Federal Bank gets Overweight tag by JPMorgan with Rs 150 target price; Here's why

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26 Aug, 2025 12:21

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In an environment of tight loan-to-deposit ratios (LDRs), Federal Bank has a relatively stronger liability franchise versus midcap bank peer group and that attracts foreign broking firm Jefferies to the stock. It has initiated coverage on Federal Bank with an Overweight rating at a target price of Rs 150.

The bank's retail deposits share stands at 76 percent, placing it in a relatively good position to go for growth in a deposit-constrained environment, as per the initiation report.

At 12 pm, the stock was quoting at Rs 125.60 on the NSE, which means JPMorgan's target indicates a 20 percent upside in the next 12 months.

"When benchmarking Federal Bank ROA (return on assets) against major private banks, the gap (50 basis points) largely comes out due to a lower risk-adjusted yield on assets and lower non-interest income," JPMorgan said.

The bank’s thesis on ROA improvement from lending in higher risk segments is credible, however, this will need tighter risk control in credit untested segments for a historically conservative regional bank, wrote analysts Saurabh Kumar and Pranuj Shah in the report.

The bank's cumulative NIM (net interest margin) improvement in FY23 was just 15 basis points, significantly lower than major private banks at 70-100 basis points. That's because the bank’s external benchmark linked book (50 percent of advances) gets offset against savings rates that are repo-linked, implying a natural hedge.

"If rates were to turn down in future given tail off in inflation print, Federal Bank's ability to hold on the NIMs will be better given it didn’t enjoy the increase on the way up," as per JPMorgan.

The firm models 16 percent EPS (earnings per share) growth over the next three years keeping ROAs at 1.25-1.3 percent over F24-26E and loan growth CAGR of 15 percent. It values the stock at 1.2x FY25E price-to-book ratio, thus arriving at Rs 150.