Shares of Federal Bank have given multibagger returns to their investors since COVID. The stock has surged as much as 253 percent from its COVID low of ₹35.70, hit in March 2020, to currently trade around ₹126. Meanwhile, it is up over 47 percent in the last 1 year but lost 9 percent in 2023 YTD
After the recent correction in 2023 YTD, brokerage house JPMorgan sees the balance of risk-reward as positive in this bank's share price. It believes that Federal Bank is better placed among its peers in the midcap space.
The brokerage has recently initiated coverage on the stock with an 'overweight' call and a target price of ₹150 (for March 2024), indicating an upside of 20 percent. The brokerage pointed out that the stock has outperformed peers on a one-year basis (+47 percent vs. NIFTY +15 percent, NSE Bank +31 percent) but struggled this year (YTD: -9 percent vs. NIFTY: flat) after posting a sharp NIM decline in its March quarter earnings. It said that the lender's valuations are supportive when compared to mid-cap peers.
"The primary attraction of the stock is its relatively stronger liability franchise vs. mid-cap bank peer group in an environment of tight LDRs (loan-to-deposit ratios). This is offset against a lower ROA (return on asset) the bank earns given a conservative book. This is incrementally changing with faster growth planned in high ROA segments. However, these are also relatively new and credit untested segments," it said.
When benchmarking, the brokerage noted, Federal Bank's ROA against major private banks, the gap (50 basis points) largely comes out due to a lower risk-adjusted yield on assets and lower non-interest income.
It further lauded the bank’s thesis on ROA improvement from lending in higher risk segments as credible, however, this will need tighter risk control in credit untested segments for a historically conservative regional bank, it warned.
It further pointed out that FB’s cumulative NIM improvement in FY23 has been just 15 bps vs major private banks (ex HDFC Bank) at 70-100 bps.
"If rates were to turn down in the future given tail off in inflation print, FB’s ability to hold on to the NIMs will be better given it didn’t enjoy the increase on the way up. Whilst Q4 decline was a shock, we think the bank should be able to hold FY23 levels with a slight upward bias on mix shift," it said.
The brokerage estimates a 16 percent EPS growth over the next three years keeping ROAs at 1.25-1.3 percent over F24-26E and loan growth CAGR of 15 percent.
In the March quarter, Federal Bank reported a 67 percent year-on-year (YoY) jump in its net profit to ₹903 crore. Meanwhile, the lender posted its highest-ever operating profit of ₹1,335 crore, up 67 percent YoY.
The lender's net interest income (NII) for the quarter rose 25.18 percent YoY to ₹1,909.29 crore from ₹1,525.21 crore in the year-ago period. However, its net interest margin (NIM) for the quarter fell to 3.31 percent against 3.49 percent in the December quarter. But, the NIM rose on a YoY basis from 3.16 percent in the year-ago quarter.
Its asset quality also improved in Q4FY23. Gross non-performing assets (NPAs) as a percentage of total advances for the quarter fell to 2.35 percent against 2.42 percent in the December quarter and 2.78 percent in the year-ago quarter.
“We have delivered industry-leading outcomes with net profit at ₹903 crore and ROE at an all-time high of 17.48 percent. The consistent performance exhibited throughout the year has yielded in net annual profits of ₹3,010.59 crore while maintaining benign asset quality across the segments," Managing Director & CEO Shyam Srinivasan said post the earnings announcement.
Stock Price Trend
While the stock has given positive returns in the last 1 year, 2023 has not been a good year for the lender.
It has given negative returns in 3 of the 5 months of the current calendar year so far. The stock has lost nearly 7 percent in May so far after a 2 percent and 2.4 percent jump in April and March, respectively. However, it shed 4 percent in Feb and 3.3 percent in Jan.
The stock hit its 52-week high of ₹143.35 on Jan 16, 2023, and a 52-week low of ₹82.5 on May 25, 2022.
Currently, the stock is down 12 percent from its 52-week high and has advanced 53 percent from its 52-week low.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.