Buy Federal Bank; target of Rs 169: LKP Research

LKP Research's research report on Federal Bank

Federal Bank has reported stable 3QFY24 earnings and the key pointers are a) NPA ratio slightly weak (GNPA: 2.29% v/s 2.26% in the previous quarter) on the back of higher slippages and slower recoveries, b) Reported slippages (₹4.8bn v/s ₹3.7bn in 2QFY23) were up with slower recoveries (₹2.9bn), c) restructuring pool declined further with 20% coverage, d) strong business growth with credit off-take of 18.4% and deposit traction of 19%, e) sequentially higher credit cost with stable PCR f) quarterly profit stood at ₹10.1bn up 5.5% sequentially with ROA of 1.4%. Moreover, the stable NIMs of 3.19% and higher treasury income led to 8.5% QOQ growth in PPOP. Additionally, the bank’s credit quality is in check and we recommend BUY.

Outlook

We believe the asset quality is likely to stay stable with 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 1.5%/15.4% by FY25E. We reiterate BUY with target price of ₹169 (based on 1.2x FY25E Adj. BVPS); a potential upside of 18%.