Federal Bank Q2 results preview: Here's what analysts expect from Jhunjhunwala's Rs 1,100 cr banking bet

Federal Bank is scheduled to announce its results for the quarter and half year ended on September 30, 2023. A majority of brokerages are expecting a mixed set of numbers from the private lender. Rekha Rakesh Jhunjhunwala's banking bet has delivered decent returns to the investors.

Analysts tracking the counter expect a double-digit growth in net interest income (NIIs) on a year-on-year (YoY) basis, while sequential performance (QoQ) may remain subdued. Net interest margins (NIMs) may contract on a quarter-on-quarter (QoQ) basis, while adjusted profit after tax (PAT) is seen flat on a QoQ basis, but up YoY.

Brokerage firms said that pre-provisioning adjusted profit (PPOP) will be the key point to note, along with the management commentary for the future growth outlook and path to normalization of return on assets (RoA) and return on equity (RoE). The margins are likely to contract about 7-10 basis points (bps), but asset quality for the lender is likely to improve.

"The bank has reported a healthy loan growth of 20 per cent YoY while deposits grew 23 per cent YoY. We expect NII growth at 10 per cent YoY with NIM marginally lower. We expect operating profit growth of 3 per cent YoY due to weak revenue growth. We expect slippages at 1.5 per cent of loans, with no major large-ticket loans," said Kotak Institutional Equities.

Kotak sees NIIs at Rs 1,931.6 crore, up 9.6 per cent YoY and flat QoQ, while PPOP coming in at Rs 1,249 crore, flat YoY and down 4.1 per cent QoQ. Profit for the lender is seen at Rs 786.5 crore, up 12 per cent on a yearly comparison but down about 8 per cent QoQ, it said.

Prabhudas Lilladher expects NIIs to expand 12.7 per cent YoY and 3.5 per cent QoQ to Rs 1,985 crore, while PPoP may contract 5.4 per cent to Rs 1,232.6 crore in Q2FY24. The brokerage sees a double-digit growth in PAT on a yearly basis but may decline about 9 per cent QoQ to Rs 776.8 crore. "Margins may moderate by 7 bps sequentially," it added.

Shares of Federal Bank gained more than a per cent to Rs 151.40 in Monday's trade, commanding a total market capitalization of close to Rs 35,500 crore. The private lender is hovering near its 52-week high at Rs 152.25, hit earlier this month. The stock settled at Rs 149.50 on Friday.

Capital raise of Rs 4,000 crore would provide required growth cushion. Q2 Y24 NIM may remain soft due to ICRR impact and deposit cost catch-up. Positive impact of capital raise on NIM could flow through in H2FY24E as incremental deposit cost peaks out, said Prabhudas. "Valuation is attractive at 1.1 times September 2025 ABV while RoA could scale up to 1.3 per cent in FY26E with limited-downside risks to our estimates, it added with a target price of Rs 175.

InCred Equities pegs Federal Bank's revenue at Rs 2,741 crore, up 15.6 per cent YoY and 3.4 per cent QoQ. EBITDA margins may contract to 50.1 per cent on Q2FY24 from 51.1 per cent in Q2FY23, while adjusted PAT is likely to come in at Rs 838.7 crore, up 19.2 per cent YoY but marginally down QoQ.

Rekha Rakesh Jhunjhunwala cumulatively owned 7.27 crore or 3.03 per cent stake in Federal Bank as of September 30, 2023. Her holding in the private lender stood at Rs 1,100 crore as of Monday. Federal Bank is Jhujhunwala's biggest banking bet after Canara Bank, which is valued around Rs 1,400 crore.

Credit growth remains healthy, driven by robust growth from new businesses and fintech partnerships and CAR ratios to moderate further, said Motilal Oswal Financial Services. The brokerage expects cost ratios to increase; margin commentary in focus going ahead and the asset quality to improve further.

Motilal Oswal expects NIMs to rise 15 per cent YoY to Rs 2,030 crore, while operating profit may come in at Rs 1,380 crore, improving 8 per cent YoY. Net profit is seen at Rs 830 crore, jumping 19 per cent on a year basis. It has a buy rating on the stock with a target price of Rs 165.

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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