Buy IDFC First Bank; target of Rs 70: Motilal Oswal

Motilal Oswal's research report on IDFC First Bank

IDFC First Bank (IDFCFB) is focusing on growing its loan book through retail and commercial loans, which form 77% of funded assets and saw a 31% CAGR 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% CAGR in loans over FY23-25. The bank has reported 5x growth in retail deposits over the past three years and simultaneously improved the CASA mix to 50%. During 9MFY23, traction in CASA and retail deposits remained healthy despite increased competition, thus demonstrating its ability to garner deposits to fund business growth. IDFCFB is well positioned to benefit from a gradual run-down of its high-cost legacy borrowings over FY23-26E (INR224b at 8-9% cost) and replacing them with deposits (at ~5.6% cost). This is likely to support NII growth which coupled with improving operating leverage should aid overall earnings. Post the recent preferential allotment of ~INR22b by its parent, their stake has increased to 40% from 36.4%. The book value has thus increased by 2-4% for FY23/24, while the Tier 1 ratio improved by ~130bp to 14.8%.

Outlook

We believe that the recent capital raise should help IDFCFB fund growth for at least one year, as the bank is growing its funded assets at a healthy pace of 25%. We estimate RoA/RoE to reach 1.3%/14.0% by FY25. Maintain BUY with an unchanged TP of INR70 (1.5x Sep'24E BV).

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