CLSA upgrades IDFC First Bank to ‘buy’, raises target price by 19%; here’s why

Following the announcement of Q3FY23 (October-December) earnings of IDFC First Bank Ltd, global brokerage house CLSA said that the private bank has shown stable momentum in liabilities, despite tough cycle.

Earlier, the brokerage had identified this as a crucial area to watch, and according to its analysis, some peer banks noticed a slowdown.

With more assurance on the liability side, the global brokerage has upgraded the private bank’s rating to ‘buy’ from ‘outperform’, and also revised its target price to 75 from 63.

According to the brokerage, on most fronts, the bank’s Q3FY23 performance was strong. Overall deposits, and current account and savings account (CASA) deposits grew 8 percent and 5 percent quarter-on-quarter (QoQ), respectively.

As per the report, it’s a strong outcome in the current context. Liquidity Coverage Ratio (LCR) deposits grew 42 percent year-on-year (YoY), and 10% QoQ to reach 57 percent of total deposits.

“The management does not see any urgency to raise deposits rates,” added CLSA.

During Q3FY23, net interest margin (NIM) rose 38 basis points QoQ to 6.36 percent, fee income grew 18 percent QoQ, operational expenditure (Opex) grew 10 percent QoQ and 23 percent YoY.

“Opex growth was higher than expected but more than offset by strong top-line momentum. We raise our FY23 earnings per share (EPS) estimate by 7% to account for a higher top line, but this is offset by higher opex. We raise our FY24-25CL estimates by 1.5-2%,” said the brokerage.

Further, CLSA believes that the key deliverable for the bank remains bringing down its cost-to-income ratio, which is high at over 70 percent currently.

According to the report, IDFC First Bank remains the highest pre-provision operating profit (PPOP) compound annual growth rate (CAGR) story for the next two years in CLSA’s banking coverage.

“We forecast a 33% PPOP CAGR over the next two years; it recorded 70% PPOP growth in 9MFY23,” said the brokerage in its report.

12 analysts polled by MintGenie on an average have a ‘hold’ call on the stock.

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