Why Is IDFC First Bank Confident of a NIM Recovery From Q3 FY26?
IDFC First Bank is preparing for a turnaround in its net interest margins (NIMs) starting Q3 FY26, after facing pressure over the past two quarters. According to Managing Director and CEO V. Vaidyanathan, the compression phase is likely behind, and margins are expected to expand steadily as funding costs stabilize and lending spreads widen. The bank, which had witnessed moderation due to repo rate cuts and treasury-related factors, now anticipates sequential improvement through the rest of the fiscal year.
With loan growth staying resilient, asset quality improving, and provisions trending lower, IDFC First Bank’s management believes its profitability cycle is turning upward. The CEO highlighted that the full benefit of the repo rate transmission is now visible in lending margins, setting the stage for higher NIMs in Q3 and Q4 of FY26. The private lender is also reducing reliance on short-term borrowings by building a stronger deposit franchise.
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Sequential Margin Improvement Expected
After witnessing NIM compression for two straight quarters, IDFC First Bank expects margins to recover from October–December 2025. In Q2 FY26, the bank’s NIM stood at 5.59%, down 59 basis points year-on-year. Sequentially, it dropped by 12 bps compared to Q1. However, the management noted that this represents the bottom of the cycle, with improvements projected as borrowing costs ease and loan repricing catches up.
| Metric | Q2 FY26 | Q1 FY26 / Q4 FY25 |
|---|---|---|
| Net Interest Margin (NIM) | 5.59% | 5.71% / 5.87% |
| Cost of Deposits | 6.22% | 6.41% (Q1 FY26) |
| CASA Ratio | 50.1% | 49.8% (Previous Quarter) |
The improvement in CASA (current and savings account) deposits has been key to reducing funding costs. On a quarterly basis, cost of funds fell by nearly 19 basis points. The bank now pays only around 60 bps above the scheduled commercial bank average, compared with over 280 bps earlier — indicating substantial efficiency gains.
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Focus on Deposit Growth and Stable Liquidity
The management reiterated that IDFC First Bank’s focus remains on granular deposits and consistent balance sheet expansion rather than chasing aggressive loan growth. The credit-deposit ratio stands at 94.2%, and the bank aims to bring it closer to the mid-80s over time. This will reduce dependency on wholesale borrowings and strengthen liquidity buffers. With over ₹2.7 trillion in loans and ₹2.9 trillion in deposits, the lender continues to prioritize balance between growth and stability.
The bank’s retail orientation is evident — mortgages, vehicle finance, and MSME loans form a substantial portion of its lending book. The wholesale portfolio has been deliberately reduced to maintain diversification and mitigate concentration risk. Management noted that none of its 25 lending verticals account for more than 12% of total exposure, ensuring a well-distributed risk profile.
Core Profitability and Operating Leverage
Core profitability has improved both quarter-on-quarter and year-on-year, supported by steady loan growth and declining cost-to-income ratios. Treasury income, which affected earlier quarters due to the absence of ₹470 crore in one-off gains, is expected to normalize. Provisioning has reduced, reflecting stable asset quality and improving recoveries. The bank’s NRI segment, digital banking suite, and startup-focused offerings continue to expand its retail base globally.
Further, integration with international payment systems and UPI-linked global mobile features in markets such as the US, Canada, France, and the UK, enhances its brand visibility among overseas Indian customers. With digital onboarding through GIFT City and cross-border solutions, IDFC First is strengthening its global banking capabilities.
Outlook: Steady Gains, Disciplined Growth
The management has emphasized that it is “in no hurry” to chase short-term targets, preferring to focus on sustainable expansion built on sound fundamentals. Lower GST rates, improving tax collections, and steady consumption growth are expected to boost credit demand across retail and MSME segments. Analysts believe that FY26 could mark a transition year where higher loan yields and better liability management restore IDFC First Bank’s profitability momentum.
Investor Takeaway
Indian-Share-Tips.com Nifty Expert Gulshan Khera, CFP®, who is also a SEBI Regd Investment Adviser, observes that IDFC First Bank’s gradual NIM improvement and focus on retail granularity are encouraging signs for long-term investors. The disciplined cost management, rising CASA share, and diversified book indicate resilience amid volatile interest cycles. The next two quarters will be key in confirming this turnaround trajectory.
Discover more expert commentary and research-based banking insights at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.
Related Queries on IDFC First Bank
- Will IDFC First Bank’s NIM recovery sustain beyond FY26?
- How does a higher CASA ratio help reduce funding costs?
- What sectors are driving IDFC First Bank’s retail growth?
- How do repo rate adjustments affect bank profitability?
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
