Federal Bank shares may attract $25 million passive inflows on Nifty Bank, FTSE weight increase

Federal Bank shares are all likely to attract a net $25 million passive flows on a slight increase in weightage in Nifty Bank and FTSE index today. Due to a new issue of capital, Federal Bank's weight will slightly increase in both Nifty Bank and FTSE Index, said Abhilash Pagaria of Nuvama Institutional Equities.

In the case of Nifty Bank, Federal Bank will see $7 million in passive inflows. The minute weight increase in Federal Bank will have minimal impact on other constituents, said Pagaria. In the base of FTSE index, $18 million passive flows are likely. "Based on Nuvama Alternative and Quantitative Research estimates, the overall inflow is expected to be approximately $25 million (15.4 million shares | 0.6 ADV)," Pagaria said.

Federal Bank recently announced a 42 per cent year-on-year (YoY) rise in net profit at Rs 853.74 crore compared with Rs 600.66 crore in the same quarter last year. Net interest income (NII) for the quarter jumped 19.6 per cent to Rs 1,918 crore compared with Rs 1,604.50 crore in the corresponding quarter last year. Federal Bank's June quarter results were a mixed bag, with profit coming in line with analyst estimates, but net interest income (NII) and a sequential fall in net interest margin (NIM) missing the Street estimates.

“After incorporating an improved outlook on loan growth and margin, we have raised our earnings estimates for FY24E and FY25E by 2 per cent and 7.9 per cent, respectively. We roll forward our valuation to June‘25E ABV while keeping our target multiple constant at 1.4 times, which leads to a target price of Rs 184,” said Nirmal Bang Institutional Equities.

Analysts are mostly positive on the Rekha-Jhunjhunwala-backed stock and suggested price targets that suggest up to 45 per cent upside potential for the stock. "Federal Bank reported a mixed 1QFY24, with a beat in net earnings and a miss in NII. The earnings beat was driven by higher other income, while the NII miss was due to margin compression. Business growth, though, was healthy, led by traction across segments. The asset quality ratio remained stable, although the slippages came in a tad higher," said Motilal Oswal Securities. The brokerage broadly maintained its estimates as controlled credit costs and healthy other income compensated for a slight moderation in NII growth. It has a target of Rs 155 on the stock.

Kotak Institutional Equities felt the NIM contraction was not an unexpected outcome. It was surprised by investors negative reaction on the progress of the bank’s NIM, given the current interest rate cycle is different to what we have seen in the past, as the loan book is lot more sensitive than deposits to policy rates. Re-pricing lead and lags makes NIM volatile, it noted.

"We like the franchise of Federal Bank in the regional banks space. In our view, the NIM pressure would be visible for all banks and we would prefer to look at the medium-term outlook, where the probability of asset quality surprises leading to unfavorable outcomes on growth and profitability is lower," it said while suggesting a target of Rs 160 on the stock.

 

 

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