Federal Bank at all-time high: Is there more upside ahead?

Banking stocks have remained investors' favourite picks during the last year and this trend is expected to continue in 2023, as brokerages remain bullish on the sector and anticipate credit off-take to remain strong.

Shares of private sector lender Federal Bank have rallied 16 percent in the last three months, 3.18 percent higher than the Bank Nifty that gained 12.82 percent during the period.

The stock gained traction in June last year at around ₹84.80 apiece, and it followed the same trajectory to this week, rising 67.68 percent to reach an all-time high of ₹142.25.

Following the bank's Q3FY23 business update, domestic brokerage firm Sharekhan remained bullish on the stock with an unchanged target price of ₹165 per share, reflecting a potential upside of 20.96 percent from the stock's Wednesday closing price.

Federal Bank posted healthy growth in advances in Q3FY2023, aided by strong growth at the system level. Traction in deposits was also encouraging, mainly through term deposits, given the stiff competition among banks to garner incremental deposits, said the brokerage.

The bank is targeting 20 percent growth in its loan book for FY2023E. Loan growth is expected to be broad-based across retail, agri, SME, and corporate segments. CASA and retail TD (less than ₹2 crore) constitute 94 percent of total deposits.

Overall deposit growth has started picking up, mainly driven by term deposits and other wholesale deposits. However, CASA growth was below par, which led to a decline in the CASA ratio to 34.2 percent vs 36.4 percent QoQ, the brokerage added.

Further, the bank is looking to strengthen its CASA share by leveraging fintech partnerships and improving the government’s business. The bank also has a strong NRI franchise, which enables the bank to build low-cost CASA, Sharekhan pointed out.

The bank is actively engaging in partnerships with neo-banks (Epifi and Jupiter), which should help the bank garner incremental deposits, it says. The bank has indicated that it expects these partnerships to contribute 25 percent to incremental deposit acquisitions during FY2023.

On the asset quality side of the bank, the brokerage said that the NPL ratios of the bank have improved to multi-year low levels.

The GNPL and NNPL ratios are at 2.5 percent and 0.8 percent, respectively. The provision coverage ratio is at 69 percent. The slippage ratio stood at 1.3 percent (annualised and calculated as a percentage of 12-month trailing loans) for H1FY2023, according to the brokerage.

Slippages in the corporate segment have been negligible in the past few quarters. The bank has been building its loan mix towards higher-rated corporates and secured retail loans over the past years, Sharekhan highlighted.

However, the restructured book stands higher compared to peers at 2.4 percent of loans. The bank has 20 percent coverage on the restructured book.

Moving forward, “focus on building better digital capabilities, sustaining a healthy loan growth outlook, maintaining stable asset quality with the higher-rated corporate book, and continuing to increase its retail mix with higher-yielding businesses such as commercial vehicles, credit cards, and microcredit are expected to augur well for the bank’s growth,” said the brokerage. 

On the downside, the economic slowdown leading to slower loan growth and higher-than-anticipated credit costs will be a key risk for the stock.

After delivering a 64 percent YoY rise in net profit in Q1FY23, Federal bank continued the same trend in the following quarter. The bank reported a 52.89 percent YoY jump in its standalone net profit at ₹703.71 crore in Q2 FY23, aided by a fall in provisions for bad loans.

The total income of the south-based lender rose to ₹4,630.30 crore in Q2 FY23 from ₹3,870.90 crore in the same period of the previous fiscal. The gross non-performing assets of the bank fell to 2.46 percent of the gross advances during the quarter from 3.24 percent in Q2 FY22.

26 analysts polled by MintGenie on average have a 'strong buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.