Buy Federal Bank; target of Rs 125: Reliance Securities

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26 Aug, 2025 12:21

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Reliance Securities' research report on Federal Bank

Federal Bank has delivered a healthy performance in 1QFY18. Its operating profit grew by 31% YoY and 1.6% QoQ to Rs5.6bn led by robust growth in balance sheet, lower opex and higher operating revenue. However, the Bank’s NII declined by 5% QoQ (+15.6% YoY) to Rs8bn due to higher interest reversal on fresh slippages. Fresh slippages increased by 74.2% QoQ to Rs4.3bn due to slippages of one large restructured corporate loan along with higher slippages from retail and agri segment owing to a sharp 92.7% QoQ and 40.3% YoY rise in provisioning expenses to Rs2.4bn. Resultantly, the Bank’s net profit declined by 18.1% QoQ to Rs2.1bn in1QFY18. Notably, despite higher fresh slippages its overall stressed loan portfolio remained stable and within the Management’s comfort zone at 4.1% in 1QFY18.

Outlook

Federal Bank has witnessed a sharp decline in SMA-2 balance, which clearly suggests fresh slippage during 1QFY18 was more of a one-off event. Hence, we expect substantial improvement in the Bank’s performance in remaining quarters of FY18. Notably, the Bank is gradually coming out of the scenario marked with higher provisioning and continued stress on asset quality for last few quarters. We expect the healthy traction in earnings to continue, going forward owing to robust growth in loan book, moderate credit cost and healthy margins. We reiterate our BUY recommendation on the stock with an unrevised Target Price of Rs125 based on 2.1x FY19E Adjusted book value.
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