Top brokerage firms are positive on Federal Bank after the December quarter scorecard and expect the shares of the lender to give healthy gains in the medium-to-long term period.
Most brokerage houses have retained their ‘buy’ call on the stock and some of them have raised their earnings estimates and target prices.
Federal Bank on January 16 reported its standalone net profit at ₹803.6 crore for the third quarter or Q3FY23, up 54 percent as compared to ₹521.7 crore in the same quarter in the previous fiscal. This was the highest-ever quarterly net profit.
The bank posted the highest-ever operating profit at ₹1,274.21 crore, witnessing a growth of 39 percent from the year-ago quarter.
The lender's net interest income (NII) rose 27 percent to ₹1,956 crore against ₹1,539 crore year-on-year (YoY) while net interest margin (NIM) rose to 3.49 percent during Q3FY23, higher by 22 basis points (bps) YoY and 19 bps QoQ.
The stock has been on an upward trajectory in the last one year. It has jumped 39 percent against a 10 percent gain in the banking index on BSE and a flat Sensex over a year.
Brokerages say buy it
Brokerage firm Motilal Oswal Financial Services has maintained a ‘buy’ call on Federal Bank stock with a target price of ₹170.
According to the brokerage firm, Federal Bank reported strong Q3FY23 numbers, with a sharp beat in net earnings, driven by lower provisions.
The brokerage firm highlighted that the bank's NII has shown strong momentum, backed by healthy business growth and re-pricing of the advances portfolio. Liability franchise remains strong, with a retail deposit mix at nearly 90 percent and a CASA ratio of nearly 34.2 percent. The headline asset quality ratio improved, led by healthy recoveries and upgrades and controlled slippages.
"We raise our FY23/FY24 earnings estimates sharply by 7 percent/5 percent, factoring in higher NII and lower provisions and expect an RoA/RoE of 1.3 percent/15.2 percent in FY25," said Motilal Oswal.
Brokerage firm Anand Rathi Share and Stock Brokers, too, has a ‘buy’ call on the stock with a target price of ₹180 and said given the bank’s strong liability franchise and capitalisation, it is set to gain market share in the near term even though slippages from the corporate book remain a risk.
"A strong liability franchise combined with an increased focus on a better yielding product mix would keep medium-term margins above 3.3 percent. Stable margins, strong fee income (high-teen credit growth) and benign credit costs should keep the bank’s RoA near current levels in the medium term, translating to a 15 percent+ RoE for FY24/FY25," said Anand Rathi.
Along similar lines, brokerage firm Prabhudas Lilladher also maintained a ‘buy’ call on the stock and raised the target price to ₹175 from ₹165, maintaining multiple at 1.5 times.
The brokerage firm has increased FY23 PAT estimates by 6 percent and FY24/25E PAT estimates by nearly 2 percent each.
"Federal Bank again surpassed its previous quarter best, with core earnings at ₹775 crore, beating Prabhudas Lilladher's estimates by nearly 16 percent led by NIM beat which came in at 3.89 percent (Prabhudas Lilladher's estimates 3.66 percent) as funding cost was lower at 4.9 percent (Prabhudas Lilladher's estimates 5.1 percent)," said Prabhudas Lilladher.
"Bank raised steady state NIM guidance from 3.30 percent to 3.35-3.40 percent. We too increase NIM for FY23E by 12bps and FY24/25E by nearly 6bps each as (1) high-yielding book, which touched ₹6200 crore, could double in 2+ years, and (2) upward deposit repricing could be slower to peers (nearly 60 percent of deposits as at FY22 have a maturity more than 3 years)," the brokerage firm added.
Brokerage firm Sharekhan by BNP Paribas also maintained a ‘buy’ rating on the stock and raised the target price to ₹170 as it said the bank is well poised to sustain an RoA of 1.2-1.3 percent over the medium term.
Sharekhan said a few more quarters of steady performance can help justify a marginally lower cost of equity, thereby implying a re-rating of the stock. Potential value unlocking in Fed Fina (NBFC subsidiary) via an IPO could be an additional catalyst for the stock.
"We believe now the bank has fewer levers to surprise positively from here on except on the operating leverage. However, a reversal in return ratios is unlikely and the asset-quality outlook is stable for the sector. Hence, we are probably reaching closer to peak RoEs for the bank," said Sharekhan.
Technical indicators are also favouring the stock.
Jigar S. Patel, Senior Manager - Equity Research, Anand Rathi Share and Stock Brokers, pointed out that at the current juncture, the stock is near its previous four-day's high of ₹138-139, indicating the possibility of a further up-move in it.
Patel added that the monthly RSI has been constantly above 70 levels along with the monthly DMI displaying a bullish structure which is a sign of a further bullish move in the counter.
"One can buy this stock around ₹138-139 for an upside target of ₹148 and a stop loss would be ₹134," said Patel.
According to a MintGenie poll, 26 analysts on average have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the analysts and broking firms. These do not represent the views of MintGenie.