Shares of Federal Bank, a leading private sector bank in India, ended on a positive note at ₹128.75, up by 0.78%, on Monday, after an 8.36% slump in the previous trading session.
The bank's shares plummeted during Friday's trade due to a decline in the bank's net interest margin (NIM) sequentially in the fourth quarter of FY23, which surprised analysts. This overshadowed other positive metrics of the bank in the March quarter (Q4) including its highest-ever quarterly net profit.
The management had previously stated that there could be a slight moderation in net interest margin (NIM) from the fourth quarter of FY23 due to an increase in the cost of deposits to mobilise deposits. However, the margin compression in Q4FY23 was significantly higher than anticipated, according to analysts.
The private sector lender on May 05 reported its highest-ever operating profit at ₹1,335 crore for Q4FY23, which grew by 67% YoY. The bank also recorded its highest-ever quarterly net profit of ₹903 crore in Q4FY23, a growth of nearly 67% YoY and 12.31% QoQ.
The bank's net profit for the financial year ending March 31, 2023, exceeded the ₹3,000 crore mark for the first time, reaching ₹3,011 crore, representing a significant increase of 59.31% over the previous fiscal year.
Net interest income (NII) during the reporting quarter rose by 25.2% YoY, though down 2.4% QoQ to ₹1,909 crore, led by a 20 bps QoQ decline in NIMs at 3.3% due to the rise of the cost of funds by 50 basis points QoQ.
While the other income saw a significant jump of 57.8% YoY and 37.4% QoQ to ₹734 crore, led by a treasury gain of ₹192 crore. Asset quality was largely steady on a QoQ basis, with GNPA and NNPA ratio at 2.36% and 0.69%, respectively.
Federal Bank's deposit mobilisation grew 5.9% QoQ and 17.4% YoY to ₹2.13 lakh crore in Q4FY23. Additionally, the bank achieved an RoA of 1.45%, the highest in 36 quarters, and a RoE of 17.48%, the highest in 57 quarters.
Brokerages remain bullish on the bank
Brokerage firm Kotak Institutional Equities maintained a 'buy' rating on the stock with an unchanged target price of ₹160 apiece.
According to the brokerage firm, Federal Bank is in a strong position to achieve a return on assets (RoA) of over 1.2% in the next few years. It said that the bank has demonstrated good performance in recent years and that its current valuations are still attractive.
"We are surprised at the immediate negative reaction of the market on Federal Bank post the announcement of results. Investors appear to be quite concerned on NIM pressure that the bank saw this quarter. Note that the funding mix of Federal Bank is different from that of frontline private banks. Hence, it is only a timing issue and not a source of concern," the brokerage said.
Federal Bank has one of the best liability franchises among regional banks, although it is dominated by retail term deposits. Hence, the pressure on NIM would have to come through earlier than others. The brokerage firm believes that FY2024 may see pressure on NIM and has factored this into its estimates, resulting in negligible changes to earnings.
ICICI Direct Research has maintained its 'buy' recommendation on the stock and has revised target price to ₹160 apiece from ₹165 earlier. Similarly, Nirmal Bang has also reaffirmed its 'buy' call and has set a target price of ₹178 apiece, signalling an upside of 39% from the stock's current market price.
28 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.