Federal Bank, a Jhunjhunwala stock bet, drops post Q3 results; here're share price targets

Shares of Federal Bank Ltd nuged lower during the trading session on Wednesday after announcing its results during the previous trading session. However, brokerage firms, both domestic and global, continue to remain positive on the lender and see a decent upside in Jhunjhunwala's biggest private banking bet after Q3 earning.

Federal Bank on Tuesday reported a net profit of Rs 1,007 crore for the December quarter of the financial year 2023-24, a 25 per cent jump on a year-on-year (YoY) basis from Rs 803.6 crore in the year-ago period led by rise in margins and other income, along with a drop in provisioning.

The net interest margin (NIMs) for the three months ended December 31, 2023 came in at 3.19 per cent, which were lowest in the past five quarters. The bank's gross non-performing asset (NPAs) stood at 2.29 per cent, down from 2.43 per cent a year ago. Similarly, net NPAs were reduced to 0.64 per cent.

"Federal Bank’s 3QFY24 result was better than our estimates," said Nirmal Bang Institutional Equities. "Deposit repricing continued to outpace yield on advances. Strong non-interest income supported PAT growth. On the business front, strong advances growth was supported by broad-based growth across all the major segments."

Nirmal Bang has cut its estimates marginally and it expects the loan book and earnings to clock a CAGR of 16.8 per cent and 18.9 per cent, respectively over FY23-FY26E, which leads to RoA of 1.3 per cent in FY26E. It continues to maintain a ‘buy’ rating on Federal Bank with a revised target price Rs 178.

Federal Bank reported 25 per cent YoY earnings growth due to 15 per cent YoY operating profit growth and negligible credit costs. Revenues grew 20 per cent YoY owing to 18 per cent loan growth and strong performance in non-interest income. NIM was stable QoQ, partly aided by capital infusion, said Kotak Institutional Equities.

"Asset quality metrics continue to show stable trends, resulting in negligible credit costs. We maintain Federal Bank as a preferred pick in the mid-tier banks," it said. Federal Bank has a higher probability of retaining a leadership position within this peer set and is likely to outperform in the medium term, it added, maintaining a 'buy' tag with a fair value of Rs 175 for the lender.

Federal bank has 1418 branches and 1960 ATMs/Recyclers as of December 31, 2023. The bank's gross loan portfolio stood at Rs 2.03 lakh crore while total deposits were at Rs 2.4 lakh crore for the period under review.

Federal posted Q3FY24 NII in line, but a beat on PAT driven by higher trading gains from a stake sale in Fedbank Financial Services. The business update gave a sense of the slowdown in retail loans, which is not the case. The bank sold IBPC of Rs 4,500, dampening growth, said Nuvama Institutional Equities.

"The RBI expects banks to keep an LDR of 80 per cent, while the Federal Bank is at 83 per cent. It has guided growth shall not slow due to lower LDR while NIM will be a derivative. Given its inexpensive valuation and a low-risk business model, we retain ‘buy’ and tweak earnings. Our new target price Rs 185 is based on 1.3 times one-year forward earnings and Rs 13 for Fedfina," it said.

Shares of Federal Bank opened at Rs 149.65 on Wednesday, but dropped 2.57 per cent to Rs 145.80 during the session, commanding a total market capitalization of more than 35,000 crore. The scrip was settled at Rs 149.70 in the previous trading session on Tuesday.

Rekha Rakesh Jhunjhunwala owned 72,713,440 equity shares or 3.02 per cent stake in Federal Bank Ltd as of December 31, 2023. The stake in the private lender as of prices on Wednesday was valued around Rs 1,090 crore.

Among the global brokerages, JP Morgan maintained 'overweight' on Federal Bank and raised target price to Rs 175, while Morgan Stanley remained equal-weight on the stock with a target price of Rs 165 on it. It said that the stock is not expensive but lacks a strong catalyst.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.

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