Buy Federal Bank; target of Rs 160: LKP Research

LKP Research's research report on Federal Bank

Federal Bank has reported mixed 1QFY24 earnings and the key pointers are a) NPA ratio slightly weak (GNPA: 2.38% v/s 2.36% in the previous quarter) on the back of higher slippages and slower recoveries, b) Reported slippages (₹5bn v/s ₹4.4bn in 4QFY23) were up with slower recoveries (₹2.5bn), c) restructuring pool declines further with 21% coverage, d) Robust business growth with credit off-take of 21% and deposit traction of 21.3%, e) slightly higher credit cost with stable PCR f) quarterly profit stood at ₹8.5bn down 5.4% sequentially with ROA of 1.28%. NIMs compression of 68bps and sequential de-growth in other income. We expect NIMs to have likely bottomed out and YOA to improve going forward on the back of favorable loan mix. Additionally, the bank’s credit quality is in check and we re-iterate BUY.

Outlook

We believe the asset quality is likely to stay stable with significant improvement in profitability. We have incorporated steady provision requirements along with stable growth in the balance sheet and thus expect it to deliver RoA/ RoE of 1.2%/15% by FY24E. We reiterate BUY with target price of ₹160 (based on 1.2x FY25E Adj. BVPS); a potential upside of 23%.