Federal Bank - Growth Outlook Steady; Getting Future-Ready Under New Leadership: Motilal Oswal

Motilal Oswal Report

Federal Bank Ltd. posted a 20% compound annual growth rate in its loan book during FY22-24 and improved its return on asset to ~1.3% in FY24 from 0.9% in FY22, despite net interest margin pressure and higher cost ratios.

In July 2024, Federal Bank received the RBI’s approval for Mr. Manian as the new MD and CEO starting Sep-24. With his extensive banking expertise, Mr. Manian is expected to drive strategic changes and drive next leg of growth and profitability for the bank after already delivering robust performance over the last few years.

We estimate Federal Bank to achieve RoA of 1.3% and RoE of 15.2% by FY27, driven by improved margins and a continued shift toward higher-yielding products.

As revenue growth outpaces cost growth, we expect the cost/income ratio to decrease to ~50% by FY27, down from 54.5% in FY24.

With current valuations at 1.2 times FY26 book value presenting an attractive longterm investment opportunity, Federal Bank is well-positioned to leverage its strong balance sheet and extensive customer base for sustainable profitability. Supported by new leadership’s focus on growth, we maintain our Buy rating on the stock with a target price of Rs 230 (1.5 times FY26E adjusted book value).

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