In its research report dated October 4, 2023, Sharekhan has expressed a bullish outlook on Federal Bank and recommended a buy rating on the stock with a target price of Rs 170.
The report highlights several positive developments for Federal Bank, including robust loan growth of 20% year-on-year (YoY) and 5% quarter-on-quarter (QoQ) in Q2FY24. This loan growth has been broad-based, encompassing both the retail (22% YoY) and wholesale (17% YoY) segments, which is considered a key positive indicator. Deposits also recorded strong growth, increasing by 23% YoY and 5% QoQ, primarily driven by solid growth in retail term deposits and wholesale deposits.
However, the report notes that the growth of Current Account and Savings Account (CASA) deposits has been tepid, growing by 5% YoY and 3% QoQ. The CASA ratio stands at 31.17%, compared to 36.41% YoY. Retail term deposits grew by 28.1% YoY and 4.9% QoQ, while wholesale deposits increased by 15.4% QoQ.
The report anticipates that Net Interest Margins (NIMs) are likely to have bottomed out in H1FY24 and expects a gradual rebound in H2FY2024. Despite the near-term NIM pressure, the report emphasizes that Federal Bank’s valuations remain reasonable. The stock is currently trading at 1.2x/1.1x its FY2024E/FY2025E Book Value estimates.
Federal Bank is considered a top pick in the mid-tier private banking segment, along with IndusInd Bank, by the report. It is expected to maintain a Return on Assets (RoA) of over ~1.2%, driven by strong loan growth, healthy fee income, and benign credit costs, even in the face of NIM pressure in the near term. This should result in a normalized Return on Equity (RoE) of ~15%.
Investors are encouraged to consider this research report when evaluating the investment potential of Federal Bank, taking into account the positive loan growth and deposit trends, as well as the bank’s reasonable valuations and future earnings prospects.
