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Yet, despite these achievements, the bank’s stock has consistently underperformed the NIFTY 500 index, with only six to seven months of outperformance in the last 60 months.
Read this | A lot has to fall in place for IDFC First Bank’s stock to rebound
The bank’s underwhelming stock performance comes despite substantial milestones, including:
Retail deposits growing more than 14x.
Wholesale deposits reducing from 73% to 20% of total deposits.
CASA ratio increasing from 8.7% to 47.2%.
Doubling its loan book.
Launching over 20 new products.
Reducing infrastructure financing from 19% to 1.2% of the loan book.
However, profitability remains subpar. While the bank has guided for a Return on Assets (ROA) of 1.4-1.6% and Return on Equity (ROE) of 13-15% for FY25, annualized H1FY25 numbers stand at a modest 0.57% and 5.15%, respectively.
In Q2FY25, provisions surged to ₹1,732 crore from ₹994 crore in the previous quarter, driven by a ₹568 crore “one-time” provision for microfinance and a toll road account. Management indicated that high provisions are unlikely to constrain profitability in coming quarters, but this remains a key monitorable.
Additionally, the high cost-to-income ratio of 70%—expected to decline slowly over the next few years—continues to weigh on profitability. Together, the cost-to-income ratio and provisions are the two critical levers for the bank’s future performance.
Reasons for optimism
Despite the challenges, there are three key reasons why IDFC First Bank may be undervalued for long-term investors:
1. Asset Quality: Microfinance loans, which make up 5.6% ( ₹12,500 crore) of the total loan book, are facing elevated stress, with over ₹300 crore in provisions. However, the bank has provisioned 99% of its Special Mention Account (SMA) book in this segment and benefits from partial insurance via the Credit Guarantee Fund for Micro Units (CGFMU).
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At the bank level, gross non-performing assets (GNPAs) is 1.92%, and net NPA (NNPA) is 0.48%. While this marks a slight deterioration from Q1FY25, the figures remain reasonable given the bank’s 15% exposure to unsecured retail loans. Excluding microfinance, GNPA/NNPA for the retail, rural, and MSME portfolio—which comprises 83% of the total loan book—stands at a healthier 1.5% and 0.5%, respectively.
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2. Deposit and credit growth: Amid a challenging environment for deposit growth, IDFC First Bank has grown its CASA book and term deposits by an impressive 38% and 28%, respectively.
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Credit growth has also been robust, with a 21.5% increase in gross loans, outperforming the system average. While the legacy infrastructure book is being wound down, most business segments have shown healthy growth. However, credit growth alone isn’t always a reliable indicator of success, as history has shown that rapid growth can sometimes precede asset quality issues.
Read this | Microfinance mayhem: This MFI could have ‘going concern’ issues
3. Valuation: Following its merger with IDFC Ltd on 1 October, the bank’s book value rose by ₹618 crore, standing at ₹52.3 per share as of September. At the current market price, this translates to a price-to-book (P/B) ratio of 1.2x, below its 5-year median of 1.5x and at the lower end of its peer group.
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Expecting IDFC First Bank to trade at multiples comparable to ICICI Bank or Axis Bank may be unrealistic.
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That said, the NIFTY Bank index, which comprises the 12 most liquid banks listed on the NSE, is currently trading below its median price-to-book multiple. This likely indicates that the banking sector as a whole is undervalued.
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The bottom-line
For IDFC First Bank, profitability remains the missing piece. The two critical levers driving this are its cost-to-income ratio and credit costs. Given that improvements in the cost-to-income ratio are expected to materialize gradually over the next 2-3 years, coupled with ongoing stress in the unsecured retail segment, the market appears to be discounting both the banking sector as a whole and IDFC First Bank specifically.
For more such analysis, read Profit Pulse.
However, over the long term, these challenges are likely to ease. With strong asset quality, robust deposit and credit growth, and attractive valuations, the bank holds promise as a rewarding opportunity for patient, long-term investors.
Note: This article relies on data from Screener.in and TijoriFinance.com. In instances where data was unavailable on these platforms, we have used alternate but widely accepted sources.
The purpose of this article is to share interesting charts, data points, and thought-provoking opinions. It is not a recommendation. If you are considering an investment, please consult your financial advisor. This article is strictly for educational purposes only.
About the Author: Rahul Rao has been investing since 2014. He has conducted financial literacy programs for over 1,50,000 investors, helped establish a family office for a 50-year-old conglomerate, and worked at an AIF focused on small and mid-cap opportunities. Rahul evaluates stocks using an evidence-based, first-principles approach, steering clear of comforting narratives.
Disclosure: The author and his dependents do not hold any stocks, commodities, cryptocurrencies, or other assets discussed in this article.
