The lender reported a net profit of ₹853.74 crore for the first quarter of FY24, registering a strong growth of 42.2 per cent from ₹600.66 crore in the corresponding period last year.
Its net interest income (NII) in Q1FY24 rose 19.6 per cent to ₹1,918 crore from ₹1,604.5 crore year-on-year (YoY). Net interest margin (NIM) contracted marginally by 7 basis points to 3.15 per cent from 3.22 per cent in the June quarter last year.
The fee income of the lender rose 21 per cent YoY to ₹535 crore, while its pre-provision operating profit (PPOP) increased 34 per cent YoY to ₹1,302 crore.
Read more: Federal Bank Q1 results: Net profit jumps 42% to ₹845 crore; NII rises over 19% YoY
Shares of Federal Bank hit their 52-week highs of ₹143.35 on BSE on January 16, 2023. They are now nearly 12 per cent down from their one-year peak level.
Mixed numbers but brokerages see a significant upside
Analysts at brokerage firms have retained their previous views on the stock even as they underscored Federal Bank’s Q4FY24 numbers were mixed.
Brokerage firm Motilal Oswal Financial Services maintained a buy call on the stock with a target price of ₹155, implying a 22 per cent upside potential.
The brokerage firm pointed out Federal Bank reported a mixed Q1FY24, with a beat in net earnings and a miss in net interest income (NII). The earnings beat was driven by higher other income, while the NII miss was due to margin compression.
Business growth, though, was healthy, led by traction across segments. The liability franchise remained strong, with a retail deposit mix at about 85 per cent and the CASA (current account and savings account) ratio at about 31.9 per cent. The asset quality ratio remained stable, although the slippages came in a tad higher, said Motilal Oswal.
“We broadly maintain our estimates as controlled credit costs and healthy other income compensated for a slight moderation in NII growth. We estimate Federal Bank to deliver RoA (return on assets) and RoE (return on equity) of 1.3 per cent and 15.8 per cent, respectively, in FY25,” Motilal Oswal said.
Brokerage firm Nuvama Wealth Management, too, maintained a buy call on the stock with a target price of ₹160, implying a 26 per cent upside, primarily because of the cheap valuation of the stock.
Nuvama underscored that Federal Bank posted a negative surprise on net interest margin (NIM) for the second quarter with NIM declining 16bp QoQ versus the expected decline of 8 bps.
“NIM decline was sharp even in Q4FY23 at 18 bps. While core fee growth was strong at 21 per cent YoY and flat QoQ, growth in non-fee other income was higher-than-expected driven by first-time income of ₹52 crore from PSL (Post Shipment Limit),” Nuvama pointed out.
“We reduce our target price to ₹160, from ₹170, as we lower the target multiple to 1.2 times, from 1.3 times to factor in higher pricing competition on loans and deposits. But, we retain ‘buy’ on cheap valuation. The stock trades below book on FY25E numbers. CEO guides NIM of 3.3 per cent for FY24E, 15bp higher than Q1FY24, but NIM progression remains a concern,” said Nuvama.
Read more: Federal Bank arm Fedfina reconsidering capital raising options, says CEO Srinivasan
Brokerage firm Prabhudas Lilladher also maintained a buy call on the stock and raised the target price to ₹175 from ₹170, implying a 38 per cent upside in the stock from the current level.
Gaurav Jani, Research Analyst at Prabhudas Lilladher expects Federal Bank’s credit growth of 18 per cent YoY in FY24E. While NIM for Q1FY24 declined by 11bps QoQ to 3.3 per cent due to back-ended loan growth and pricing pressures, Prabhudas Lilladher believes margins could expand in Q2FY24 as yields have risen since the last 45 days.
“For FY24 we are factoring a NIM decline of 14bps to 3.1 per cent. However, NII and NIM estimates could be upgraded if Federal Bank raises capital. Shareholder approval for fundraising is to the tune of ₹4,000 crore. The credit cost environment remains benign and we raise FY24 and FY25 PAT estimates by 4.5 per cent and 2.5 per cent respectively due to lower provisions,” said Prabhudas Lilladher.
Disclaimer: The views and recommendations given in this article are those of the brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 14 Jul 2023, 12:14 PM IST