Digital Banking And Retail Deposits In India Will Unlock Value

Key Takeaways

• Lower funding costs and strategic deposit growth are set to boost margins and support long-term, stable earnings amid rising financial inclusion.
  
• Digital investments and a retail-focused loan book enhance efficiency, contain credit costs, and strengthen the foundation for scalable, sustainable profitability.
  
• Persistent asset quality issues, weak revenue growth, high cost ratios, and reliance on capital raises threaten long-term profitability and competitiveness amidst increasing industry pressures.

Catalysts

Provides various banking and financial services in India.

• The significant repricing and reduction of fixed deposit and funding rates, now nearly in line with much larger peer banks, is expected to materially lower the cost of funds as legacy deposits and borrowings mature in the next few quarters, likely leading to higher net interest margins and improved earnings.
  
• Ongoing, robust expansion in customer and retail deposits (30% Y-o-Y CASA deposit growth and improving CASA ratio to 48%) positions the bank to capitalize on increasing financial inclusion and the shift of India's growing middle class into the formal banking system, supporting long-term loan growth and stable revenue expansion.
  
• Strategic investments in digital platforms, cloud-native tech stack, and data-driven retail banking enable IDFC First Bank to ride the rapid digitization of financial services in India, lowering cost-to-serve, improving operating efficiency, and unlocking scalable fee-based income opportunities.
  
• A disciplined shift toward a granular, retail-focused loan book (growing mortgages, vehicles, credit card portfolios), with continued reduction in high-risk microfinance and corporate exposures, is likely to keep credit costs contained and support stable long-term net margins, despite near-term sectoral asset quality anxieties.
  
• Operating expense growth has been tightly controlled at 11% Y-o-Y, well below advances growth, with management targeting continued cost moderation and a medium-term reduction in cost-to-income ratio-creating positive operating leverage to benefit ROE and bottom-line profitability as revenues rebound.

IDFC First Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IDFC First Bank's revenue will grow by 30.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 16.4% in 3 years time.
• Analysts expect earnings to reach ₹76.7 billion (and earnings per share of ₹7.09) by about July 2028, up from ₹13.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, down from 39.0x today. This future PE is lower than the current PE for the IN Banks industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 3.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.58%, as per the Simply Wall St company report.

IDFC First Bank Future Earnings Per Share Growth

Risks

• Increasing slippages and rising GNPA and net NPA ratios across multiple product segments-especially persistent stress in microfinance, rural, and some MSME lending lines-highlight the risk of continued asset quality deterioration, which could structurally raise credit costs and compress net margins and earnings in the long run.
  
• The sharp decline and stagnation in higher-yielding microfinance business, combined with only moderate increases in lower-yielding segments and potential inability to fully offset with other products, could cause a permanent drag on net interest margins and revenue growth.
  
• The bank's cost-to-income ratio remains structurally high (over 70%) and management's guidance on reducing it is contingent on improvement in income, not costs, making profitability and return on equity sensitive to even minor revenue disappointments.
  
• Comparatively low Current Account (CA) balances and ongoing need to refine deposit mix are likely to keep IDFC First's cost of funds above those of established peers, putting long-term pressure on net interest margins and earnings, especially if deposit competition increases.
  
• The bank's recent and planned capital raises, while strengthening regulatory ratios, could be dilutive to existing shareholders if operating leverage and ROE fail to scale, and persistent heavy investment in tech and branches may weigh on bottom-line growth, especially if secular fintech/digital trends accelerate customer disintermediation or industry competition intensifies.

Valuation

• The analysts have a consensus price target of ₹75.167 for IDFC First Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹85.0, and the most bearish reporting a price target of just ₹55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹467.8 billion, earnings will come to ₹76.7 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹69.24, the analyst price target of ₹75.17 is 7.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.