Motilal Oswal sees improving asset quality, stronger deposit mobilisation and fading MFI and fraud-related pressures supporting an earnings recovery at IDFC First Bank

Shares of IDFC First Bank gained around 3 per cent in intraday trading on Wednesday, September 23, moving closer to their 52-week high after Motilal Oswal Financial Services (MOFSL) upgraded the stock to ‘Buy’ from ‘Neutral’. The brokerage has assigned a target price of ₹105, citing improving balance-sheet quality, stronger deposit growth, better internal controls and a gradual recovery in profitability.

The stock rose to ₹87.77 during the session on the BSE, close to its previous 52-week high of ₹88.70 recorded on July 27, 2026. According to the market data cited in the source, IDFC First Bank had gained about 25 per cent over the preceding year, while the Sensex declined 12.3 per cent during the same period.

Motilal Oswal Raises Rating to Buy

MOFSL’s upgrade is based on its assessment that several pressures that had affected IDFC First Bank’s earnings are now beginning to ease.

The brokerage expects the bank’s core franchise to benefit from sustained loan growth, improving deposit mobilisation, stronger fee income and better operating leverage.

MOFSL has set a target price of ₹105, valuing the bank at 1.6 times its estimated FY28 adjusted book value (ABV).

The brokerage’s view is that the bank is gradually moving away from a balance-sheet repair phase towards a period of more consistent earnings growth.

Advances and Deposits Continue to Expand

According to MOFSL, IDFC First Bank has delivered strong balance-sheet growth over the past three years.

Advances have grown at a compound annual growth rate (CAGR) of around 21 per cent, while deposits have expanded at a faster 26 per cent CAGR.

The faster growth in deposits has strengthened the bank’s liability franchise and reduced pressure on its funding profile. The credit-to-deposit ratio has declined to around 94 per cent from 108 per cent in FY23.

A lower credit-to-deposit ratio provides greater room for the bank to support future loan growth without relying to the same extent on incremental deposit mobilisation.

FCNR Deposits Could Support Incremental Income

Another factor highlighted by MOFSL is the bank’s mobilisation of $3.57 billion through Foreign Currency Non-Resident (Bank) deposits, equivalent to around 11 per cent of deposits.

The brokerage estimates that the leverage associated with these deposits could result in a 7-12 basis point compression in full-year net interest margins (NIMs).

However, this potential pressure could be partly offset by changes in deposit pricing. The bank’s move towards progressive savings-account pricing, combined with reductions in term-deposit rates, could help manage funding costs.

MOFSL estimates that the FCNR mobilisation could increase incremental net interest income by around 1.5-4.4 per cent.

Earnings Could Benefit From Improving Operating Leverage

Despite the potential near-term NIM pressure, MOFSL expects the combination of FCNR-related income, improving operating efficiency and stronger business growth to support earnings.

The brokerage estimates that these factors could result in a 4.1-6.8 per cent increase in FY27 estimated earnings.

The improvement in operating leverage is particularly important because higher business volumes can allow the bank to spread its operating expenses over a larger revenue base.

Asset Quality Pressures Are Gradually Easing

Asset quality has been one of the major factors affecting IDFC First Bank’s profitability over the past two years.

The bank was impacted by stress in its microfinance institution (MFI) portfolio, which pushed credit costs to around 3 per cent in FY25 and FY26.

The MFI portfolio has subsequently reduced significantly, falling to around ₹6,700 crore from ₹13,340 crore in FY24.

With the size of the MFI book declining, the potential impact of further stress from this segment could become more manageable.

MOFSL also noted that the bank has recently lowered its credit-cost guidance, which the brokerage views as an indication of improving asset-quality trends.

Fraud-Related Impact Has Been Recognised

The bank’s reported earnings were also affected by a deposit fraud incident.

According to MOFSL, the financial impact related to the incident has now been fully recognised. This removes one of the significant exceptional pressures that had affected the bank’s reported performance.

The combination of the reduced MFI exposure and the recognition of the fraud-related impact could allow investors to focus more closely on the underlying performance of the core banking franchise.

Internal Controls and Governance Strengthened

MOFSL also highlighted improvements in IDFC First Bank’s internal controls and governance processes.

Strengthening these areas is important for a bank because operational controls, risk management and governance directly influence credit quality, deposit confidence and long-term balance-sheet stability.

The brokerage’s assessment suggests that the improvements in these areas, alongside declining credit-cost pressures, have contributed to its more constructive view of the bank.

Loan Growth and Fee Income Remain Key Drivers

Going forward, MOFSL expects loan growth of around 21 per cent, along with stable NIMs and continued traction in fee income, to support the recovery in profitability.

Fee income is particularly relevant as it can diversify a bank’s revenue base beyond the interest income generated from loans.

If the bank can maintain strong loan growth while keeping asset quality under control, improving operating leverage could become increasingly visible in its earnings.

From Balance-Sheet Repair to Earnings Recovery

The central argument behind MOFSL’s upgrade is that several of IDFC First Bank’s previous earnings headwinds are fading.

The MFI stress cycle has reduced the size of the affected portfolio, the fraud-related impact has been recognised, deposit growth has outpaced loan growth and credit-cost guidance has improved.

This creates the possibility of a more normalised earnings environment.

However, the recovery will still depend on the bank maintaining asset-quality discipline while expanding its loan book and controlling funding costs.

Key Risks Investors Need to Monitor

Despite the positive brokerage outlook, several factors remain important for investors tracking IDFC First Bank.

Any renewed stress in the MFI or other unsecured lending portfolios could increase credit costs. Similarly, pressure on NIMs could affect earnings if deposit costs remain elevated or loan yields weaken.

The bank will also need to balance rapid loan growth with prudent underwriting. Stronger growth can improve operating leverage, but aggressive expansion without adequate risk controls could eventually affect asset quality.

Investors will therefore need to monitor quarterly trends in deposits, advances, NIMs, credit costs, slippages, provisions, fee income and operating expenses.

Market Outlook

IDFC First Bank’s latest share-price move reflects renewed investor attention following Motilal Oswal’s upgrade to ‘Buy’ and ₹105 target price. The brokerage’s thesis centres on the fading impact of MFI stress and the deposit fraud incident, stronger deposit mobilisation, improving internal controls and the potential for operating leverage to support earnings.

The bank’s next phase of growth will depend on whether it can sustain strong loan and deposit expansion while maintaining stable margins and controlling credit costs. The reduction in the MFI portfolio and full recognition of the fraud-related impact could provide greater earnings visibility, but asset quality and funding costs remain important variables.

With the stock trading close to its 52-week high, investors are likely to focus closely on whether the expected improvement in profitability is reflected in upcoming financial results and whether the bank can translate balance-sheet growth into sustainable earnings growth.