Nomura Initiates Coverage on IDFC First Bank with Buy Rating and ₹105 Target Price
Nomura initiates Buy rating on IDFC First Bank with ₹105 target price, highlighting operating leverage inflection and earnings momentum. The bank has transformed from wholesale-led to retail-focused model (80:20 mix vs 37:63 in FY19) with CASA at 50% and borrowings reduced to 13% from 32% in FY22. Nomura expects sector-leading 67% EPS CAGR over FY26-28, with ROA improving to 1.20% and ROE to 11.80% by FY28 from current 0.60% and 5.40% respectively.
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Nomura has initiated coverage on IDFC First Bank with a Buy rating and target price of ₹105, citing clear operating leverage inflection and strong earnings momentum as the bank transitions into sustained profitability. The brokerage believes the multi-year investment and balance sheet transformation is largely complete, setting the stage for broad-based improvement in returns.
Balance Sheet Transformation Shows Strong Progress
IDFC First Bank has built a robust liabilities franchise with significant improvements in its funding profile. The bank's funding mix transformation demonstrates the success of its strategic initiatives over recent years.
| Funding Parameter | Current (H1 FY26) | Previous Period | Change |
|---|---|---|---|
| CASA Ratio | ~50% | - | Strong improvement |
| Borrowings Share | 13% | 32% (FY22) | -19 percentage points |
Business Model Shift Drives Growth Visibility
The bank has structurally shifted from wholesale-led to retail-focused operations, providing strong visibility on future growth. This transformation represents a fundamental change in the bank's strategic positioning.
| Business Mix | H1 FY26 | FY19 | Transformation |
|---|---|---|---|
| Retail-to-Wholesale Ratio | 80:20 | 37:63 | Complete reversal |
| Expected Loan CAGR (FY26-28) | 20% | - | Strong growth trajectory |
| Expected Deposit CAGR (FY26-28) | 22% | - | Robust expansion |
The bank's fee income profile stands at over 2.00% of average assets, comparing favorably with industry peers and demonstrating revenue diversification.
Sharp Earnings Inflection Expected
Nomura forecasts significant improvement in profitability metrics driven by operating leverage and enhanced efficiency. The brokerage expects core pre-provision operating profit to grow at a strong pace over FY26-28.
| Profitability Metric | FY26 | FY28 Target | Improvement |
|---|---|---|---|
| Return on Assets | 0.60% | 1.20% | +60 basis points |
| Return on Equity | 5.40% | 11.80% | +640 basis points |
| Cost-to-Assets Ratio | 5.60% | 5.10% | -50 basis points |
| Cost-to-Income Ratio | 71% | 64% | -7 percentage points |
The brokerage estimates a sector-leading EPS CAGR of 67% over FY26-28, supported by net interest margin improvement of about 14 basis points and credit cost decline of roughly 35 basis points.
Operating Leverage Emerges as Key Driver
Operating expenses were elevated between FY19 and FY25 as the bank invested heavily in branches, technology, people and new businesses. However, operating leverage is now visible at segment level across retail liabilities, assets and credit cards. As growth normalizes and scale benefits accrue, efficiency ratios are expected to improve significantly.
Margin Stabilization with Upside Potential
Nomura believes net interest margin pressure from repo-linked repricing and loan-mix changes is largely behind the bank. As term deposits reprice, NIMs are expected to bottom out in FY26, recover gradually in FY27 and stabilize thereafter. Savings account rate cuts remain an upside lever, with 50-100 basis point reduction potentially adding meaningfully to margins and returns.
Asset Quality Concerns Addressed
Asset quality stress has been concentrated in the microfinance portfolio where corrective measures have been implemented, while credit card and consumer loan quality remains contained. Nomura builds in lower credit costs of 1.90% and 1.80% for FY27 and FY28 respectively, compared with higher levels in FY25 and FY26.
Historical Stock Returns for IDFC First Bank
| 1 Day | 5 Days | 1 Month | 6 Months | 1 Year | 5 Years |
|---|---|---|---|---|---|
| +1.98% | +0.54% | +6.43% | +10.76% | +37.84% | +87.93% |
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