IDFC FIRST Bank’s Q4FY25 earnings sparked significant discussion, revealing challenges and opportunities as the bank navigates a competitive financial landscape. Despite underperforming market expectations in net interest income and profit after tax, the bank showcased resilience in stabilizing non-microfinance stress and advancing its digital infrastructure. This article delves into the bank’s performance, analyzing credit costs, income dynamics, operational expenses, and strategic priorities, while offering insights into its growth trajectory.
Understanding Q4FY25 Financial Performance
The Q4FY25 results for IDFC FIRST Bank highlighted a mixed performance. Net interest income and profit after tax fell short of CNBC TV18 poll estimates, reflecting pressures from high credit costs and a strategic reduction in the microfinance portfolio. However, the bank maintained stable non-microfinance stress levels, a critical positive amid market concerns.
The credit cost ratio, reported at 2.45% for the year, exceeded the bank’s guidance, driven by microfinance challenges and a legacy infrastructure account. Excluding these factors, the core credit cost stood at 1.76%, signaling robust underlying portfolio health. Gross non-performing assets (NPAs) remained steady at 1.87%, with net NPAs at 0.83%, underscoring effective risk management in the core book.
Navigating Credit Costs and Microfinance Challenges
Credit costs emerged as a focal point in IDFC FIRST Bank’s Q4FY25 performance. The reported 2.45% credit cost ratio included impacts from microfinance and a legacy toll road infrastructure account. Adjusting for these, the core credit cost of 1.76% reflects a healthier portfolio.
Microfinance, a historically volatile segment, significantly influenced the bank’s performance. The microfinance book shrank dramatically from ₹13,500 crore in March 2024 to ₹9,500 crore, a 44% reduction. This contraction, while reducing income due to high yields of 23–24%, was a deliberate move to de-risk the portfolio. The bank anticipates the worst of microfinance stress has passed, with provisions peaking in Q4FY25 and expected to decline progressively in subsequent quarters.
A key indicator of improving microfinance health is the reduction in the Special Mention Account (SMA) pool, which dropped from ₹777 crore to ₹640 crore. This decline in SMA-0, SMA-1, and SMA-2 accounts signals lower future provisioning needs, bolstering confidence in the bank’s recovery trajectory.
Income Growth Dynamics and Strategic Portfolio Shift
Income growth faced headwinds in Q4FY25, primarily due to the microfinance portfolio contraction. The reduced book size directly impacted interest income, as the high-yield microfinance segment’s share in the total portfolio fell from 7% to approximately 4.8%. The bank projects this share to further decline to 3%, aligning with its ambition to transition from a mid-tier to a large-scale bank.
Despite the slowdown, IDFC FIRST Bank expects income growth of around 14% in the coming year, tempered by the lower microfinance contribution. This growth will be supported by a diversified loan book, with retail, MSME, commercial, corporate, and agri segments driving expansion. The bank’s strategic focus on reducing microfinance reliance aims to enhance portfolio stability and support sustainable income growth.
Operational Expenses: Balancing Growth and Efficiency
Operational expenses (OPEX) remain a critical area of focus for IDFC FIRST Bank, with Q4FY25 OPEX reaching ₹4,991 crore. This figure, comparable to larger banks like Kotak Mahindra, reflects the bank’s aggressive expansion over the past five years. From 200 branches in 2020 to 1,000 branches today, and from 200 ATMs to 1,100, the bank has significantly scaled its physical and digital infrastructure.
The high OPEX has driven the cost-to-income ratio to among the highest in the industry, at approximately 75%. However, the bank is actively addressing this through cost optimization. OPEX growth slowed from 21% in Q1 of the previous year to 12% in Q4FY25, with projections for 13% growth in the next year. This disciplined approach to cost management is expected to enhance operating profit and profit after tax in FY26.
The bank’s investment in new business lines, such as cash management, FASTag, credit cards, and liability franchises, has contributed to elevated costs. These initiatives, while currently cost-intensive, are designed to deliver long-term returns as the bank scales its operations.
Leveraging Technology for Growth and Efficiency
Technology plays a pivotal role in IDFC FIRST Bank’s strategy, enabling deposit growth and operational efficiency. In FY25, the bank grew deposits by 25% while adding only 58 branches, a 7% increase in branch count. For the current year, a planned 10% branch expansion is expected to drive 23–24% deposit growth, highlighting the power of digital channels.
The bank’s digital machinery supports significant deposit origination, with ₹50,000 crore generated annually. This digital-first approach not only reduces reliance on physical branches but also enhances customer experience, positioning IDFC FIRST Bank as a modern, tech-driven institution.
Margin Trends and Cost of Funds Optimization
Net interest margins (NIMs) moderated to 5.95% in Q4FY25, down from over 6% previously, reflecting the reduced microfinance portfolio and broader market dynamics. The bank anticipates further margin compression to 5.85% in FY26, driven by expected repo rate cuts of 50 basis points and a 30% repo-linked loan book.
To counter margin pressures, IDFC FIRST Bank has strategically lowered its cost of funds. Fixed deposit rates were recently aligned with those of larger banks, a significant shift from being 200 basis points higher five years ago. This reduction in deposit costs is expected to mitigate the impact of lower yields, maintaining margin stability.
Return on Assets (ROA) and Market Perception
The bank’s return on assets (ROA) declined to 0.34% in Q4FY25, impacted by higher credit costs and lower income. This contributed to a 1.2% stock price drop on the results day, despite a buoyant market. However, IDFC FIRST Bank targets a 1% ROA by the end of FY26, driven by receding microfinance stress and improved operational efficiency.
The bank’s proactive measures, including cost optimization and portfolio diversification, aim to restore investor confidence. The revised Liquidity Coverage Ratio (LCR) guidelines, requiring only ₹4,000 crore in additional cash compared to ₹10,000 crore under draft guidelines, further support margin improvement by freeing up lendable funds.
Strategic Growth Segments
With microfinance de-emphasized, IDFC FIRST Bank is focusing on five key segments for growth:
- Retail Banking: Expanding retail loans and deposit products to capture a broader customer base.
- MSME Banking: Targeting small and medium enterprises with tailored financial solutions.
- Commercial Banking: Building a dedicated team to serve mid-sized corporates, bridging small businesses and large corporates.
- Corporate Banking: Strengthening relationships with large corporates for high-value lending.
- Agri Banking: Supporting agricultural businesses with specialized financing.
The bank’s focus on commercial banking, in particular, signals a strategic push to diversify revenue streams and reduce reliance on any single segment.
Addressing Cost-to-Income Ratio Concerns
The cost-to-income ratio of 75% remains a challenge, but IDFC FIRST Bank is confident in reducing it to the mid-to-late 40s within two to three years. This target aligns with industry benchmarks for modern banks, as highlighted by industry veteran KV Kamath’s vision of banks cutting cost-to-income ratios significantly.
The bank’s youth—only six years old compared to peers with decades of operations—contextualizes its high cost base. Investments in technology, new business lines, and branch expansion are expected to yield economies of scale, driving the ratio lower as the bank matures.
Debunking Branch Cost Misconceptions
Concerns about high branch costs, estimated at ₹19 crore per branch compared to ₹6–7 crore for peers like ICICI and HDFC, were addressed as misleading. IDFC FIRST Bank’s lower branch count (1,000 versus competitors’ larger networks) and digital-driven deposit origination skew traditional cost-per-branch metrics. Non-branch businesses, such as credit cards and cash management, also contribute to OPEX, making direct comparisons inaccurate.
The bank emphasized that its branch costs align with industry norms, and its digital infrastructure reduces the need for extensive physical expansion, supporting cost efficiency.
Future Outlook: FY26 and Beyond
Looking ahead, IDFC FIRST Bank is poised for recovery and growth. Key projections include:
- Loan Book Growth: Approximately 20% growth in FY26, driven by diversified segments.
- Income Growth: 14% growth, tempered by microfinance reduction but supported by other segments.
- OPEX Moderation: 13% growth, reflecting disciplined cost management.
- ROA Recovery: Targeting 1% by FY26, supported by lower credit costs and improved efficiency.
- Cost-to-Income Ratio: Mid-to-late 40s within two to three years, aligning with industry standards.
In FY27, the bank anticipates further improvements, with income growth accelerating to 18% as the microfinance base stabilizes. The bank’s strong brand, robust franchise, and technological advancements position it for sustained growth.
Conclusion: A Bank in Transition
IDFC FIRST Bank’s Q4FY25 performance reflects the challenges of a young bank navigating a complex financial environment. While microfinance stress and high OPEX posed hurdles, the bank’s strategic focus on portfolio diversification, cost optimization, and digital innovation sets a strong foundation for future success. By targeting a 1% ROA, reducing its cost-to-income ratio, and leveraging technology, IDFC FIRST Bank aims to evolve into a leading large-scale bank. Investors and stakeholders can anticipate a transformative journey as the bank capitalizes on its strengths and addresses its challenges.
