Federal Bank: Kotak Institutional Equities felt the NIM contraction was not an unexpected outcome. It was surprised by investors negative reaction on the progress of the bank’s NIM. 
Special 
Federal Bank: Kotak Institutional Equities felt the NIM contraction was not an unexpected outcome. It was surprised by investors negative reaction on the progress of the bank’s NIM. Federal Bank's June quarter results were a mixed bag with profit coming in line with analyst estimates, but net interest income (NII) and a sequential fall in net interest margin (NIM) missing the Street estimates. Analysts are mostly positive on the Rekha-Jhunjhunwala-backed stock and suggested price targets that suggest up to 45 per cent upside potential for the stock.
"Federal Bank reported a mixed 1QFY24, with a beat in net earnings and a miss in NII. The earnings beat was driven by higher other income, while the NII miss was due to margin compression. Business growth, though, was healthy, led by traction across segments. The asset quality ratio remained stable, although the slippages came in a tad higher," said Motilal Oswal Securties. The brokerage broadly maintained its estimates as controlled credit costs and healthy other income compensated for a slight moderation in NII growth. It has a target of Rs 155 on the stock.
Kotak Institutional Equities felt the NIM contraction was not an unexpected outcome. It was surprised by investors negative reaction on the progress of the bank’s NIM, given the current interest rate cycle is different to what we have seen in the past, as the loan book is lot more sensitive than deposits to policy rates. Re-pricing lead and lags makes NIM volatile, it noted.
"We like the franchise of Federal Bank in the regional banks space. In our view, the NIM pressure would be visible for all banks and we would prefer to look at the medium-term outlook, where the probability of asset quality surprises leading to unfavorable outcomes on growth and profitability is lower," it said while suggesting a target of Rs 160 on the stock.
Nuvama Institutional Equities said it maintained its ‘Buy’ rating on the stock due to inexpensive valuation and its own expectation of better performance in quarters ahead.
"However, we note that delivery on quarterly margins will be closely monitored by the market and a key trigger. There could be upside risks to opex from higher pensions if rates fall. The bank is likely to raise equity in FY24E," it said.
The bank CEO has guided NIM expansion through the rest of the year without factoring in qualified institutional placement (QIP), Nuvama said adding that while NIM may improve in Q2FY24, it sees pressure in H2FY24E.
Federal Bank had on Thursday announced a 42 per cent year-on-year (YoY) rise in net net profit at Rs 853.74 crore compared with Rs 600.66 crore in the same quarter last year. Net interest income (NII) for the quarter jumped 19.6 per cent to Rs 1,918 crore compared with Rs 1,604.50 crore in the corresponding quarter last year.
The private lender said gross non-performing assets for the quarter rose to Rs 4,434.77 crore compared with Rs 4,183.77 crore in the March and Rs 4,155.33 crore crore in the year-ago quarter. Gross NPAs as percentage of total advances stood at 2.38 per cent against 2.36 per cent in March and 2.69 per cent in the year-ago quarter.
“After incorporating an improved outlook on loan growth and margin, we have raised our earnings estimates for FY24E and FY25E by 2 per cent and 7.9 per cent, respectively. We roll forward our valuation to June‘25E ABV while keeping our target multiple constant at 1.4 times, which leads to a target price of Rs 184,” said Nirmal Bang Institutional Equities.
Also read: Federal Bank share price targets suggest up to 45% upside potential for Jhunjhunwala stock
Also read: Rs 120 to Rs 542: This railway stock scaled all-time high in a year
Copyright©2025 Living Media India Limited. For reprint rights: Syndications Today
