IDFC First Bank Shares In Focus After UBS Initiates Coverage With 'Neutral' Rating: 5 Key Factors

IDFC First Bank's share price will be in focus during today's market session after leading brokerage UBS initiated coverage on the private sector bank's stock with a 'neutral' rating over fundamental factors and technical factors.

In a note on Friday, July 11, UBS kept a 12-month target price of the stock at Rs 85 with a limited upside potential seen on return on asset (ROA). UBS added that the high credit cost and operational expenditure (opex) pose medium-term ROA challenges for the stock.

IDFC First Bank, initially an infrastructure-focused lender, has diversified into a retail franchise after its merger with Capital First in Dec 2018. "While the bank is building its liability franchise, with a retail/CASA deposit mix of ~76%/47% as of FY25, its incremental ROA upside potential seems limited," said UBS. Shares of IDFC First Bank have rallied over 7% in one month and nearly 20% year-to-date (YTD).

1.Risk reward neutral: Although easing liquidity supports a growth environment, UBS expects IDFC First Bank's cost-to-income (C/A) ratio to moderate but remain elevated, keeping ROA a modest 1% by FY27 (vs. 1.1% in FY22-24) and limiting ROE expansion. At 1.3x Sept 2026E P/BV, the bank's risk-reward seems neutral, with limited upside potential.

2.Sector tailwinds to support growth: UBS expects a loan CAGR of 20% in FY25-28 (vs. 22% in FY20-25), led by unsecured loan moderation, while secured retail, SME and corporate loans sustain momentum. The bank has lowered its share of legacy infrastructure loans to 1% from 19% in FY19, while the share of retail, rural and MSME loans has risen to 82% vs. 35% in FY19. Moreover, the bank has ramped up its deposit base at a 31% CAGR in FY20-25, with CASA and retail deposits growing 41% during that period.

3.NIM to remain stable: UBS believes that the private sector lender's loan mix shift and rate cuts may pressure NIM; however, the bank has calibrated its interest rate (rate cuts of 25-125bp), likely offsetting some pressure in the medium term. "Thus, we expect NIM to remain at 6.1% by FY27 (similar to FY25). Q1 performance may remain muted due to higher credit cost and margin pressure," said UBS.

4.High credit cost: Credit cost has remained high (~2.6% in FY25) due to the bank's high exposure to unsecured (26% of total loans) and legacy infrastructure loans. "While we think credit card asset quality is likely to peak, MFI loan stress could be sustained for the near term," added UBS.

5.UBS forecasts: The brokerage will watch for early delinquencies in IDFC First Bank's business loans. The credit cost is expected to remain high in the near term and forecast it to be 2.1% for FY26 and 1.8-1.9% in FY27-28. "That, along with a high C/l ratio of ~67%, leads us to forecast ROA of 1% by FY27 (vs. 1.1% in FY22-24)," said UBS.

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