IDFC First Bank stock loses favour, splits opinion among brokerages

Valuation of 1.2 times its FY20 book said to be high, but investors willing to take risks may consider the stock

The last six months was a smooth ride for the IDFC First Bank stock, with neat gains of 13 per cent. However, Morgan Stanley’s underweight report published on March 6 derailed its run — it fell 4.5 per cent on Thursday.

The report comes when domestic brokerages are positive on the bank and foreign ones are not. Besides Morgan Stanley, Deutsche Bank, too, has a ‘sell’ rating, while Nomura, Credit Suisse, and Goldman Sachs are all neutral on the stock. 

Scepticism largely ema­nates from the mismatch between the tall targets set by its new management and its current performance. At present, the bank does not generate positive return on equity (RoE), but aspires to touch the 13-15 per cent level in 5-6 years. Morgan Stanley says this could be difficult and estimates RoE of only 9 per cent by FY24. 

While the bank has substantially cleaned up its book, high cost structure and a relatively weaker current account-savings account (CASA) franchise may weigh on financials. In the December quarter (first for the merged entity), gross non-performing assets (NPAs) ratio fell to 2 per cent from 5.6 per cent a year ago, for IDFC Bank on a standalone basis. 

Net NPA ratio of a per cent was also impressive. The share of retail loans jumped to 35 per cent, from 8 per cent a year ago, making the bank more retail-oriented, thanks to the merger with Capital First. However, it is still lower than the 45 per cent average of other private banks. 

Despite net interest income at Rs 1,145 crore, growing 131 per cent year-on-year, high operating costs — mainly one-time expenses (goodwill write-off) — resulted in a net loss of Rs 1,538 crore in Q3. Adjusted net profit at Rs 153 crore was up just 4.7 per cent YoY, estimates Edelweiss. 

CASA ratio at 10.4 per cent, despite 51 per cent CASA growth, doesn’t instil confidence, and is the lowest in the industry. 

“A weak liability franchise may continue to remain a drag,” say analysts at Deutsche Bank. This is why Morgan Stanley believes valuations at 1.2x its FY20 book are rich and the stock doesn’t offer much for investors.  

The new management, headed by V Vaidyanathan (of erstwhile Capital First), has an impressive track record. Analysts at Edelweiss say the merged entity’s RoE will be lower during integration phase. However, a diversified product portfolio, aggressive management with a proven execution track record and adequate capital will lift RoE. 

Long-term investors willing to take some risk may consider the stock on decline.