Axis Securities maintains a buy call on this private sector banking stock and sees a 31% rise

Outlook and stock returns

The stock is currently trading at Rs 53.70 per share, open at Rs 54 per share. The stock’s 52-week low was recorded on June 22, 2022, at Rs 28.95, and its 52-week high was recorded on October 06, 2022, at Rs 55.15. IDFC First Bank has a market capitalization of Rs 33,427.59 crore.

The stock jumped 8.92% in one week and generated positive returns of 6.54% in the past month. The stock has given a massive positive return of 59.26% to shareholders over the past 3 months. The stock has returned positive 11.98% over the past year. He gave 45.47% in the previous three years. However, over the past 5 years, it has given negative returns of 8.98%.

Strong growth momentum and ROA/ROE expansion to generate value!

Strong growth momentum and ROA/ROE expansion to generate value!

On the deposit front, IDFCFB has been focused on building a granular liability franchise over the past 5 years. Consequently, Retail Deposits (Retail CASA + Retail Term Deposits) grew at a 3-year CAGR of 73% to reach Rs 68,035 Cr during FY22. With strong service levels, attractive pricing, a strong brand and excellent customer-focused products, CASA filings have grown 86% CAGR over the past 3 years. Consequently, the bank’s CASA ratio (%) increased from 8.68% (in December 2018 at the time of the merger) to an impressive 50.04% in June 22, allowing the bank to reduce its cost of borrowing from 13.5% in FY2018. to 5.1% in FY22.

IDFCFB has shown resilience in weathering the disruptions of COVID-19 and emerged with better asset quality, a large deposit base and a granular retail-focused asset portfolio. while credit costs were at a high level during the pandemic, the company clearly came out with a much better cost of credit of 0.9% (as of Q1FY23). Despite the negative impact of the pandemic, IDFCFB successfully implemented its de-risking strategy and increased its retail portfolio as well as reduced its high-risk infrastructure loan portfolio. Consequently, from FY2018 to FY22, the bank’s retail portfolio and commercial finance recorded healthy growth of 89.4% CAGR and 77.02% CAGR respectively, while the loan portfolio to infrastructure decreased by 28.8% CAGR. This loan portfolio de-risking strategy helped the bank report strong asset quality with GNPA/NNPA at 3.7/1.3% in FY22. “We believe IDFCFB is well positioned in the market to benefit from (a) a granular liability deductible, (b) one of the best CASA ratios in the industry, (c) reduced successful loan portfolio risks, (d) Pan-India geographic presence, and (e) improving asset quality trends,” the brokerage said.

Successful implementation of loan portfolio risk reduction plan

Successful implementation of loan portfolio risk reduction plan

The bank focused on building a strong post-merger retail franchise by proactively recognizing the shift in the Indian landscape, emerging risk in infrastructure finance and low margins in corporate banking and has developed a strategy to achieve its loan portfolio with the objective of reducing risk, diversifying and improving margins. This helped it achieve its risk reduction strategy even with the unexpected and unprecedented stress that hit the infrastructure book during the Covid-19 pandemic. “Overall, the bank has reduced its infrastructure finance portfolio from 37% (Mar 2018) to 5.2% (Mar 22) of total assets financed. Going forward, we expect the infrastructure finance portfolio to loans will show healthy 20-25% growth in fiscal 23.-25E with a key focus on the retail segment and slightly flat to lower growth in the enterprise segment,” the brokerage said.

Franchise of granular deposits to support the cost of funds since the merger

Franchise of granular deposits to support the cost of funds since the merger

After the merger, the bank had a very low retail deposit of Rs 10,400 Cr against a loan portfolio of Rs 104,660 Cr, resulting in a very high cost of borrowing (at 13.5% at during EX18). “With the new management at the helm led by V. Vaidyanathan, the bank has focused on building a strong retail deposit base with a high proportion of CASAs. As a result, the bank’s cost of borrowing was reduced to 5.1% in FY22. Currently, with a strong CASA ratio of 50.04% (Q1FY23), we believe IDFCFB is well positioned to grow with a cost level of reasonably durable borrowing,” the brokerage said.

Continuous improvement in ROA with a double-digit ROE

Continuous improvement in ROA with a double-digit ROE

The bank has seen a significant improvement in ROA over the past four quarters, with ROA rising from 0.37% in Q2FY22 to 0.97% in Q1FY23. We expect the bank to continue its journey to further increase its ROA/ROE by leveraging a) its strong unit economy, b) additional retail lending activity at an ROE of 18-20%, c ) Improve branch productivity with a normalized cost to revenue ratio and, and d) Increase its commission revenue from new business launches like Wealth, FASTag, Credit Card, CMS, among others. We expect IDFCFB to continue to deliver an ROA above 1% in fiscal years 23-25E.

    Strong growth momentum with expansion of ROE;  Initiate with BUY

Strong growth momentum with expansion of ROE; Initiate with BUY

In Q1FY23, the bank’s retail portfolio continued to show strong and broad-based growth momentum of 40% YoY. This was driven by credit cards (+183% YoY), digital and gold loans (+123% YoY) and home loans (+60% YoY). Additionally, the bank has reduced the infrastructure loan portfolio by 32% CAGR over the past 3 years. “We believe this will lead to better asset quality and ultimately lower borrowing costs. We also believe the bank’s ROA/ROE will continue to increase with strong operating performance, improved asset quality, a reduction in the cost/income ratio with operating leverage and decline.In this light, we are initiating a hedge with a “BUY” rating and a target price of 70 rupees/share (1.6x FY25E ABV), implying a 29% rise in CMP’s share,” the brokerage said.

Disclaimer

Disclaimer

The security was selected in the brokerage report of Axis Securities. Greynium Information Technologies, the author and the respective brokerage are not responsible for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.