IDFC First Bank sees stronger asset quality as FY27 RoA guidance reaches 1 per cent

Investment View and Valuation

Motilal Oswal Financial Services maintained its Neutral recommendation on IDFC First Bank and revised its target price to Rs 90 from its July 26, 2026 results update. The broker characterised Q1 FY27 as a strong quarter, supported by healthy operating performance and improved asset-quality indicators. However, reported profitability benefited from one-off interest on an income-tax refund and strong treasury gains, while adjusted margins are expected to contract during FY27.

The target price is based on 1.4 times March 2028 estimated adjusted book value. The Neutral stance reflects the revised valuation despite improving deposits, loan growth, asset quality and credit-cost outlook, alongside the expected margin contraction and the contribution of one-off income to Q1 FY27 performance.

Q1 FY27 Financial Performance

IDFC First Bank reported Q1 FY27 profit after tax of Rs 1,070 crore, up 132 per cent year-on-year and 237 per cent quarter-on-quarter, and 34 per cent above Motilal Oswal's estimate. The beat was driven by healthy operating performance and lower-than-expected provisioning. Reported return on assets was 1.06 per cent; adjusted for one-offs, return on assets was about 0.90 per cent.

Net interest income was broadly in line with the broker's estimate. Reported net interest margin expanded 3 basis points quarter-on-quarter to 5.96 per cent, but was 5.90 per cent excluding income-tax-refund interest. Motilal Oswal noted that adjusted net interest margin declined 3 basis points quarter-on-quarter.

Other income was 9 per cent above the broker's estimate, aided by fee income and Rs 180 crore of treasury gains. Operating expenditure was broadly in line, while pre-provision operating profit was 7 per cent above the estimate. The cost-to-income ratio declined to 69.2 per cent.

Business Growth and Funding Mix

Business growth accelerated during the quarter. Net advances grew 20.8 per cent year-on-year and 5.0 per cent quarter-on-quarter. Retail advances increased 21.5 per cent year-on-year and 4.5 per cent quarter-on-quarter, while wholesale loans grew 11.0 per cent quarter-on-quarter.

Deposits grew 17.7 per cent year-on-year and 5.9 per cent quarter-on-quarter. CASA deposits gained traction, lifting the CASA ratio by 100 basis points quarter-on-quarter to 50.8 per cent. The credit-deposit ratio declined to 94.4 per cent.

Asset Quality and Credit Costs

Asset quality improved in Q1 FY27. Gross slippages declined to Rs 1,740 crore from Rs 1,770 crore in Q4 FY26, while the slippage ratio improved to 2.49 per cent from 2.68 per cent.

• Gross NPA declined 10 basis points quarter-on-quarter to 1.51 per cent.
• Net NPA declined 4 basis points to 0.44 per cent.
• Provision coverage improved 102 basis points to 71.5 per cent.
• Credit cost improved to 1.53 per cent from 1.63 per cent in Q4 FY26.

The MFI book was stable at about Rs 6,700 crore and had 93 per cent insurance coverage under CGFMU. The bank received Rs 510 crore of CGFMU claims and created a voluntary floating contingency provision of about Rs 515 crore to Rs 520 crore, citing prudence amid macroeconomic and geopolitical uncertainty.

Management Guidance for FY27

Management raised FY27 net interest margin guidance by 5 basis points to about 5.80 per cent, while expecting cost of funds to improve and remain near 6 per cent. Management said a greater corporate and secured-business mix could be mildly margin dilutive, but business-mix decisions would prioritise return on assets rather than headline margin.

• FY27 credit-cost guidance was reduced to 1.5–1.6 per cent from 1.7–1.8 per cent.
• Management guided for FY27 return on assets of 1 per cent.
• The ECL transition is expected to be broadly capital-neutral because EIR benefits should largely offset higher provisioning requirements.

Management also said investigations and recovery efforts relating to the previously disclosed fraud incident are progressing, without providing a timeline.

Broker Estimates and Outlook

Motilal Oswal raised FY27 and FY28 earnings estimates by 21 per cent and 12 per cent respectively, based on an improved asset-quality outlook. The broker estimates FY27 profit after tax of Rs 4,350 crore, return on assets of about 1.0 per cent and return on equity of 8.9 per cent. FY28 profit after tax is estimated at Rs 6,000 crore.

The broker's outlook remains balanced: improving deposits, loan growth, asset quality and credit-cost expectations are positive, but expected margin contraction and the contribution of one-off income to Q1 FY27 profitability temper the overall view.