Buy Federal Bank; target of Rs 175: Prabhudas Lilladher

Prabhudas Lilladher's research report on Federal Bank

FB reported a slightly weak quarter with core PPoP missing PLe by 3.7% led by higher opex while asset quality saw a blip as GNPA was 2.38% (PLe 2.28%) due to higher slippages and lower recoveries. Loan growth was 5.2% QoQ (~2.5% for system) and bank expects this momentum to sustain. We expect credit growth of 18% YoY in FY24E. While NIM for Q1’24 declined by 11bps QoQ to 3.3% due to back-ended loan growth and pricing pressures, margins could expand in Q2’24 as yields have risen since the last 45 days. For FY24 we are factoring a NIM decline of 14bps to 3.1%.

Outlook

However, NII/NIM estimates could be upgraded if FB raises capital. Shareholder approval for fund raise is to the tune of Rs40bn. Credit cost environment remains benign and we raise FY24/25E PAT by 4.5%/2.5% due to lower provisions. Maintaining multiple at 1.5x on FY25E ABV, we retain BUY and raise TP to Rs175 from Rs170.