Axis Securities has reiterated a BUY call on IDFC First Bank Ltd., setting a revised target price of Rs 82 per share, implying an upside of nearly 22% from current levels. The bank delivered a mixed Q4FY26 performance—Net Interest Income (NII) remained broadly in line, pre-provision operating profit (PPOP) disappointed, but profitability surprised positively. Encouragingly, asset quality continues to improve, while margin resilience and disciplined cost control are setting the stage for a structural return on assets (RoA) recovery. With operating leverage expected to kick in and liability-side inefficiencies gradually easing, the bank appears positioned for a steady re-rating over the medium term.

Q4FY26 Performance Snapshot: Profit Beat Masks Operational Weakness

Mixed quarterly outcome with earnings upside:
The bank reported NII of Rs 5,677 crore, reflecting a 16% YoY growth, supported by both loan expansion and margin improvement. However, PPOP declined sharply by 42% YoY, highlighting pressure on operating profitability. Despite this, PAT came in at Rs 319 crore, beating expectations due to lower provisions and a tax write-back.

Margin surprise remains a bright spot:
Net Interest Margins (NIMs) expanded to 5.93%, outperforming management guidance of 5.85%. This reflects effective balance sheet optimization and favorable funding dynamics during the quarter.

Deposit Disruption Temporary; Growth Momentum Rebuilding

Short-term deposit slowdown observed:
Deposits remained flat sequentially due to multiple headwinds—rate rationalization, tight liquidity, seasonal outflows, and a one-off branch issue.

Early recovery signals visible:
Management has indicated improving trends in April 2026, supported by steady customer acquisition. The bank expects to return to ~5% QoQ deposit growth starting Q1FY27, signaling normalization ahead.

Operating Leverage: The Core Driver of Future Profitability

Cost discipline becoming structural:
Excluding one-offs, operating expenses grew only ~12% YoY, indicating tight cost control. The bank aims to maintain opex growth at 13–14%, below revenue growth, unlocking operating leverage.

Cost-income ratio remains elevated but improving:
The C/I ratio surged to 85.8% in Q4FY26 but is expected to decline steadily as scale benefits kick in. The liability franchise drag has already reduced to ~1% and is projected to improve further.

Long-term efficiency roadmap:
Management targets a liability franchise cost-income ratio of ~100% over the next 4–5 years, down from 146% in FY26—an important catalyst for RoA expansion.

Asset Quality Strengthens; Credit Costs Under Control

Improvement across key metrics:
Gross NPAs declined to 1.61%, while Net NPAs stood at 0.48%. Slippages dropped significantly to 2.5%, marking a multi-quarter low.

Microfinance portfolio stabilizing:
Collection efficiency has normalized to pre-crisis levels (~99.7%), reducing systemic risk in the MFI segment.

Credit cost outlook stable:
The bank expects credit costs to moderate to 1.7–1.8% in FY27, supported by improving asset quality trends.

Growth Outlook: Strong Credit Expansion with Diversified Drivers

Loan growth remains robust:
Advances grew 20% YoY, driven by mortgages, vehicle loans, consumer finance, and business banking, which together contributed ~87% of incremental growth.

Balanced portfolio strategy:
The bank is cautiously expanding its MFI and wholesale books, targeting ~15–20% growth in MFI and leveraging opportunities in cleaned-up wholesale segments.

Medium-term growth trajectory:
Axis Securities expects a ~21% CAGR in credit growth, supported by diversified lending and gradual normalization of legacy portfolios.

Financial Projections and Valuation Metrics

Valuation remains attractive:
The stock currently trades at ~1.1x FY28E ABV and is valued at 1.3x, leading to a target price of Rs 82 per share.

Investment Thesis: Gradual Re-Rating with Execution-Linked Upside

RoA expansion is the key catalyst:
The bank is expected to improve RoA from 0.4% in FY26 to 0.9–1.2% over FY27–FY28, driven by operating leverage and cost optimization.

Margin stability supports earnings visibility:
NIMs are expected to stabilize around 5.8%, ensuring consistent income generation despite a shift toward lower-yield segments.

Liability franchise turnaround critical:
Reducing cost inefficiencies on the liability side will be central to unlocking long-term profitability.

Risks to Monitor: Execution and Macro Sensitivities

High cost ratios could delay profitability:
If cost discipline weakens, RoA recovery may remain muted.

Credit growth slowdown risk:
Macroeconomic factors or systemic liquidity constraints could impact loan growth.

Asset quality surprises:
Any deterioration in unsecured lending or credit cards could elevate credit costs.

Final Verdict: BUY with Medium-Term Conviction

Axis Securities maintains a BUY rating on IDFC First Bank with a target price of Rs 82, implying a 22% upside. The investment case hinges on a gradual but visible recovery in operating metrics, improving asset quality, and structural gains from operating leverage. While near-term volatility may persist, the bank’s strategic repositioning and improving fundamentals suggest a compelling medium-term opportunity for investors willing to ride the recovery cycle.