Brokerages maintain buy rating on Federal Bank post June quarter earnings

Many brokerages maintained their rating and target price on the stock post June quarter earnings

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Shares of Federal Bank Ltd on July 14 were trading flat after it posted weaker earnings for June 2023 quarter with many brokerages maintaining their rating and target price on the stock. The stock was trading at Rs 127 on BSE, up 0.04 percent from its previous close at 10.50am,

Brokerage firm Prabhudas Lilladher, Kotak Institutional Equities, ICICI Securities, Yes Securities and Motilal Oswal Securities have maintained their buy rating on the stock. Kotak has kept target price unchanged at Rs 160 a share while ICICI Securities and Yes Securities retained their target price at Rs 155 a share and 175 a share. Prabhudas Lilladher has increased its target price marginally to Rs 175 from Rs 170 a share.

Federal Bank Ltd. recorded a 5.41 percent decrease in net profit for the quarter ending in June, primarily due to an increase in provisions compared to the previous quarter. According to an exchange filing, the private lender’s net profit amounted to Rs 854 crore, compared to Rs 903 crore in the preceding quarter. However, on an annualized basis, the net profit jumped 42 percent.

As of June 30, the net interest margin of the lender declined to 3.15 percent, compared to 3.31 percent in the previous quarter. Additionally, the asset quality of the lender weakened, indicated by a slight increase in the gross non-performing asset ratio to 2.38 percent. Meanwhile, the net non-performing asset ratio remained unchanged at 0.69 percent. Provisions also saw a significant increase, rising by 33.4 percent quarter-on-quarter to Rs 155.6 crore.

“We remain surprised at investors’ negative reaction to the progress of the bank’s NIM, as we ought to acknowledge the following: (a) The current interest rate cycle is different to what we have seen in the past, as the loan book is a lot more sensitive than deposits to policy rates. Re-pricing lead and lags makes NIM volatile. (b) We also had a challenge where the wedge between loans and deposit growth has persisted longer, which hurts banks that are a lot more reliant on term deposits. (c) Finally, we are in a period of benign credit costs and lower slippages that would result in higher competitive intensity. All of the above would imply that there would be pressure and importantly, higher volatility of NIM”, Kotak said in its latest note.

The total advances of the lender experienced a notable 21 percent year-on-year growth, reaching Rs 1.83 lakh crore. The retail book portfolio grew 17 percent year-on-year. Additionally, the lender’s total deposits expanded by 21 percent as well, amounting to Rs 2.22 lakh crore.

During the quarter, gross slippages inched up quarter-on-quarter (QoQ) to Rs 500 crore, compared to Rs 450 crore in the previous quarter. Within the retail segment, slippages increased from 1.4 percent to 1.67 percent in the last two quarters and further rose to 1.92 percent in Q1FY24, primarily originating from the restructured book. The recovery was relatively weak, resulting in an increase in net slippages to Rs 255 crore (56 basis points) compared to Rs 55 crore (13 basis points) QoQ. As a result, there was a 6 percent rise in gross non-performing assets (NPA) QoQ, supported by minimal write-offs, the lender said in its earnings release.

” FB 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. We broadly maintain our estimates as controlled credit costs and healthy other income compensated for a slight moderation in NII growth”, said Motilal Oswal Securities in a note to its investors.

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