Nomura Initiates Buy on IDFC First Bank, Sets ₹105 Target

Introduction to Nomura's Coverage

Brokerage firm Nomura has initiated coverage on IDFC First Bank with a strong 'Buy' recommendation and a target price of ₹105 per share. This projection implies a potential upside of approximately 25% from the bank's recent trading levels, signaling confidence in its growth trajectory. According to Nomura, the bank is at a significant inflection point, transitioning from a multi-year investment phase into a period of sustained and broad-based profitability.

A Strategic Shift to Sustained Profitability

One of the primary reasons for the optimistic outlook is the completion of the bank's long-term balance sheet restructuring. IDFC First Bank has successfully navigated a complex transition period focused on investments in technology, branch expansion, and human resources. Nomura's report highlights that this phase is now largely complete, setting the stage for consistent earnings generation. The bank's strategic evolution from a wholesale-led lender to a granular, retail-focused institution is a cornerstone of this transformation, promising greater stability and a more predictable revenue stream.

Building a Robust Retail Franchise

IDFC First Bank has fundamentally altered its business model over the past few years. The bank's loan book has seen a structural shift, with the retail-to-wholesale mix improving to 80:20 in the first half of FY26, a stark contrast to the 37:63 ratio in FY19. This retail focus is supported by a strong liabilities franchise. The bank has successfully built a low-cost funding base, evident from its CASA (Current Account and Savings Account) ratio of around 50%. Consequently, reliance on market borrowings has reduced significantly, falling to just 13% of the funding mix from 32% in FY22.

Strong Growth and Superior Fee Income

Growth visibility for the bank remains high. Nomura projects that IDFC First Bank's loan and deposit books will expand at a Compound Annual Growth Rate (CAGR) of 20% and 22%, respectively, between FY26 and FY28. In addition to core interest income, the bank has developed a strong fee income profile, which stands at over 2% of its average assets. This is considered superior to many of its peers and provides a diversified and stable source of revenue.

Recent Financial Performance

The bank's recent performance underscores its positive momentum. In the second quarter of FY26, IDFC First Bank reported strong growth across key metrics, reflecting improved operational efficiency.

Profitability and Efficiency Projections

Nomura anticipates a sharp improvement in profitability, driven by operating leverage and declining credit costs. The brokerage forecasts a sector-leading EPS CAGR of nearly 67% over FY26-FY28.

Operating Leverage and Margin Outlook

While operating expenses were elevated between FY19 and FY25 due to strategic investments, operating leverage is now becoming visible. As the bank achieves scale, its cost-to-assets and cost-to-income ratios are expected to decline. Nomura also believes that the pressure on Net Interest Margins (NIMs), seen due to loan-mix changes and repricing, has largely passed. NIMs are expected to bottom out in FY26 and gradually recover, supporting overall profitability.

Improving Asset Quality

Asset quality has been a key focus area, and the bank has shown consistent improvement. The Gross NPA and Net NPA ratios have fallen continuously, standing at 1.86% and 0.52%, respectively. While some stress was noted in the microfinance portfolio, corrective measures have been implemented. Nomura expects credit costs to decline steadily from 2.60% in FY25 to 1.80% by FY28, reflecting better risk management and a healthier loan portfolio.

Analyst Consensus

The positive view from Nomura aligns with a broader positive consensus among analysts. Out of 29 analysts covering the stock, 19 have a "buy" rating, six recommend "hold," and only four suggest "sell." This indicates a generally favorable outlook on the bank's prospects within the investment community.

Conclusion

IDFC First Bank appears to be at a pivotal moment, transitioning from a phase of heavy investment to one of sustainable growth and profitability. The successful shift to a retail-centric model, a strong low-cost deposit franchise, emerging operating leverage, and improving asset quality are key pillars supporting this positive outlook. Nomura's 'Buy' rating and ₹105 target price reflect a strong conviction in the bank's ability to deliver superior returns for its shareholders in the coming years.