Surging Retail Deposits And Digital Transformation Poise Bank For Strong Earnings Growth

Key Takeaways

• Strong retail and CASA deposit growth provides a stable, low-cost funding base, supporting future loan growth and positively impacting revenue.
  
• Transition to a consumer-centric digital bank with significant credit card issuance bolsters future fee income, enhancing revenue and margins.
  
• Challenges in the microfinance and infrastructure segments, along with regulatory changes, could impact IDFC First Bank's asset quality, profitability, and earnings stability despite growth in deposits and retail loans.

Catalysts

Engages in the provision of various banking and financial services to corporates, individuals, multi-national companies, SMEs/entrepreneurs, financial institutions, and the government in India.

• The bank’s strong growth in retail and CASA deposits, with a year-on-year increase of 37% and 37.5% respectively, could drive higher net interest income as they provide a stable and low-cost funding base for future loan growth. This impacts revenue positively.
  
• The focus on growing the retail loan book, which has grown by 25% year-on-year, especially in segments like home loans and vehicle financing with good asset quality, suggests potential for higher interest income and lower credit risk. This supports earnings growth.
  
• IDFC First Bank’s proactive provisioning strategy, especially for microfinance and infrastructure-related NPAs, could lead to lower future credit costs and more stable earnings as these existing issues are resolved. This influences net margins favorably once provisions decrease.
  
• The transition towards a consumer-centric digital bank with a strong presence in credit card issuance, where they have issued over 3.1 million cards, positions the bank well for future fee income growth, contributing positively to revenue and margins.
  
• Strategic cost management efforts, evidenced by a stable cost-to-income ratio, paired with the expected benefits from the ongoing reduction in high-cost legacy borrowings, could enhance net margins by lowering the overall funding costs in the medium term.

IDFC First Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IDFC First Bank's revenue will grow by 32.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.8% today to 15.1% in 3 years time.
• Analysts expect earnings to reach ₹69.1 billion (and earnings per share of ₹7.8) by about December 2027, up from ₹23.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹41.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2027 earnings, down from 20.4x today. This future PE is greater than the current PE for the IN Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 6.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.15%, as per the Simply Wall St company report.

IDFC First Bank Future Earnings Per Share Growth

Risks

• Provisions have been significantly affected this quarter due to issues in the MFI business and a particular toll road project, which could negatively impact the bank's earnings.
  
• Increased delinquencies in the microfinance segment have led to additional provisions, suggesting potential challenges in maintaining asset quality and net margins.
  
• The unexpected suspension of toll collections by a government directive has resulted in a substantial one-time provision, indicating risks related to infrastructure financing and unpredictability in earnings.
  
• Despite strong growth in deposits and retail loans, the bank still faces profitability challenges as seen from the high cost-to-income ratio, potentially affecting the bottom line.
  
• Regulatory changes and evolving market conditions may pose ongoing risks, affecting revenue streams and operating margins, as indicated by hints of tighter yield controls in segments like microfinance.

Valuation

• The analysts have a consensus price target of ₹72.47 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 ₹95.0, and the most bearish reporting a price target of just ₹56.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹457.4 billion, earnings will come to ₹69.1 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 14.1%.
• Given the current share price of ₹64.65, the analyst's price target of ₹72.47 is 10.8% higher.
• 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.