Federal Bank - Going From Strength To Strength: Axis Securities

Axis Securities Report

With a strong start to FY25, Federal Bank Ltd. remains well-positioned to sustain its growth momentum throughout the year, supported by healthy demand. The bank intends to focus on growth opportunities where the risk-reward profile is favorable. The bank aims to replicate its credit growth in deposits through focused efforts, including expanding its branch network, enhancing CA propositions, launching new products, driving digital initiatives, and refining scorecards for on-ground staff.

While we believe Federal Bank remains well positioned to deliver a sustainable return on asset of 1.3%, improving net interest margins backed by shifting portfolio mix towards higher-yielding products would be a key enabler for the bank to deliver RoA of 1.4% by FY27E and would drive the next leg of stock re-rating.

We expect Federal Bank to deliver RoA/RoE of 1.3-1.35%/14-16% over FY25-27E supported by steady NIMs, gradually improving the Opex ratio and stable credit costs (~30- 35 basis points).

Additionally, the appointment of Mr. KVS Manian, a veteran banker with rich experience of nearly three decades should help the bank deliver on strategy and ensure strong sustainable growth.

Adjusting for the numbers published in the annual report, we make minor tweaks to our estimates, while broadly maintaining them over FY25-27E. We reiterate our Buy recommendation on the stock with a target price of Rs 230/share (1.5 times FY26E adjusted book value on core book and a subsidiary value of Rs 12), implying an upside of 16% from the current market price.

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