit cost and improving efficiency should drive RoE at 10-12 percent in FY24-25E and thus valuation, said ICICI Direct.
According to a MintGenie poll, 10 analysts on an average have a ‘hold’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of broking firms. These do not represent the views of MintGenie.