This Mid Cap Cap Banking Stock Grew 22.77% In 3 Months, Brokerage Suggests Buy For Rs 130 Target Price

Axis Securities has given a "buy" call to Federal Bank (FB) for a potential upside of around 7% with a target price of Rs 130 per share. FB is a Kerala-based private sector bank with a pan-India presence. It has exposure to Insurance and NBFC business through its joint venture with IDBI and wholly-owned subsidiary FedFina. The bank continues to proactively execute its strategy of a branch-light and distribution-heavy franchise.

Stock Outlook & Return

The stock currently trades for Rs 122.40 per share on NSE. The stock recently touched its 52-week high level at Rs 129.75, and the Current market price is near its high level. Its 52-week low level is Rs 219.75, which it hit on 27 December 2021. It is a mid-cap bank having a market capitalization of Rs 25,767.99 crore.

Its share surged by 1.28% over the past week and 2.38% over the past month, respectively. It has given 22.77% positive over the last three months. The stock over a year has given 41.45% positive return to the shareholders, and 45.45% in the past 3 years, respectively. Meanwhile, over the past five years, the stock has surged 4.53%.

Improved Loan-mix Balance

FB's credit growth regained momentum and remained robust in Q1FY23 with advances growing at 16% YoY during Q1FY23. We expect the book to grow at a 16% CAGR over FY22-25E, driven by strong growth in newer segments like credit cards, and personal loans along with ample opportunities in the core segments. The bank is also keenly focused on neo-banking tie-ups to reach the country's under-banked population and expects these partnerships to contribute meaningfully to the overall business growth moving forward. We believe this will not only keep the bank's customer acquisition costs low but will also help FB augment its business growth as well.

Improving Liability Franchise

FB has been amongst the few mid-tier banks that have consistently improved their deposit base. Though deposits growth was muted in Q1FY23 at ~8% YoY, CASA deposits registered a healthy growth of 15% YoY, improving the CASA ratio to 36.8%. The share of Retail deposits remained steady QoQ at ~94%.

Manageable Asset Quality

Similar to the frontline banks, FB has managed COVID-19 stress quite well. In Q1FY23, asset quality improved by 11bps on a sequential basis with GNPA at 2.7%, aided by healthy recoveries while slippages were marginally higher QoQ. PCR stood largely stable at ~66%. The restructured book has declined QoQ to Rs 3,366 Cr (2.2% of advances) vs. Rs 3,536 Cr (2.4% of advances) QoQ. ~43% of the restructured book has started billing and expects ~15-18% of the restructured pool to slip into NPA. The management has guided for slippages for FY23 to mirror FY22's performance and stand at ~Rs 1,800 Cr.

Outlook

FB is cautiously building a loan mix toward high-rated corporate and retail loans. The bank's liability franchise remains strong with CASA plus Retail TD of +90% and one of the highest Liquidity Coverage Ratios (LCR) amongst banks. Restructuring levels are also in control. The management indicated the possibility of the bank reporting RoA improvement to 1.1% as it exits FY23 and another 10-15bps improvement by FY24E. This will be led by NIM expansion of ~5-7bps with a change in loan mix, stable credit costs, and improving cost ratios with employee costs moderating (~Rs 500-510 Cr quarterly run rate in FY23) and the Fintech partnerships yielding results. The management has revised the bank's overall credit growth guidance upwards to 18% and it will strive to accelerate growth where appropriate opportunities are available.

Valuation & Risks

Key positives are increasing retail focus, strong fee income, adequate capitalization, and prudent provisioning. "We expect steady provision requirements along with healthy growth in the balance sheet and NIMs to deliver RoA/RoE of 1.1%/13.3% by FY24E. We maintain a BUY with a revised target price of Rs 130/share (1.25x FY24E ABV)," Axis Securities said.

Asset quality trends in the upcoming quarters and Loan growth moderation would be two key risks to the buy call, according to the brokerage.

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.