Buy Federal Bank; target of Rs 250: Motilal Oswal

Motilal Oswal's research report on Federal Bank

Federal Bank (FB) reported 2QFY26 PAT of INR9.6b (down 10% YoY, up 11% QoQ, 13% beat), led by healthy NIMs (up 12bp QoQ, vs our estimate of 8bp decline). NII stood healthy (8% beat to MOFSLe), as NIMs expanded 12bp QoQ to 3.06% amid a faster reduction in CoF. FB remains focused on reorienting its asset mix to improve yields and the CASA mix. Advances grew 6% YoY/1% QoQ, led by faster growth in SME (CoB + BuB), CV, and Gold. Deposits grew 7.4% YoY/ 0.5% QoQ, while CASA deposits grew 10.7% YoY/2.7% QoQ. CASA ratio improved to 31.01% (30.35% in 1Q). Slippages declined to INR6.8b (down 11.6% YoY), driven by a decline in retail and agri slippage. GNPA/NNPA ratios declined 8bp/ flat QoQ to 1.83%/0.48%. We raise our PAT estimate by ~5% for FY26/27E, factoring in NIM expansion as well as slightly lower provisions. We estimate FB to deliver FY27E RoA/RoE of 1.19%/12.8%. Reiterate BUY with a TP of INR250 (1.5x FY27E ABV).

Outlook

We increase our earnings estimate by 5-5.5% for FY26/27E, factoring in margin expansion as well as slightly lower provisions. We estimate FB to deliver an FY27 RoA/RoE of 1.19%/12.8%. Reiterate BUY with a TP of INR250 (based on 1.5x FY27E ABV).