IDFC First Bank shares can rally 23%, says Nomura after initiating coverage with Buy call

Core Viewpoint - Nomura initiated coverage on IDFC First Bank with a Buy rating, projecting a target price of Rs 105, indicating a potential upside of 23.5% from current levels [9]. Growth Projections - Strong growth visibility is anticipated, with loans and deposits expected to achieve CAGRs of 20% and 22%, respectively, over FY26-28F [9]. - The bank's fee income profile is noted to be superior to peers, exceeding 2% of average assets [9]. Profitability Improvement - A decline of 35 basis points in credit costs is expected to enhance profitability, with RoA and RoE projected to rise to 1.2% and 1.8% by FY28, up from 0.6% and 5.4% in FY26 [2][9]. - This earnings acceleration is forecasted to result in a sector-leading EPS CAGR of 67% over FY26-28F [2]. Operating Efficiency - Operating expenses have remained high during FY19-25 due to investments in branches, manpower, technology, and new businesses [3]. - As growth normalizes, cost efficiency is expected to improve, with cost-to-assets and cost-to-income ratios projected to decline to 5.1% and 64% by FY28F, from 5.6% and 71% in FY26F, respectively [3]. Net Interest Margin (NIM) Outlook - NIM pressure experienced over FY25-H1FY26 is largely absorbed, with expectations for NIMs to bottom out in FY26 and gradually recover through FY27 [6]. - Potential cuts in savings account rates could add 17-33 basis points to margins and 12-23 basis points to RoAs [6]. Asset Quality and Credit Costs - Asset quality stress is primarily confined to the microfinance portfolio, with corrective measures already taken [7]. - Credit costs are expected to moderate, with projections of 1.9% in FY27 and 1.8% in FY28, compared to 2.6% in FY25 and 2.1% in FY26F [7]. Earnings Inflection - Sustained loan growth, improving operating leverage, and moderating credit costs are anticipated to drive a significant earnings inflection over FY26-28F, alongside a material improvement in profitability [8].