Jhunjhunwala stock: Kerala-based bank with 62% MF, FPI stake is Axis Securities' top buy

Kerala-headquartered Federal Bank Ltd is Axis Securities' top stock pick for the week. A total of 41 mutual funds and 359 foreign portfolio investors together owned over 62 per cent stake in this private lender, with 24 insurance companies holding an additional 10.17 per cent stake. Rekha Jhunjhunwala is among its shareholders with 3,60,30,060 shares or 1.48 per cent stake. 

While near-term challenges will keep return on asset (forecast: 1.1 per cent) and return on equity (11 per cent) delivery subdued in FY26, Axis Securities expects Federal Bank's RoA and RoE to improve between 1.3-1.4 per cent/13-15 per cent over the FY27-28E. 

It cited five reasons for the same: They are healthy risk-adjusted credit growth, margin improvement levers playing out with portfolio mix shift towards better-yielding segments and lower CoF; strong deposit franchise with improved CASA mix, strengthened fee income profile, and stable asset quality metrics, keeping credit costs under control.

"We recommend a Buy on the stock with a target price of Rs 214/share, implying an upside of 10% from the CMP," Axis Securities said. The stock is down 3 per cent year-to-date/

Federal Bank has exposure to Insurance and NBFC business through its joint venture with IDBI and wholly-owned subsidiary FedFina. The bank continues to execute its strategy of a branch-light and distribution-heavy franchise proactively.

With the bulk of the repo rate cut impact reflecting in the yields, the quantum of NIM compression in Q2 is expected to be significantly lower at 5-10 basis points. Resultantly, Axis Securities expects NIMs to bottom out in Q2, assuming no further rate cuts. 

"The SA rate cut taken in mid-Jun’25 is yet to reflect in the CoF, and should enable the bank to cushion the dent on margins. With TD repricing kicking in from the forthcoming quarters, NIMs are expected to improve gradually over H2," Axis Securities said,

Federal Bank has seen a gradual shift in its portfolio mix from EBLR loans declining to 48 per cent against 52 per cent in March 2024 and a corresponding increase in the fixed rate portfolio to 33 per cent from 27 per cent.
Its management sees levers to further decrease the share of EBLR loans, as the growth in the fixed-rate Gold, CV, and Car Financing portfolio gathers pace. Moreover, the gradual shift towards mid-yielding segments along with improving mix of CASA deposits, should also provide support to NIMs.