IDFC First Bank shares slip over 5% after Q3 earnings miss estimates; analysts slash target price

Stock market today: Shares of IDFC First Bank, formed by merging the banking arm of project financer Infrastructure Development Finance Company (IDFC) and Capital First, tumbled 5.4% in early morning trade on Monday, January 27, to ₹58.90 apiece after the bank's Q3FY25 numbers, released on Saturday, missed analyst estimates.

The bank reported a sharp 53% drop in standalone net profit to ₹339.4 crore, significantly lower than the analyst projection of ₹551 crore. The decline in net profit was attributed to increased opex and elevated provisions. Credit costs and slippages remained high due to stress in the microfinance (MFI) portfolio.

Sequentially, net profit grew by 69% from ₹201 crore in the preceding September quarter of FY25. However, for the first nine months of FY25, net profit declined by 45.3% year-on-year (YoY).

The bank stated that its profitability was impacted by reduced income from a slowdown in microfinance (MF) loan disbursals, increased microfinance provisions, and the normalisation of credit costs in non-MF businesses.

The microfinance portfolio, as a percentage of the overall loan book, declined from 5.6% in Q2FY25 to 4.8% in Q3FY25. Total provisions, excluding tax, doubled to ₹1,338 crore from ₹655 crore in the same quarter last year.

Net interest income (NII)—the difference between interest earned and paid—rose 14.4% to ₹4,902 crore, compared to ₹4,286.6 crore in the year-ago quarter. Total income increased to ₹11,123 crore during the quarter, up from ₹9,396 crore in the same period last year.

On the advances and deposits front, the bank reported healthy growth. Net advances expanded by 20% YoY, driven by a 21.3% YoY increase in retail, rural, and MSME loans. On the deposit front, customer deposits grew by approximately 30% YoY, with retail deposits contributing 80%, ensuring a stable funding base. CASA deposits saw a 32.3% YoY growth, maintaining a strong CASA ratio of 47.7%.

Analyst cut EPS estimates

Domestic brokerage firm Centrum Broking highlighted that the bank has shown strong performance in terms of advances and deposits, outperforming peers in attracting and retaining low-cost deposits.

However, it said the bank continues to face key challenges, including higher operating expenses and elevated credit costs, which it expects to improve only by FY27 and beyond. Despite this, the bank’s ambitious Return on Equity (RoE) targets remain out of reach, with Q3FY25 marking another setback.

Quarterly RoE, which peaked at over 13% in Q4FY23, dropped to 3.6% in Q3FY25. This suggests that FY25 RoE will fall short of the already subdued FY24 levels. Consequently, Centrum Broking has marginally lowered its FY25 estimates and now expects the bank to achieve RoE above its cost of equity only by FY27.

Given the weaker macroeconomic outlook and delays in achieving return targets, Centrum maintained a 'Reduce' rating for the stock and lowered the target price to ₹58 from ₹61 'earlier. 

Similarly, Motilal Oswal reduced its target price on the stock to ₹70, retaining its 'Neutral' rating on the stock. The brokerage trimmed its earnings estimates by 26% and 10% for FY25E and FY26E, respectively, citing higher operating expenses. It projects FY26 RoA and RoE at 0.8% and 8.1%. 

Nuvama Institutional Equities also sharply cut its EPS estimates for FY25E and FY26E by 22% and 27%, respectively, factoring in higher credit costs and operating expenses for FY25E, along with slower revenue growth and elevated credit costs for FY26E. The firm has maintained a 'Hold' rating with a target price of ₹60 apiece. 

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.