IDFC First Bank Q3 Results: Net Profit Surges 48% as MFI Stress Subsides

IDFC First Bank has reported a strong financial performance for the third quarter of the financial year 2025-26 (Q3 FY26), characterized by a significant jump in profitability and improving asset quality. The Mumbai-based private sector lender saw its net profit rise by 48% year-on-year, reaching ₹503 crore compared to ₹339 crore in the same period last year. This growth comes at a time when the bank is successfully navigating the tail-end of stress in its microfinance institution (MFI) portfolio.

V Vaidyanathan, the Managing Director and CEO of IDFC First Bank, indicated that the challenges previously faced by the MFI sector are largely over. The bank has observed a consistent decline in slippages, which has paved the way for improved credit costs. With the microfinance stress cycle subsiding, the bank is now focusing on strengthening its balance sheet and optimizing its operating efficiency for the upcoming quarters.

Strong Growth in Core Operating Income

The bank's core revenue metrics showed healthy expansion during the October-December 2025 quarter. Net Interest Income (NII) grew by 12% year-on-year to ₹5,492 crore, up from ₹4,902 crore in the previous year. This growth was supported by a steady increase in the bank's funded assets and a disciplined approach to lending across its retail and MSME segments.

Other income, which includes fee-based revenue and treasury gains, increased by 15% to ₹2,029 crore. Consequently, the pre-provision operating profit (PPOP) rose by 16% to ₹2,033 crore. These figures reflect the bank's ability to generate consistent income despite the volatile interest rate environment and the specific headwinds faced in the microfinance segment earlier in the year.

Recovery in the Microfinance Segment

A major highlight of the Q3 FY26 results is the stabilization of the MFI book. Management confirmed that the industry-wide stress in microfinance has played out. The bank's gross slippage numbers have declined by approximately 9% on a quarter-on-quarter basis, while net slippages have improved by 7%. This downward trend in slippages is a clear indicator that the asset quality in the rural and micro-lending segments is returning to normalcy.

The MFI portfolio now constitutes a smaller portion of the total funded assets, standing at approximately 2.7%. The bank has also maintained high insurance coverage on this portfolio, which further protects the balance sheet from potential future shocks. As the drag from this segment fades, the bank expects a meaningful reduction in overall credit costs starting from the fourth quarter of FY26.

Net Interest Margin and Cost of Funds

IDFC First Bank is targeting a Net Interest Margin (NIM) of 5.8% or higher by the end of the March 2026 quarter. The bank recently implemented significant cuts in savings account and deposit rates, with some buckets seeing reductions of up to 200 basis points. These lower deposit costs are expected to flow through the margins in Q4 FY26, providing a boost to profitability.

The management noted that the cost of funds has already begun to improve, dropping by 19 basis points sequentially in the recent period. By reducing the interest paid on deposits while maintaining a high-yield retail loan book, the bank is positioning itself for sustained margin expansion over the medium term.

Deposit Franchise and CASA Strength

The bank continues to boast one of the strongest deposit franchises in the Indian private banking space. The CASA (Current Account Savings Account) ratio stood at a comfortable 50.07% as of December 31, 2025. Customer deposits grew by 23.4% year-on-year to reach ₹2,69,094 crore, reflecting high customer trust and a successful retail-led deposit strategy.

While the bank expects the CASA ratio to remain in the 45-50% range, it aims to keep it closer to the 50% mark. The focus remains on raising low-cost granular deposits to fund its credit growth, which is projected to stay within the 20-23% range annually.

Financial Summary Table

Asset Quality and Credit Costs

Asset quality metrics remained resilient during the quarter. The Gross Non-Performing Assets (GNPA) ratio improved to 1.86%, while the Net Non-Performing Assets (NNPA) ratio stood at 0.52%. Excluding the MFI segment, the bank's other loan books, including mortgages, vehicle loans, and consumer loans, have remained exceptionally clean.

The credit cost for the quarter was approximately 2.25%, but management expects this to trend lower as slippages continue to fall. The bank has also utilized a portion of its microfinance provision buffer, reflecting the reduced stress in that specific portfolio. The provision coverage ratio (PCR) remains healthy at 72.2%, providing an adequate cushion for the existing NPA pool.

Asset Quality Ratios

Market Impact

Following the earnings announcement, market sentiment toward IDFC First Bank has remained positive. The bank's shares have gained nearly 30% over the past year, reflecting investor confidence in its retail transformation and the resolution of legacy issues. With a market capitalization of approximately ₹71,842 crore, the bank is increasingly viewed as a stable long-term player in the private banking sector.

Analysts suggest that the bank's ability to maintain high credit growth while simultaneously lowering its credit-deposit (CD) ratio is a significant positive. The CD ratio, which once stood at 169% following the merger, is now on a clear glide path toward the 80s, indicating a much more balanced and sustainable liquidity position.

Analysis Section

The Q3 FY26 results underscore IDFC First Bank's successful transition from a wholesale-heavy institution to a retail-focused powerhouse. The most critical takeaway is the management's assertion that the MFI pain is now a thing of the past. By aggressively cutting deposit rates, the bank is prioritizing margin protection over sheer volume, a move that is likely to be rewarded by the markets in the form of higher valuations.

Furthermore, the bank's operating leverage is beginning to play out. In the first half of FY26, total business grew by 21.6% while operating expenses grew by only 11.8%. This gap between income growth and expense growth is expected to widen as the bank scales its digital infrastructure and reduces its cost-to-income ratio in the coming years.

Conclusion

IDFC First Bank has delivered a robust set of numbers for Q3 FY26, marked by a 48% surge in net profit and a clear turnaround in asset quality. The stabilization of the microfinance book and the strategic reduction in deposit rates set the stage for a strong finish to the fiscal year. As the bank continues to improve its operating leverage and strengthen its retail franchise, it remains well-positioned to achieve its medium-term targets of higher NIMs and lower credit costs. Investors will be closely watching the Q4 FY26 results to see if the NIM target of 5.8% is achieved as guided by the management.