Three reasons why IDFC First Bank might be undervalued
Subscribe to enjoy similar stories. Over the past 23 quarters and more, IDFC First Bank has staged a remarkable turnaround. Led by chief executive V.
Vaidyanathan, the management has delivered on nearly every metric set out in December 2018, when IDFC Ltd merged with Capital First. Yet, despite these achievements, the bank’s stock has consistently underperformed the NIFTY 500 index, with only six to seven months of outperformance in the last 60 months. Read this | A lot has to fall in place for IDFC First Bank’s stock to rebound The bank’s underwhelming stock performance comes despite substantial milestones, including: Retail deposits growing more than 14x.
Wholesale deposits reducing from 73% to 20% of total deposits. CASA ratio increasing from 8.7% to 47.2%. Doubling its loan book.
Launching over 20 new products. Reducing infrastructure financing from 19% to 1.2% of the loan book. However, profitability remains subpar.
While the bank has guided for a Return on Assets (ROA) of 1.4-1.6% and Return on Equity (ROE) of 13-15% for FY25, annualized H1FY25 numbers stand at a modest 0.57% and 5.15%, respectively. In Q2FY25, provisions surged to ₹1,732 crore from ₹994 crore in the previous quarter, driven by a ₹568 crore "one-time" provision for microfinance and a toll road account. Management indicated that high provisions are unlikely to constrain profitability in coming quarters, but this remains a key monitorable.
Additionally, the high cost-to-income ratio of 70%—expected to decline slowly over the next few years—continues to weigh on profitability. Together, the cost-to-income ratio and provisions are the two critical levers for the bank’s future performance. Despite the challenges, there are three key reasons why IDFC
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