IDFC FIRST Bank sees FCNR-led growth despite temporary NIM pressure

Investment View and Q2FY27 Performance

ICICI Securities Limited maintained its BUY recommendation on IDFC FIRST Bank in its October 26, 2026 results update. The broker views Q2FY27 operating performance favourably, with net interest income and slippages broadly in line with its expectations. Profit after tax of Rs 1,040 crore was 5 per cent ahead of estimates as operating expenses were contained.

Asset quality remained steady, and the bank delivered its third consecutive quarter of around 500 basis points of operating jaws. ICICI Securities believes this indicates improving efficiency and unit economics.

Loan and Deposit Growth

IDFC FIRST Bank reported loan growth of 30 per cent YoY and 14 per cent QoQ, aided by FCNR loans, which accounted for around 7.5 per cent of the loan book. Excluding FCNR, loan growth was around 6 per cent QoQ, supported by wholesale lending and business banking.

Deposits rose after the bank raised USD 3.6 billion of FCNR deposits. The bank used the FCNR liquidity to reduce bulk term deposits, whose share fell to 13.9 per cent from 17 per cent QoQ, and to avoid renewal of certificates of deposit.

Net Interest Margin and Funding Costs

The key near-term negative was a 38 basis point QoQ contraction in reported NIM to 5.58 per cent. Management attributed the decline to FCNR deposits, excess liquidity, loan-mix changes, day-count effects and a one-off income-tax refund in the base quarter.

Management expects NIM to recover to 5.80 per cent by Q4FY27 as excess liquidity is deployed, day-count effects reverse and benefits from a further assumed 25 basis point repo-rate increase accrue. FCNR deposits carried a landed cost of 6.85 per cent compared with 7.80 per cent for domestic term funding after regulatory requirements.

ICICI Securities estimates that the FCNR-related NIM impact was around 16 basis points, although the estimated effect on return on assets was only around 2 basis points.

Fees and Operating Efficiency

Fee income grew 24 per cent YoY, although FCNR-related fee income was modest at Rs 30 crore. Operating expenses increased only 4 per cent QoQ. Core cost-to-income was stable at 70 per cent, while incremental cost-to-income was 55 per cent.

Management expects the impact of changes in banca rules on fee income to be broadly offset by FCNR benefits, repo-rate increases and product-mix changes. ICICI Securities nevertheless factors in a likely sharp structural erosion in banca fees.

Asset Quality and Capitalisation

Slippages increased QoQ to Rs 1,890 crore, but the slippage ratio improved 10 basis points QoQ to 2.3 per cent. SMA 1 plus SMA 2 in the overall RAM portfolio improved 5 basis points to 72 basis points.

The bank remains watchful of El Nino-related stress, while ICICI Securities identifies increased stress in the rural and retail books as the principal risk. CET1 was 13 per cent.

Management guided that the ECL-transition effect on CET1 would be offset by credit-risk guidelines, with the recurring impact broadly offset by operating-expense amortisation.

Estimates and Valuation

ICICI Securities raised its FY27E and FY28E EPS estimates by 8 per cent and 2 per cent, respectively, reflecting higher growth and NIM assumptions. However, FY28E profit after tax was broadly unchanged because of expected lower banca fees.

The broker reduced its target price to Rs 95 from Rs 100 by lowering the target valuation multiple to around 1.4 times FY28E adjusted book value from around 1.5 times earlier. The revised valuation explicitly incorporates structurally lower banca fee income.