Jhunjhunwala portfolio stock: Should you buy shares of this Kerala-based bank?
Rekha Jhunjhunwala (including Rakesh Jhunjhunwala's stake) owned 3.02 per cent stake in the bank as on December 31, which was worth Rs 1,148 crore as on Thusrday’s closing level.
- Mar 8, 2024,
- Updated Mar 8, 2024 9:19 AM IST
Shares of Kerala-based Federal Bank Ltd have received thumbs up from a couple of brokerages this month, as brokerages seemed convinced that the long-term levers for return on asset (RoA) improvement are in place. Kotak has upped its target price of Federal Bank to Rs 185 from Rs 175. Axis Securities put the stock in its March Buy list, citing improved mix of high-yielding products and improving liability franchise. Motilal Oswal Securities finds the stock worth Rs 175 while Systematix Institutional Equities sees it at Rs 712. IIFL Securities, which has a target of Rs 180 on the stock, expects the bank to report 18-20 per cent loan growth which shall be broad based, with unsecured and CV segments growing faster on a smaller base).
Rekha Jhunjhunwala (including Rakesh Jhunjhunwala's stake) owned 3.02 per cent stake in the bank as on December 31, which was worth Rs 1,148 crore as on Thusrday’s closing level.
Kotak, which recently met with the Federal Bank management, said the private lender has been steadily looking to improve risk-adjusted net interest income net interest income (NIM) through loan mix and a better liability profile. The higher-yield portfolio should increase from current levels, but it would be calibrated to the underlying economic conditions, it said. (2) Besides, Kotak said, deposit mobilisation is seeing better traction from branches outside Kerala and is looking to target multiple deposit pools; it would look to open 100 branches a year and the break-even is better than expected.
Also, "Business banking has a healthy tailwind with stronger balance sheets of borrowers and intent to expand after a prolonged slowdown in recent years. The bank has a relatively strong architecture, which allows fintech partners to grow; this has allowed it to improve its own customer experiences. A younger workforce is a clear differentiator across branches and at the leadership level; the ability to work through new ideas and execute them helps in exploring new opportunities," Kotak said.
Axis Securities said despite the increase in the share of new higher-yielding products, the increase in cost of fund continues to eat into the bank’s margins. Going forward, margin pressures are likely to persist in the near term, while yield improvement would be gradual.
Delayed NIM recovery, improving core fee income, improving efficiency, and steady credit quality will drive ROA improvement for the bank, Axis Securities said.
Federal Bank is eyeing an ROA of 1.5 per cent over the next 18-24 months. Cost ratios are expected to remain elevated to account for the pension provision in Q4FY24 and early FY25.
In the absence of NIM recovery, the bank is looking acieve an ROA of about 1.4 per cent by improving fee income and leveraging steady credit costs, Axis Securities said.
IIFL Securities said Federal Bank's LDR stands at 83 per cent, which could pose a risk to the growth guidance. "NIM has likely bottomed out in Q3 and is expected to remain stable, however rate cuts could lead to a decline in NIM with 51 per cent of loans linked to repo. Bank has commenced the search process and is evaluating both internal and external candidates for CEO succession," it noted.
Shares of Kerala-based Federal Bank Ltd have received thumbs up from a couple of brokerages this month, as brokerages seemed convinced that the long-term levers for return on asset (RoA) improvement are in place. Kotak has upped its target price of Federal Bank to Rs 185 from Rs 175. Axis Securities put the stock in its March Buy list, citing improved mix of high-yielding products and improving liability franchise. Motilal Oswal Securities finds the stock worth Rs 175 while Systematix Institutional Equities sees it at Rs 712. IIFL Securities, which has a target of Rs 180 on the stock, expects the bank to report 18-20 per cent loan growth which shall be broad based, with unsecured and CV segments growing faster on a smaller base).
Rekha Jhunjhunwala (including Rakesh Jhunjhunwala's stake) owned 3.02 per cent stake in the bank as on December 31, which was worth Rs 1,148 crore as on Thusrday’s closing level.
Kotak, which recently met with the Federal Bank management, said the private lender has been steadily looking to improve risk-adjusted net interest income net interest income (NIM) through loan mix and a better liability profile. The higher-yield portfolio should increase from current levels, but it would be calibrated to the underlying economic conditions, it said. (2) Besides, Kotak said, deposit mobilisation is seeing better traction from branches outside Kerala and is looking to target multiple deposit pools; it would look to open 100 branches a year and the break-even is better than expected.
Also, "Business banking has a healthy tailwind with stronger balance sheets of borrowers and intent to expand after a prolonged slowdown in recent years. The bank has a relatively strong architecture, which allows fintech partners to grow; this has allowed it to improve its own customer experiences. A younger workforce is a clear differentiator across branches and at the leadership level; the ability to work through new ideas and execute them helps in exploring new opportunities," Kotak said.
Axis Securities said despite the increase in the share of new higher-yielding products, the increase in cost of fund continues to eat into the bank’s margins. Going forward, margin pressures are likely to persist in the near term, while yield improvement would be gradual.
Delayed NIM recovery, improving core fee income, improving efficiency, and steady credit quality will drive ROA improvement for the bank, Axis Securities said.
Federal Bank is eyeing an ROA of 1.5 per cent over the next 18-24 months. Cost ratios are expected to remain elevated to account for the pension provision in Q4FY24 and early FY25.
In the absence of NIM recovery, the bank is looking acieve an ROA of about 1.4 per cent by improving fee income and leveraging steady credit costs, Axis Securities said.
IIFL Securities said Federal Bank's LDR stands at 83 per cent, which could pose a risk to the growth guidance. "NIM has likely bottomed out in Q3 and is expected to remain stable, however rate cuts could lead to a decline in NIM with 51 per cent of loans linked to repo. Bank has commenced the search process and is evaluating both internal and external candidates for CEO succession," it noted.