IDFC FIRST Bank released its Q1 FY26 financial results showing a mix of encouraging growth metrics alongside persistent profitability pressures. The bank’s net profit stood at Rs 463 crore for the quarter ended June 2025, marking a significant 32% decline compared to the same quarter last year, though improving sequentially by 52%. This stark dip was largely due to heightened provisions driven by disturbances in its microfinance (MFI) business, a segment the bank is actively running down amid evolving financial conditions.
Growth amidst Headwinds
The bank’s operating income displayed resilience, with total operating income up by around 13.4% year-on-year. Net Interest Income (NII) also saw healthy growth of approximately 5.1% YoY to Rs 4,933 crore, evidencing strong core income generation capabilities. Fee income and other non-interest revenue streams increased steadily, buoying performance.
A notable trend was the contraction in net interest margin (NIM) by 24 basis points sequentially to 5.71%. This compression is attributed to several factors: the pass-through of lower repo rates to borrowers, decreased investment yields, and a shift in the bank’s asset mix away from the higher-yielding MFI book. The MFI portfolio was pared down sharply, reducing its share from 6.3% to 3.3%, aligning with the bank’s strategic focus to moderate risks in this segment.
Deposits and Loans: Building a Stronger Base
Customer deposits, the raw material for any bank’s growth, expanded robustly by 25.5% year-on-year to Rs 2,56,799 crore. CASA deposits surged by over 30%, improving the bank’s CASA ratio to a healthy 48%, a key indicator of low-cost funding strength. Retail deposits accounted for 80% of total deposits, underscoring strong customer franchise growth.
On the asset side, loans and advances expanded by 21%, reaching Rs 2,53,233 crore. Growth was broad-based with retail, rural, MSME, and wholesale banking sectors contributing substantially. Wholesale loans soared by nearly 39%, while retail-related lending rose 17%, reflecting diversified portfolio expansion. The bank’s calculated incremental credit-to-deposit ratio was a conservative 75.8%, indicating measured lending.
Asset Quality and Provisions: A Cautious Stance
Asset quality showed mild deteriorations. Gross Non-Performing Assets (GNPA) marginally increased to 1.97% from 1.87%, while Net NPAs rose slightly to 0.55%, reflecting elevated credit costs, primarily linked to MFI slippages. The bank adequately provisioned Rs 1,659 crore for the quarter, a 67% jump from the previous year, demonstrating a prudent risk management approach.
Despite provisioning challenges, the Provision Coverage Ratio stood firm near 72%, signifying well-covered stressed assets. The bank’s approach includes insurance cover (CGFMU) to mitigate risks linked with the uncollateralized microfinance portfolio, providing a layer of credit risk buffer.
Cost Efficiency: A Work in Progress
Operating expenses grew 11% YoY, constraining profitability amid margin pressures and elevated loan loss provisions. The cost-to-income ratio remains high at over 70%, compared to leading banks operating near 40%. Management has outlined plans to leverage scale benefits and slow branch additions, aiming to moderate operating costs through digital initiatives and efficiency drives.
Management Outlook: Positioned for Recovery
CEO V Vaidyanathan expressed optimism based on the bank’s strong capital base (Capital Adequacy Ratio close to 15% including profits) and robust deposit franchise. He expects margins to improve in the latter half of FY26 as the benefits of repo rate cuts pass through fully and as the microfinance portfolio issues subside. The bank targets cost-to-income ratio moderation and sustained loan book growth in the range of 18-20%.
Investment Implications
IDFC FIRST Bank’s stock trades at a price-to-book (P/B) ratio of around 1.34, slightly below its five-year median of 1.5. The bank remains well-capitalized with a diversified loan portfolio but faces near-term earnings headwinds from provision requirements and margin pressure. Improvement triggers include stabilization of asset quality and achieving cost efficiency comparable to leading peers.