Target: ₹180

CMP:₹145.90

Federal Bank reported healthy credit growth of 18/3 per cent y-o-y/q-o-q. Its higher-yielding portfolio contributes about 24.6 per cent of the total portfolio vs 21.4 per cent y-o-y.

Cost of deposits inched up 17 bps q-o-q, while yields improved 2 bps during the quarter. NIMs contracted 3 bps q-o-q. Non-interest income grew 62/18 per cent y-o-y/q-o-q aided by a one-time gain from a stake sale in FedFina (about ₹80-90 crore). The C-I Ratio improved to 51.9 per cent from 52.5 per cent sequentially. PPOP grew 13/9 per cent y-o-y/q-o-q.

Credit costs stood at 19 bps vs 48 bps y-o-y and 9 bps q-o-q. Thus, earnings growth was strong at 25/6 per cent y-o-y/q-o-q. GNPA inched up 3 bps q-o-q. Slippages during the quarter were higher owing to a ₹78-crore slippage from the corporate book; however, it is expected to be upgraded in Q4FY24. Restructured book continued to taper to 1.1 per cent vs 1.2 per cent q-o-q.

While growth momentum is likely to continue driven by healthy demand, the bank will adopt a risk-calibrated approach in sourcing customers, especially in the newer high-yielding segments. On the back of delayed margin recovery and higher opex, we trim our earnings estimates by about 3 per cent in FY25E. However, backed by lower credit costs, we raise our FY24E earnings estimates by about 2 per cent.

The stock currently trades at 1.1x Sep’25E ABV and we value the stock at 1.3x FY25E ABV to arrive at a target price of ₹180/share, implying an upside of 20 per cent from the CMP. We reiterate a BUY on the stock.

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