High investor interest propels IDFC First Bank's stock to new highs

Lender's financial performance has been robust but high valuations may cap further gains

IDFC First Bank is one among several private banks that seems to have attracted investor interest with the share price rising 158 per cent in one year. A key reason for these gains is robust performance.

In Q4 FY23, Net Interest Income (NII) reported growth of 35 per cent on a year-on-year (YoY) basis and 10 per cent sequentially, displaying business momentum and margin expansion. Interest income grew by 41 per cent YoY and 9 per cent quarter-on-quarter (QoQ). Interest expenses grew by 50 per cent YoY and 8 per cent QoQ. Reported NIM (net interest margin) for Q4 FY23 improved 28 bps sequentially to 6.41 per cent. The net profit grew 134 per cent YoY and 33 per cent QoQ to Rs 803 crore. Deposits grew by an exceptional 47 per cent YoY.

The cost-to-income ratio has been reduced from 77.8 per cent in FY22 to 72.5 per cent in FY23. The bank had a legacy of high cost borrowing which has reduced to Rs 17,673 crore from Rs 25,180 crore. Another Rs 5,000 crore of additional rundown is expected in FY24, and the entire high-cost book is expected to be wiped out by FY26. Repricing these loans with lower-cost deposits will reduce cost of funds.

Management guidance is that it can bring down the cost further as both liabilities and credit card businesses with a higher cost-income ratio are expected to normalise as the businesses scale up. As a result, the pre-provision profit of the bank grew by 89 per cent YoY and 24 per cent QoQ. The credit cost was at 1.26 per cent for Q4 and 1.16 per cent for FY23, below guidance of 1.5 per cent. Credit cost is expected to stay below 1.5 per cent.

The bank has accelerated growth with a focus on retail advances. The gross funded assets grew by 24 per cent YoY to Rs 1.60 trillion, with retail loan book constituting 79 per cent of the overall book. The advance and deposit books are expected to grow by 24 per cent over the period FY23-25. The CASA (current account and savings account) ratio of the bank stood at 49.8 per cent, compared to 50.0 per cent in the previous quarter. The capital adequacy was at 16.8 per cent.

Asset quality has also seen improvement, with gross non-performing asset (NPA) and net NPA recording sequential reductions of 45 bps and 17 bps to 2.51 per cent and 1.03 per cent respectively. The retail segment has a GNPA and NNPA of 1.65 per cent and 0.55 per cent, respectively. Collection efficiency was at 99.5 per cent. The Provision Coverage Ratio improved to 80.3 per cent.

Retail is obviously the focus. The cost-to-income ratio, which was a major overhang, is now showing improvement. The substitution of legacy high-cost borrowings with low-cost deposits will support the margin. Combining these factors, ROE (return on equity) could climb above 14 per cent by FY25.

The bank is looking to benefit from the demand recovery by rapidly expanding its branch network and targeting 25-30 per cent loan book growth. New retail products should help to maintain NIMs and reduction in borrowing and credit costs would aid PAT expansion. The business model has to be supported by scalability, superior technology, and good customer relationships.  

However, valuations could be an issue for conservative investors. It has moved 19 per cent in the last month (now Rs 81.68) hitting its all-time high. This is an overshoot of 12-month price targets set in May-June which started at Rs 73.