IDFC First Bank: Fundamentally Strong Bank with Good Growth Prospects

IDFC First Bank, formed by the merger of the former IDFC Bank and Capital First in 2018, is a prominent Indian banking institution. Led by MD/CEO V. Vaidyanathan, it has transitioned from a corporate-focused low NIM bank to a retail-focused high NIM bank. With 641 branches and 719 ATMs across India, the bank is expanding its operations. Under Vaidyanathan’s leadership, it has witnessed significant growth in scaling up digital cash management, trade forex, wealth management etc. IDFC First Bank is well-positioned as a leading player in the Indian banking sector, driven by strong management and a focus on key financial indicators.

Sources of Revenue: (FY23)

The bank has seen a solid growth in Net Interest Income and Fee income compared to the previous financial year. NII has grown by 30.1% while the fee income has grown by 54%.

Key highlights:

1.Stable CASA Ratio:

IDFC First Bank maintains a stable Current Account and Savings Account (CASA) ratio, consistently around 50% which is better than HDFC and ICICI bank who are the top players in the industry.

2. Lower Cost to Income Ratio:

The bank has successfully reduced its cost to income ratio from around 95% in 2019 to approximately 72.5% in FY23.

3. Improved Asset Quality:

IDFC First Bank has experienced significant enhancements in asset quality and client base. Gross and Net NPAs have come down significantly when compared to the last financial year.

4. Enhanced ROE and ROA:

IDFC First Bank has witnessed an impressive increase in return on equity and return on assets. These improvements highlight the bank’s efficient capital utilization and improved profitability.

5. Higher Retail Deposits:

Over the years bank has to moved to a more retail centric approach resulting in lower NPAs.

6. Profit: 

YOY profit has risen by 1575%. (FY22-145 crores, FY23- 2,437 crores)

7. IDFC first bank has an attractive P/B valuation ratio of 2.29 when compared to its peers. (Kotak Mahindra – 3.77, AU Small Finance bank-6.17, IndusInd – 2.13)

8. Loans and Advances saw a 24% growth compared to the last financial year (currently at Rs. 1,60,599 Cr).

9. Higher Net Interest Margin: With interest margins at 6.05%, IDFC First Bank outperforms the likes of HDFC and ICICI. This indicates the bank’s ability to generate higher interest income from lending activities.

10 year view:

For IDFC first bank, we see a 15-17% CAGR growth in book value in the next 10 years.

Reasons include the bank’s solid CASA ratio, increasing NII margin, lower costs and various other solid financial indicators.

The FII stake in the bank is currently at 20% which is very low compared to its peers and hence more FII inflows are expected due to the solid performance of the bank which will also aid in the growth of the bank.

Also India economy is bound to grow rapidly in the next few decades and banking is the backbone of our economy. IDFC First will capitalize on this growth which will reflect in the books of the bank.

We estimate the stock to grow by atleast 7 times or grow by a CAGR of 21.73% in the next 10 years.

Disclaimer: This research is for informational purposes only and does not constitute investment advice. Please do your own due diligence and consult your financial advisor before making any investments.

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