Jefferies India has initiated coverage on IDFC First Bank, assigning it a 'buy' rating and raising its target price to Rs 100 per share, reflecting a 26 per cent upside potential from the current market price.
IDFC First Bank is recognised for its robust banking platform, catering to a diverse customer base with competitive rates and advanced technology. The bank has demonstrated significant growth, particularly in urban areas, where it accumulated over Rs 50,000 crore in retail deposits between March 2021 and December 2023, achieving a remarkable 30 percent compound annual growth rate (CAGR).
Expanding its lending operations into retail, rural and SME sectors, IDFC First Bank has diversified its corporate portfolio beyond infrastructure loans.
Jefferies anticipates continued strong deposit growth for IDFC First Bank, projecting a 28 per cent CAGR from FY24 to FY27. This growth is expected to support expansion initiatives and bond repayment. Additionally, the bank is poised to benefit from easing cost pressures as high-cost bonds decrease substantially by March 2026, potentially leading to deposit rate cuts from FY27.
Despite a moderate decline from the current 25 per cent, healthy credit growth is forecasted, primarily driven by retail, rural and SME loans. The loan-to-deposit ratio (LDR) is expected to decrease from 102 per cent to 90 per cent by FY25 and further to 84 per cent by FY27.
Jefferies foresees an improvement in IDFC First Bank's earnings trajectory starting from the second half of FY25. This improvement will be driven by operational efficiencies, absorption of FLDG costs, repayment of high-cost liabilities and the credit card platform reaching break-even.
Over the period from FY24 to FY27, Jefferies expects multiple factors to contribute to earnings growth, including asset expansion, margin expansion of over 20 basis points, an increase in fee/asset ratio and a substantial reduction in the cost-income ratio to 66 per cent.
However, the brokerage notes potential risks to its thesis, including higher-than-expected operating expenses and credit costs. Nonetheless, IDFC First Bank is well-positioned to benefit from falling rates due to its significant share of fixed-rate loans (60 per cent).
Jefferies concludes that IDFC First Bank's strong earnings growth and improved profitability should lead to a rerating, considering its reasonable valuations at 1.5 times FY25 adjusted price-to-book ratio. Additionally, the bank's ability to raise capital will be crucial, given its relatively lower CET1 CAR, lower ROE and higher loan growth. Jefferies factors in two capital raises in FY25 and FY27.