Federal Bank share price targets reduced; stock tumbles, what's next?

Federal Bank's June quarter (Q1) results fell short of market expectations, with a slowdown in loan growth and a slight deterioration in asset quality. The weaker performance prompted a few brokerages to lower their target prices for the private sector lender.

This sent the stock 5.10  per cent lower at the opening bell. The scrip was quoting at Rs 185.95 apiece on BSE.

Nirmal Bang said Federal Bank’s Q1 performance was in line with its expectations at net interest income (NII) and pre-provision operating profit (PPOP) levels but below estimates at PAT level by 12.5 per cent.

Profit for the quarter declined 14.6 per cent YoY due to a slowdown in loan growth, compression in margins and higher provisions. Loan and deposit growth slowed down to 9.2 per cent YoY and 8 per cent YoY respectively. On the other hand, net interest margin (NIM) declined 22 basis points YoY to 2.94 per cent. Add to that, slippages rose due to stress in agriculture loans and the MFI segment.

"After factoring the weaker than expected performance of 1QFY26 and lower loan growth outlook ahead, we have cut our earnings estimates by 10.8 per cent and 10.4 per cent in FY26E and FY27E respectively," Nirmal Bang said.

It revised its target price on the stock to Rs 215 from 260 earlier and downgraded Federal Bank to a ‘Hold’ from ‘Buy’. 

The Federal Bank management has guided for a 5–10 basis points  NIM decrease in Q2FY26 and credit cost of 55 bps for FY26E. 

The MFI slippage peaked in May. The bank has 20 per cent exposure to Karnataka. The bank's CEO does not see any major stress build-up in BUB, which is secured. 

"Credit cost shall remain elevated in Q2 and then fall. We are cutting FY26E/27E EPS by 11 per cent each and reduce target price to Rs 225/1.5x FY26E BV from INR230. Federal is the safest mid-sized bank with potential to deliver strong growth; maintain ‘BUY’," Nuvama said.