Shares of Federal Bank managed to claw back some losses in early Friday trading after a 5.5% slump the previous day, following a disappointing net interest margin (NIM) performance in its Q1FY24 results. The bank’s bright start to the year, underscored by its pre-quarter business update, fell short of expectations with rising deposit rates increasing the cost of funds.
The bank’s cost of funds has risen to 5.32% last quarter from 5.12% in Q4FY23 and 4.20% in Q1FY23. This led to margin pressure. The bank’s NIM saw a sequential drop of 16 basis points (bps) to 3.15%. While the bank’s net interest income (NII) which grew 20% y-o-y to Rs1,919 crore in Q1FY24, it was still below analysts’ expectations.
Bank management reassured investors that most of the deposit repricing is in the rearview mirror and expects NIM to bounce back from Q2FY24 onwards. They also reaffirmed their guidance for a 3.30% NIM for FY24, adding that improved pricing in the last 45 days could mean that yield expansion outpaces the cost of funding. The bank also plans to boost the portion of high-yield assets in its loan book, targeting areas like commercial vehicles and credit cards.
Despite management’s optimistic outlook, analysts are skeptical. They expect a weaker NIM on the back of a rising cost of funds trend. “Unlike management expectations of stable NIMs and return on asset (RoA) uptick year-on-year, we model about 10 basis points year-on-year decline in calculated NIMs and stable RoA for FY24. We expect the bank to report steady about 1.2% RoAs for FY24-25E with strong fee income broadly offsetting pressure on NIMs,” said analysts from ICICI Securities Ltd.
Meanwhile, Federal Bank saw healthy credit and deposit growth of 21% each year-on-year (y-o-y) in Q1 with strong performance across all its business segments. The management expect to maintain 18-20% run rate for credit and deposit growth in FY24.
It is comforting that the asset quality metrics continue to show stable trends, resulting in negligible credit costs. The net non-performing assets (NPA) as of June stood at 0.69% which was at similar levels in March FY23 and significantly down from 0.94% last year.
The stock of Federal Bank seems to be capturing the worries to a good extent. Since touching 52-week high in January, the stock is down nearly 11%. Any potential upside hinges on the bank’s capital raise which is expected to happen in the near-term and NIM improvement in Q2. NII/NIM estimates could be upgraded if Federal Bank raises capital, said analysts from Prabhudas Lilladher. “We expect calculated NIM for FY24E to decline by 14 basis points year-on-year to 3.1% as yield increase post Q2FY24 seems unlikely and Federal Bank is more focused on growth,” they said in a report on 14 July.