Why IDFC First Bank Share Price is Falling

Editor's note: Extending its weak performance in 2024 so far, share price of IDFC First Bank has declined for consecutive trading sessions in March.

The recent downtrend took its YTD performance to a loss of around 15%.

The sentiment has dampened ever since the private lender posted its Q3 earnings. Weak guidance for the next few quarters prompted brokerage houses to cut estimates which led to a fall in its share price.

However, the company does have strong growth levers in place including its 2.0 initiative and the impending merger with IDFC.

In January 2024 when the stock was experiencing a similar downtrend, we covered a detailed editorial explaining the reasons and what lies ahead for IDFC First Bank.

Continue reading...

Why IDFC First Bank Share is Falling

Indian markets experienced another gloomy day as shares of major heavyweights took a hit, leading benchmark indices to close the session with a significant drop of over 1.5% on 23 January 2024.

The Nifty 50 tumbled 1.5% in trade, settling at 21,238 points, while the BSE Sensex finished the session with a drop of 1.5% at 70,370 points.

The downward trend in banking stocks persisted in trading, causing the Nifty Bank Index to reach a 7-week low at 45,015 points, reflecting a 2.26% drop. Notably, 11 out of 12 constituents of the index finished the session in negative territory.

Among the biggest laggards, IDFC First Bank stood at the top with a drop of over 6.7%.

Here's why shares of the bank fell.

#1 Q3 Result Misses Estimate

Despite IDFC First Bank reporting an 18.4% year-on-year (YoY) jump in net profit at Rs 7.2 billion (bn) for the December 2023 quarter, shares fell over 5% following an 8% miss compared to estimates.

This miss was attributed to higher provisions and operating expenses.

While the net interest income (NII) surged by 30.5%, reaching Rs 42.9 bn, the bank experienced a slight miss in its operating expenses and credit costs.

The gross non-performing asset (GNPA) stood at 2% in the December 2023 quarter against 2.1% in the September 2023 quarter. Net NPA came at 0.7% against 0.7% quarter-on-quarter.

The net interest margin (NIM) stood at 6.4% compared to 6.1% in Q3FY23.

In monetary terms, gross NPA stood at Rs 37.8 bn against Rs 37.5 bn quarter-on-quarter, whereas net NPA came at Rs 12.5 bn against Rs 11.9 bn quarter-on-quarter.

The bank reported provisions for the quarter at Rs 6.5 bn, up by 45.5% from Rs 4.5 recorded in the same quarter a year earlier.

The current account saving account (CASA) deposits grew by 28.6% year-on-year from Rs 664.9 bn as of 31 December 2022 to Rs 854.9 bn as of 31 December 2023. CASA Ratio stood at 46.8% as of 31 December 2023.

The capital adequacy ratio of the bank stood strong at 16.7% with a CET-1 Ratio of 13.9% as of 31 December 2023. The bank raised fresh equity capital of Rs 30 bn in 1st week of October 2023.

Despite these positive numbers, the shortfall from anticipated estimates led to the decline in stock value.

#2 Reduced Loan Book Guidance

The bank has revised its loan book projections for the next five years, anticipating a 5-year compound annual growth rate (CAGR) of 19.8%, a reduction from the current year-over-year (YoY) growth rate of 22.3%.

The forecasted increase in loans and advances is also moderated, with an expected 5-year CAGR of 20.3%, compared to the current YoY growth rate of 24.5%.

Similarly, customer deposits are projected to grow at a 5-year CAGR of 24.8%, down from the current YoY growth rate of 42.8%.

Specifically, the bank foresees a 5-year CAGR of 24.5% for CASA deposits, a decrease from the current YoY growth rate of 28.6%.

The anticipated growth rate for term deposits is also adjusted to a 5-year CAGR of 24.5%, contrasting with the current YoY growth rate of 28.6%.

This downward revision in the loan book guidance has contributed to a decline in the bank's share value.

IDFC-IDFC First Bank Merger

In December 2023, the Reserve Bank of India (RBI) gave its nod for the reverse merger of IDFC with its banking subsidiary, IDFC First Bank.

The scheme remains subject to other statutory and regulatory approvals.

Under the proposed reverse merger scheme, an IDFC shareholder will get 155 shares for every 100 shares they hold in IDFC First Bank.

The IDFC-IDFC bank merger will result in the consolidation of IDFC FHCL, IDFC Limited, and IDFC First Bank.

Further, the amalgamation will simplify the corporate and organisational structure of the 3 firms by consolidating them into a single company.

To know more about how this merger will help IDFC First Bank, check out: IDFC to Merge with IDFC First Bank. What Does it Mean for Investors?

What Next?

Looking ahead, IDFC First Bank has outlined key areas to drive its growth in the current financial year, which includes home loans, business banking, digital loans, KCC (Kisan Credit Card), tractor loans, gold loans, and priority sector loans.

Despite these growth strategies, it's worth noting that credit growth in the financial year 2024 is expected to be slower compared to the growth rate witnessed in 2023.

Over the next 12-18 months, the bank anticipates steady profitability but limited scope for margin improvement.

The bank's management is confident in its ability to navigate any potential slowdown, underpinned by the attainment of significant operating profits.

They believe that the current level of operating profit is approaching a state of permanency.

To boost credit line growth, the bank has plans for nationwide expansion.

However, this expansion is expected to bring about significant competition, not only from larger private sector banks but also from fintech companies.

How IDFC First Bank Shares Have Performed Recently

IDFC First Bank shares have fallen 9% in the last one month. The stock is down 8.9% in 2024 so far.

In past three months the stock is down 8%, while it gave returns of over 35% in the last one year.

IDFC First Bank touched its 52-week high of Rs 100.7 5 September 2023 and a 52-week low of Rs 52.1 on 28 March 2023.

At the current price, IDFC First Bank trades at a PE multiple of 19.1 and a price-to-book value multiple of 2x.

About IDFC First Bank

IDFC First Bank (formerly IDFC Bank) is an Indian private sector bank formed by the merger of the banking arm of Infrastructure Development Finance Company and Capital First, an Indian non-bank financial institution.

It is the first universal bank to offer monthly interest credit on savings accounts, lifetime free credit cards with dynamic and low annual percentage rates.

To know more about IDFC First Bank, check out its IDFC First Bank factsheet and quarterly results.

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