Analyst Concall
IDFC FIRST Bk sees NIM rising to 5.8% Q4 sans more rate cuts
This story was originally published at 22:08 IST on 26 July 2025
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--IDFC FIRST Bank: Expect INR-75-bln fundraise to complete in Jul-Sept
--CONTEXT: Comments from IDFC FIRST Bk's mgmt in post-earnings analyst call
--IDFC FIRST Bank: Microfinance stress has hit a bottom finally
--IDFC FIRST Bank: Not concerned on slippage ratio, continue to be watchful
--IDFC FIRST Bank: See collection efficiency improving in some segments
--IDFC FIRST Bank:Expect pressure on NIM continue in Jul-Sept post rate cuts
--IDFC FIRST Bank: Guide for credit cost FY26 to be 2.00-2.05%
--IDFC FIRST Bank: NIM may recover to Q4FY25 level by Jan-Mar if no rate cut
--IDFC FIRST Bank: Word of caution on cost-to-income guidance of 65% by FY27
--IDFC FIRST Bank: Aim to contain FY26 operating expense growth at 12% YoY
--IDFC FIRST Bank: See Jan-Mar NIM around 5.8% sans more rate cuts
--IDFC FIRST Bank: See value in growing microfinance business in medium-term
--IDFC FIRST Bank:Aim to grow microfinance book again once stress stabilises
--IDFC FIRST Bank: Transmission of April rate cut not complete
--IDFC FIRST Bank: Fund raise to prop up NIM without cutting deposit rates
--IDFC FIRST Bank: Don't see material stress on asset quality going ahead
By Aaryan Khanna and Cassandra Carvalho
NEW DELHI/MUMBAI – IDFC FIRST Bank expects its net interest margin to rise to around 5.8% or slightly higher by Jan-Mar from 5.71% in the June quarter, the management told analysts and investors in a post-earnings conference call. This would be achieved both by cost of funds going down over the period after the Reserve Bank of India's repo rate cuts and through its capital infusion plans, which would be completed in the quarter ending September.
"I am not sure if we discussed in the call or not, but like 5.8%-ish or so is what we expect Q4 (March quarter) to be," the management said. "...(it could be) slightly higher, but only caveat with it is also contingent on repo, any more repo rate cuts which may sort of come through."
Earlier in the call, the management said its margins could be similar to Jan-Mar 2025 levels, which was at 5.95%, in the same quarter the next year. While Jul-Sept will see still pressures of margins as loans reprice lower following the RBI's Monetary Policy Committee cutting the policy repo rate by 100 basis points since February, interest margins and income should rise in the second half of 2025-26 (Apr-Mar), the management said.
"So, that pass-through (of rate cuts) to a great extent will happen in Q2 on the June cut," Chief Financial Officer Sudhanshu Jain said. "And I would say some bit of repo transmission for the earlier cuts would also have an impact in Q2." The management said that even the full passthrough of the repo rate cut in April had also not happened yet.
Following that, the bank's interest margins should expand even without cutting term deposit rates further, particularly as it makes use of the capital infusion that will come through in the September quarter, Managing Director and Chief Executive Officer V. Vaidyanathan said. In April, the bank's board approved raising INR 75 billion from arms of Warburg Pincus LLC and Abu Dhabi Investment Authority. Last week, Currant Sea Investments B.V.--the Warburg Pincus subsidiary--received approval from the RBI to pick up a 9.99% stake, with an agreement to investment INR 48.76 billion in the private sector lender.
Earlier Saturday, IDFC FIRST Bank reported an on-year fall in net profit to INR 4.63 billion, though the bottom line ended up higher than analyst estimates. However, net interest income was below estimates and high provisions of INR 16.52 billion--particularly on the microfinance portfolio--continued to eat into the bottom line.
MICROFINANCE BUSINESS
The management said the stress in the microfinance segment was finally at a bottom. IDFC FIRST Bank wants to grow its microfinance business in the medium-term despite the recent buildup of bad loans and high provisioning that has eaten into profits, Vaidyanathan said. He said the bank's network on the ground was well suited to expand the business again, the high yields on the loans aided profitability and the lender could meet its priority sector lending targets better.
"Because let me make it simple to you, that this is a really good franchise we have built. It's a really, really good franchise," Vaidyanathan said. "It's not just because this major incident happened... I have no intention of shutting it down or closing it or anything like that. It's a really good business."
From the current levels of INR 83.54 billion as of Jun. 30, Vaidyanathan said the portfolio would bottom out at around INR 75 billion and then start rising again. Going ahead, the bank would look to ensure its microfinance loans were insured, which was a learning from the current period of stress. The bank said 72% of its microfinance loans were covered by insurance as of Jun. 30. Incremental disbursements in the portfolio were being insured under the central government's Credit Guarantee Fund for Micro Units scheme.
The bank has been curtailing its microfinance loan book over the past 15 months, which stood at only 3.3% of its total advances on Jun. 30 from 6.6% in March 2024. The CEO had said in April that FY25 had been lost to the shock on the microfinance portfolio, which led to the lender's annual profit after tax halving to INR 15.25 billion in the financial year ended March.
Collection efficiency of the Chennai-based lender had fallen sharply in mid-2024 following devastating floods in Tamil Nadu, leading to a spurt in bad loans and provisioning building up over the next few quarters and still playing out in the June quarter. In January, the Karnataka government also said it was mulling an ordinance that protects borrowers from microfinance lenders from high rates of interest and coercive recovery tactics.
The management said it remains watchful of further stress in the rural segment, but said collection efficiencies have improved in some states with a large microfinance exposure for the bank. Collection efficiency improved to 99.0% in the June quarter from 98.1% in the March quarter and nearly 96% earlier in FY25.
ASSET QUALITY
The rise in bad loans in the June quarter was led by the microfinance book, seasonal stress in collection efficiency and one service provider of automated teller machines, the management said. The account led to a slippage of INR 1.08 billion, which was fully provided for, according to the bank's investor presentation.
The management told analysts there was no material buildup in stress among different verticals to flag, even as slippages and provisions rose in the June quarter and non-performing asset ratios worsened. Fresh slippages even excluding the microfinance book, including the ATM account, rose 23% on quarter to INR 19.72 billion. The gross slippage ratio of the bank excluding microfinance rose to 3.54% in the June quarter from 3.35% in the March quarter.
"I have also said that the slippage ratio for the current quarter, it's only marginally up, which is what we saw in last four quarters of FY25," the management said. "So we are personally not very concerned, but we continue to be watchful." The management reiterated a 2-1-2 mantra for asset quality – a gross non-performing asset ratio of 2%, a net NPA of 1%, and a credit cost of 2%.
It guided for credit costs to be in the 2.00-2.05% range in FY26 as well. Credit costs rose to 2.0% in the June quarter from 1.8% in the trailing quarter, excluding the microfinance business. Some of the verticals may see cyclical stress in the coming months, but a large shock such as the microfinance one was not coming in the near-term, and the bank was monitoring an increase in bad loans carefully, the management said.
"So would you say can, can the numbers change the five basis points, 10 basis points? Yeah, of course," Vaidyanathan said. "You're running a bank. Anything can happen. But 50 basis points? No, no, no."
EXPENSES IN CHECK
The bank is consciously looking to reduce its operating expenses and aims to keep its operating expense growth within 12% in FY26, the management said. It highlighted that June quarter operating expense growth was only 11% on year at INR 49.21 billion. However, it flagged risks to its cost to income guidance of 65% by FY27. In Apr-Jun, its cost-to-income ratio was 74%, excluding trading gains.
"So just keep a word of caution there...because of the microfinance issue and this repo rate, so many things have happened," Vaidyanathan said. "So just keep an eye out on that. But we are at least attempting to go in the direction."
Another way to control expenses was that the bank had sharply cut its fixed deposit rates, which would aid the bottom line and cost of funds structurally over many quarters, while offering higher savings deposit rates to customers, Vaidyanathan said. This would allow the lender to continue exceeding the pace of deposit growth in the banking system, he said. While banking system deposits were up 10.1% on year as of Jun. 27, according to RBI data, IDFC FIRST Bank's deposits grew 25.5% on year to INR 2.57 trillion as of Jun. 30. End
Edited by Ashish Shirke
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