JP Morgan bullish on Rekha Jhunjhunwala-led banking stocks; do you have any?

According to JP Morgan, the stock’s primary attraction in a tight LDR environment is its relatively strong liability franchise versus the midcap bank peer group.

Also, the share price of Federal Bank has outperformed its peers on a one year basis. The stock is up 47.95% compared to a gain of nearly 12% in Nifty 50 and 28.3% gain in Nifty Bank. However, so far in 2023, Federal Bank stock was struggling after registering a sharp decline in NIM in the March 2023 quarter.

Year-to-date, Federal Bank’s share price has fallen a little over 8% as compared to its flat position in Nifty 50 and almost 2% uptick in Nifty Bank.

Federal Bank share price on Friday declined 0.4% at 126.20 on the NSE.

Nevertheless, Morgan said in its note on May 19, “We think valuations at 1.1x FY24E P/B and 8x FY24E P/E compared to mid-cap peers are supportive and give investors a broad buy thesis.” Getting paid. Franchise build-out. Cap raise could be a clearing event providing capital for growth. Initiate overweight.”

Initiating its overweight stance, JPMorgan highlighted 3 key factors that will drive the future performance of Federal Bank’s share price. These:

1. Improvement in ROA:

While benchmarking Federal Bank’s ROA against leading private banks, JP Morgan found that the difference (50 bps+) is largely attributable to lower risk-adjusted yield on assets and lower non-interest income. Cost of funds / opex differential is not high as compared to mid-tier bank peer group.

Morgan’s note said, “The bank’s thesis on ROA improvement (JPMe 5- 10bps each year) by lending to high-risk areas is credible, however, for a historically conservative regional bank credit risk tighter in untapped areas.” Control will be required. Notably, FY23 ROA at 1.25% is already the highest level seen since FY13.”

2. NIM Risk Factors:

Federal Bank’s cumulative NIM improvement in FY23 has been just 15bp against major private banks (ex HDFCB) at 70-100bps. Additionally, the bank’s EBLR book (50% of advances) is offset by the savings rate linked to the repo, creating a natural hedge.

“FB’s ability to hold on to NIM would be better served if rates fall in the future given the tail off in the inflation print,” Morgan’s note said, as it did not enjoy an increase along the way. While the fourth While the decline in the quarter was a shock, we feel the bank should be able to maintain FY23 levels with a slight upward bias on the mix shift.”

3. Liability Franchise is Strong:

Data from JP Morgan showed that Federal Bank’s liability franchise is best in the mid-cap bank peer group with retail deposit share (per LCR) at 76%, lower cost of funds vs mid-cap bank peer group and controlled CD /LCR ratio at 82%/128%.

It added, “This puts FB in a relatively good position for growth in a deposit-constrained environment. The lack of branch additions (5-year: 2% CAGR) remains a concern for medium-term growth.” “

Thus, JP Morgan said, “We project 16% EPS growth over the next three years while keeping ROA at 1.25-1.3% on F24-26E and loan growth CAGR of 15%. We haven’t seen a cap increase in our numbers.” The stock is trading at 1.1x FY24E P/B and 8x P/E – at a discount versus mid-cap bank peer group. Our Mar-24 DDM based PT of Rs 150 values ​​the bank at 1.2x FY25E P/B keeps.”

Overweight rating on a stock means that the respective share price deserves to be weighted higher than the current weighting on the benchmark. It also means that the stock has potential to outperform going forward.

Together A target price of 150 has been set on Federal Bank, the stock has a potential of around 18% upside.

Ace investor Rekha Jhunjhunwala will be a major beneficiary with Federal Bank’s double-digit upside trajectory.

Rekha holds a total of 7,27,13,440 equity shares or 3.48% of the shares in Federal Bank as on March 31, 2023.

Disclaimer: The views and recommendations given above are of individual analysts or broking companies and not of Mint. We advise investors to do due diligence with certified experts before making any investment decision.