IDFC First Bank margins and asset quality strengthen FY27 RoA outlook

Investment View and Valuation

ICICI Securities' July 28, 2026 result update highlights a strong Q1 FY27 recovery in IDFC First Bank's business momentum, profitability and asset quality following the fraud-related disruption. The broker retains its BUY recommendation and revises the target price to Rs 100, valuing the bank at 1.55 times FY28E book value. The improving deposit franchise, lower credit costs and strengthening operating leverage are expected to reinforce the bank's medium-term earnings trajectory.

Business Growth and Deposit Franchise

IDFC First Bank reported Q1 FY27 advances growth of 20.6 per cent year-on-year and 5.2 per cent quarter-on-quarter to Rs 3.05 lakh crore. Growth was led by mortgages, vehicles, consumer finance, MSME and corporate segments.

Customer deposits increased 16.6 per cent year-on-year and 5.3 per cent quarter-on-quarter to Rs 2.98 lakh crore. The CASA ratio improved to 50.8 per cent from 49.8 per cent in Q4 FY26. The Retail, Rural and MSME portfolio grew 18 per cent year-on-year, while wholesale expanded 30 per cent.

ICICI Securities views the improving liability mix and average CASA above 50 per cent as structural support for profitability. However, rapid corporate-loan growth could modestly dilute asset yields.

Net Interest Income, Margins and Fees

Reported Q1 FY27 net interest income rose 21.1 per cent year-on-year to Rs 5,972 crore. Reported net interest margin was 5.96 per cent. Adjusting for the Q1 income-tax refund benefit and the Q4 day-count effect, management indicated underlying margin improvement of about 5 basis points quarter-on-quarter to around 5.9 per cent.

Cost of funds declined to 5.96 per cent from 6 per cent in Q4 FY26. Management raised FY27 NIM guidance to about 5.8 per cent from 5.75 per cent, although it expects moderation from Q1 levels due to asset-mix shifts, investment-book normalisation and stable funding costs.

Fee income rose 22.9 per cent year-on-year, supported by disbursement growth of more than 25 per cent and higher trade finance, commercial banking and foreign-exchange fees. Treasury gains were Rs 181 crore on softer government-security yields.

Asset Quality and Credit Costs

Asset quality improved materially during Q1 FY27. GNPA and NNPA declined to 1.51 per cent and 0.44 per cent, respectively, while gross slippages fell 30 per cent year-on-year. Credit cost moderated to 1.53 per cent.

Management reduced FY27 credit-cost guidance to 1.5-1.6 per cent from 1.7-1.8 per cent as MFI stress normalised. The MFI book stabilised at around Rs 6,700 crore, with disbursements nearly doubling year-on-year. Management expects approximately 15 per cent MFI growth by FY27-end.

SMA-1 and SMA-2 reduced to 0.77 per cent, while MFI SMA normalised to 0.71 per cent. About 93 per cent of the MFI portfolio is covered under CGFMU.

Profitability and Operating Leverage

Q1 FY27 profit after tax was Rs 1,075 crore, up 132.4 per cent year-on-year. The increase was aided by core-income growth, lower credit cost, treasury gains and operating leverage.

The bank received a Rs 515 crore CGFMU claim and created an equivalent contingency provision for macroeconomic, geopolitical and monsoon-related uncertainties. Cost-to-income, excluding trading gains, improved 310 basis points year-on-year to 70.7 per cent. Management aims to take it below 70 per cent during FY27.

Management now expects approximately 1 per cent return on assets in FY27, earlier than previously expected. ICICI Securities estimates FY27E and FY28E net profit of Rs 3,922 crore and Rs 5,878 crore, with RoA of 0.8 per cent and 1.0 per cent, respectively.

Key Risks

• An adverse change in the loan mix could dilute margins.
• A renewed build-up in MFI stress could increase credit costs and affect asset quality.