IDFC First Bank shares downgraded by UBS, price target cut on expensive valuations

Shares of IDFC First Bank Ltd. declined on Wednesday, November 19, as brokerage firm UBS downgraded the stock and cut its price target as well.

UBS has downgraded its rating on IDFC First Bank to "sell" from "neutral" and has reduced its target price to ₹75 per share from its previous ₹80 apiece. This implies a downside of 6.2% from its previous closing price of ₹80.11 per share.

The brokerage cites a modest upside to IDFC First Bank's Return on Assets (RoA), limited improvement in its credit costs, and also cites expensive valuations among other factors as some key reasons behind the downgrade.

UBS has also lowered its Earnings Per Share (EPS) estimate for FY26 and FY27 to 8% and 5%, respectively for IDFC First Bank.

Credit cost to see limited improvement

Ever since its September quarter earnings, IDFC First Bank's share price has gained around 13% on better asset quality potential and an improving growth environment, UBS said. It expects unsecured loans (primarily MFI) asset quality to stabilise but non-MFI asset quality may remain sticky.

As per the analyst's sector note, it expects an increased risk from business / SME loans for mid-size banks and it has raised its credit cost forecasts by 5 basis points. Hence, it believes this would limit any material improvement in credit cost.

UBS said it has also built in another 25 basis points repo rate cut, and that, along with slower unsecured loan growth, which may keep the net interest margin (NIM) stable around 5.8% over financial year 2026-2028. It expects an elevated cost-to-income ratio of around 67% to keep the RoA between 0.9% - 1% by FY27.

UBS said IDFC First Bank trades at 1.4 times its estimated price-to-book ratio for FY27, which is a 7% discount to Axis Bank. This seems "rich" when compared to peers with better RoE profiles, UBS said.

Loan growth and margins outlook stable

UBS said it expects a gradual pick-up in unsecured loans, but this may remain below the overall 20% compounded annual growth rate (CAGR) for FY26-28. It expects margins to remain steady with yield pressure likely offset by lower cost of funds and a higher current account savings account (CASA) ratio.

UBS said its latest study indicates the risk of business /  SME loan delinquencies is trending up for recent borrowers for mid-size banks, posing a downside risk as these form around 13% of IDFC First Bank's total loans and could limit material asset-quality improvement.

Valuation seems expensive

UBS said it has raised the lender's credit costs by 5 bps to incorporate SME risk, which may remain at 1.9% to 2% over FY27-28. It has lowered its fee income while tweaking its margin and opex assumptions.

UBS has estimated the lender's cost-to-income ratio of around 67% for FY27 and 64% for FY28 and forecast around 1% and 9% RoA and RoE, respectively by FY27, compared to 1.1% in FY22-24. Hence, overall it has cut its earnings per share estimates to 8% and 5% for FY26 and FY27, respectively.

UBS said operating expenses and credit costs are the two upside risks for the lender.

Shares of IDFC First Bank were trading 0.5% lower at ₹79.7 apiece around 11 am. The stock has gained 24.2% this year, so far.

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