Federal Bank Remains Brokerages' Top Pick After Stellar Q1 Results, New CEO

After reporting higher-than-expected net profit in the first quarter of fiscal 2025, Federal Bank Ltd. remained the top pick for brokerages on the back of strong asset quality, despite seasonal impact on agriculture business.

The bank's net profit rose 18.2% to Rs 1,010 crore in the April-June quarter, against analyst estimates of Rs 943.9 crore.

Asset quality for the lender was flat with gross non-performing asset ratio improving 2 basis points quarter-on-quarter to 2.11%. Net NPA, too, stayed flat sequentially at 0.6%.

• Net profit up 18.2% at Rs 1,010 crore versus Rs 854 crore (YoY).

• Net interest income rose 19% at Rs 2,292 crore versus Rs 1,919 crore (YoY).

• Gross NPA at 2.11% versus 2.13% (QoQ).

• Net NPA flat at 0.6% (QoQ).

While Morgan Stanley has an 'equal weight' rating on the stock and Nomura has a 'buy' rating, both the brokerages have raised their target price for the stock and said that it remains their top pick among peers.

Morgan Stanley has raised the target price to Rs 200 per share from Rs 180 apiece earlier. While, Nomura has increased it to Rs 240 apiece from Rs 195 per share earlier.

For re-rating, it is key for the lender to sustain return on asset at current levels of 1.3%, Morgan Stanley said. This appears difficult to the brokerage owing to low credit costs, which will normalise over the next four to six quarters, limited margin buffer, and potential material downside risk when rate cycle turns.

The bank appears better placed than peers on access to retail deposits, the brokerage said. "This should help accelerate market share gains as a macro recovery gains pace. It has also increased its focus on relatively higher-margin segments, and growth in these segments could pick up in the medium term."

The performance in deposit mobilisation in the first quarter was impressive, especially relative to other banks, with deposits growing 19.6% on the year and 5.4% sequentially, Nomura said.

The bank's loan-to-deposit ratio at 83% was the lowest among private banks, which should aid the bank in sustaining loan growth momentum, it said.

Appointment of KVS Manian as its new managing director and chief executive officer from September 2024 can drive continued re-rating of the stock, Nomura noted.

The stock snapped its three-day rally on Thursday after hitting its lifetime high Wednesday.

Shares of the bank fell as much as 1.68% before paring loss to trade flat at Rs 201 apiece as of 11:36 a.m. This compares to a 0.31% decline in the NSE Nifty 50.

The stock has risen 28.68% year-to-date and 48.14% in the last 12 months. Total traded volume so far in the day stood at 0.61 times its 30-day average. The relative strength index was at 74.22, indicating that the stock may be overbought.

Of the 41 analysts tracking the company, 33 maintain a 'buy' rating, six recommend a 'hold' and two suggest a 'sell', according to Bloomberg data. The average 12-month analysts' consensus price target implies an upside of 8.2%.