Investors are sitting on good profits in the shares of Federal Bank Ltd. The stock is up 24% so far in FY13, meaningfully beating the Nifty Bank index, which has gained 7.5%.
The Bank’s recently released provisional business update for the quarter ended September (Q2FY23) shows strong momentum. Gross advances in the quarter-on-quarter (QoQ) grew by 6.2%, compared favorably with a growth of 4.6% in the first quarter. Year-on-year (y-o-y), advances grew 19%.
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Systematic recovery in credit growth augurs well for all banks including Federal Bank. According to an October 3 report by Emkay Global Financial Services Ltd, “Keeping in mind the strong growth momentum for the industry and the bank, we revise our credit growth for Federal Bank from 16% to 18% in FY23E. “
Federal Bank’s total deposits grew at a relatively slower pace of 3.16% sequentially in the second quarter, with current and savings account (CASA) deposits up 2%. Analysts at Axis Securities Ltd believe that Federal Bank is one of the few medium tier banks that has consistently improved its deposit base. As a result, the CASA ratio fell 43 basis points (bps) sequentially to 36.41 per cent. One basis point is 0.01%.
Effective October 1, Federal Bank has increased interest rates on savings bank deposits across various buckets, but there is still a wide gap to bridge compared to the Reserve Bank of India’s repo rate hiking trajectory. Therefore, there is a need to keep an eye on the impact on the margins of the bank in the coming quarters.
In Q1, Federal Bank’s net interest margin (NIM) was up 6bps qoq at 3.22%. During the Q1 earnings call, the bank’s management had said that their margins would be in the range of 3.25-3.27% in the coming quarters.
Asset quality will be another focus area. The management expects a fall of around Rs 1,800 crore in FY13 and expects the return on assets (ROA) to improve to 1.1% on exit this fiscal. The Axis report said that stable provisioning, balance sheet and healthy growth in NIMs will help the bank deliver an ROA of 1.1% by FY24.
Given that Federal Bank shares have outperformed in FY23 so far, investors are capturing a good share of optimism.
“Opening up potential value in its NBFC subsidiary (Fedfina) through an initial public offering could be an additional catalyst for the stock and also reduce capital levels,” said analysts at Emkay.
On the other hand, reduction in credit growth or deterioration in asset quality are downside risks.
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