Shares of Federal Bank tumbled as much as 5 percent to Rs 185 per share on August 4 as the lender posted a drop in quarterly profit, hit by higher provisions, a sharp jump in credit costs, and a rise in bad loans compared to the previous quarter.
Still, many brokerages remain positive on the stock, as the bank’s management expects the stress in the microfinance book and credit costs to ease after the second quarter.
Nuvama Institutional Equities maintained a “buy” rating on the stock, with a target price of Rs 230 per share. According to them, the June quarter was soft, net interest margins fell by 18 basis points quarter-on-quarter, slippages increased by 34 percent, and credit costs jumped 66 basis points.
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Most of the slippages were from the agriculture loan book, which rose to Rs 270 crore from Rs 71 crore in March. Business banking slippages also rose 24 percent sequentially to Rs 77 crore.
The bank’s management said that May saw the peak stress in the microfinance portfolio, and things have been improving since then. Due to this stress, credit costs increased by 38 basis points from the previous quarter to 65 basis points. The management, however, expects this to reduce and end the year at 55 basis points.
CLSA analysts also maintained an “outperform” rating, with a target price of Rs 230. They said that while margins did contract, they still fared better than peers. Strong other income and lower operating expenses helped support profitability, they added.
On the other hand, Morgan Stanley analysts were cautious. They gave the stock an “underweight” rating with a target price of Rs 165 per share. They expect the bank’s return on assets to moderate to 1 percent in FY26, given the rise in bad loans and credit costs from microfinance stress.
For the June quarter, Federal Bank’s net profit dropped 14.6 percent to Rs 861.8 crore. Provisions surged 177 percent, mainly due to agri and microfinance loans. Net interest income rose 2 percent year-on-year to Rs 2,336.8 crore.
There was also an improvement in asset quality. The gross non-performing asset (NPA) ratio improved to 1.91 percent from 2.11 percent, and the net NPA ratio declined to 0.48 percent from 0.60 percent.
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