IDFC First Bank deposit franchise and cost leverage support sustainable earnings recovery

Investment View and Valuation

In its September 22, 2026 company update, Motilal Oswal Financial Services upgraded IDFC First Bank to BUY from Neutral and set a target price of Rs 105, based on 1.6 times FY28E adjusted book value. The broker sees the bank moving from a balance-sheet repair phase into a period of steadier earnings compounding, supported by a stronger deposit franchise, broad-based loan growth, improving operating leverage and normalising credit costs.

Loan Growth and Business Mix

IDFC First Bank has delivered three-year advances and deposits CAGR of 21 per cent and 26 per cent, respectively. The credit-to-deposit ratio declined to 94 per cent from 108 per cent in FY23 as deposit growth outpaced loan growth.

In 1QFY27, net advances rose 20.8 per cent year on year. Wholesale loans grew 30 per cent and retail loans rose 21.5 per cent, led by vehicle finance and consumer loans, each up around 26 per cent, while gold loans increased around 103 per cent. Management expects additional market-share gains in gold loans, consumer loans and vehicle finance while selectively moderating MFI exposure.

Motilal Oswal estimates loan CAGR of around 21 per cent over FY26 to FY28E, with loans reaching more than Rs 3.4 trillion in FY27E and Rs 4.1 trillion in FY28E.

Deposit Franchise and Funding

The broker highlights substantial improvement in the liability franchise. Retail deposits account for around 80 per cent of customer deposits compared with 27 per cent at merger, while CASA is 51 per cent. Retail deposits grew 20 per cent year on year, supported by branch-led and digital mobilisation.

IDFC First Bank mobilised USD 3.57 billion of FCNR(B) deposits, equivalent to 11 per cent of deposits. Motilal Oswal expects deposit CAGR of around 25 per cent during FY26 to FY28E, which would reduce the credit-to-deposit ratio to 89 per cent by FY28E.

Margins and FCNR(B) Impact

FCNR(B) mobilisation is both an earnings opportunity and a margin consideration. Motilal Oswal estimates that its approximately 73 per cent leverage may lower full-year NIM by 7 to 12 basis points, depending on whether proceeds are deployed into loans or used to retire high-cost liabilities. However, it estimates incremental NII of 1.5 per cent to 4.4 per cent and FY27E EPS accretion of 4.1 per cent to 6.8 per cent.

Management has shifted savings-account pricing to a progressive structure and reduced peak term-deposit rates by 15 basis points. Adjusted NIM was 5.90 per cent in 1QFY27, down 3 basis points quarter on quarter, while management raised FY27 NIM guidance by 5 basis points to 5.8 per cent. The broker forecasts NIM at 5.7 per cent in FY27E and FY28E.

Operating Leverage and Cost Efficiency

Cost efficiency is a key earnings driver. Management targets annual cost-to-income improvement of around 350 basis points and aims to reduce the ratio to 60 per cent over the next few years from around 71 per cent excluding trading income.

Operating expenses grew 16.4 per cent year on year, below 21.5 per cent growth in operating income excluding trading. Motilal Oswal estimates cost-to-income will improve to 69 per cent in FY27E and 65 per cent in FY28E, driving pre-provision operating profit CAGR of around 42 per cent over FY26 to FY28E.

Asset Quality and Earnings Outlook

Past earnings were constrained by the MFI stress cycle and the one-off Chandigarh fraud. MFI provisions pushed credit costs to around 3 per cent in FY25 and FY26, but the MFI book has been reduced to Rs 67 billion from Rs 133.4 billion in FY24 and the fraud-related impact has been fully recognised.

The broker raised FY27E and FY28E PAT estimates by 2.6 per cent and 5.3 per cent to Rs 44.7 billion and Rs 63.1 billion, respectively.

Key Factors for the Thesis

• Execution on cost reduction.
• Stable NIM.
• Sustained deposit momentum.
• Continued asset-quality improvement.