Jefferies see this private banking major as a re-rating candidate for 3 possible reasons

Global brokerage Jefferies, envisioning prospects of probable re-rating in the private sector lender, has initiated coverage on IDFC First Bank with a ‘buy’ and a target price of Rs 100 per share, implying probable gains to the tune of over 19 per cent.

Here are the 3 major triggers which the brokerage believes could boost the stock price of the lender:

Bank establishes most improved deposit franchise:

The brokerage holds that the lender has established a well-rounded platform that is indeed the most improved deposit franchises. The brokerage highlights that the lender straddles a broad range of customers and products along with robust tech platforms and competitive rates. It has strong recognition among urban clients, which helped it mobilise over Rs50000 crore in retail deposits between Mar-21 and Dec-23 (30% Cagr), & is among the fastest growing banks in the sector. 

Also, on the lending front, the bank has expanded out of the purview of the infra loans. Also, the lender has ramped up presence in retail, rural and SME segments.

On the lending side, it has ramped up presence in retail, rural and SME segments, while diversifying corporate books outside infrastructure loans.

Deposit to log 28 per cent CAGR over FY24-27

The brokerage expects 28 per cent CAGR in deposits over FY24-27 for funding growth as well as aid repayment of the bonds of the erstwhile IDFC. Also, as the cost of bonds will fall and the discharge of these bonds will be the norm, the bank may be incentivised to cut deposit rates from FY27.

“Even as credit growth is likely to moderate from 25% (as of 3QFY24), it will still be healthy around 22% Cagr over FY24-27, led by retail, rural & SME loans,” the brokerage added. Consequently, LDR or loan to deposit ratio  is also seen moderating going forward from 102 per cent to 90 per cent by FY25.

Levers to earning growth and profitability from 2HFY25

We expect the earnings trajectory to improve from 2HFY25 as opex efficiencies, absorption of first loss default guarantee (FLDG) costs, repayment of high-cost liabilities & break-even of credit card platform play out, added the brokerage. Also, the brokerage noted that over FY24-27, it sees multiple levers to earnings growth, driven by asset growth, scope for +20 bps margin expansion, 10 bps rise in fee/asset ratio and +700 bps fall in the cost-income ratio to 66%. 

Additionally, the brokerage estimates 28 per cent EPS CAGR, plus 30 bps ( expansion in ROA to 1.5% and +300bps rise in ROE to 14%.

Also, a fall in the key interest rates will bode well for IDFC First Bank more than larger peers on the back of a higher share of fixed-rate loans.

The bank’s  strong earnings growth and improvement in profitability should drive a rerating as valuations are reasonable at 1.5x FY25 adj PB, pointed the brokerage. Its ability to raise capital will be a key enabler as CET1 capital adequacy ratio (CAR) is relatively lower at 14%, ROE is lower and loan growth is higher.

Nonetheless, the key risks to the upside call as listed by the brokerage is higher-than-expected opex and credit costs., pointed the brokerage.