Federal Bank declines 5% on profit booking post strong Q3FY23

Shares of Federal Bank dropped 5 per cent to Rs 135.35 from Rs 142.95 in Tuesday’s intra-day trade, on profit booking, after the private sector lender reported strong 54 per cent year-on-year (YoY) jump in profit after tax (PAT) at Rs 804 crore in December quarter (Q3FY23). The stock opened 2 per cent higher at Rs 142.85 per share.

The healthy profit growth mainly led by robust credit growth, sharp margin uptick, and continued lower LLP, were partly offset by higher staff costs due to ad hoc provisions for wage revision.

Net Interest Income (NII) for the quarter grew by 27.14 per cent YoY to Rs 1,957 crore, whereas NIMs stood at 3.89 per cent against 3.4 per cent, in a year ago quarter.

On the asset quality front, the bank recorded improvement as gross NPAs (Non-Performing Assets) declined 2.43 per cent as compared to 3.06 per cent at the end of third quarter of previous fiscal. At the same time, net NPAs eased to 0.73 per cent, as against 1.24 per cent, in the same period a year ago.

Meanwhile, the bank guides for some moderation in margin during Q4, due to rising cost pressures, but raised medium-term guidance to 3.35-3.4 per cent, up from 3.25-3.3 per cent.

Analysts at Prabhudas Lilladher, too, increased NIM for FY23E by 12bps and FY24/25E by around 6bps each, as high yielding book, which touched Rs 6,200 crore, could double over 2 years and upward deposit repricing could be slower to peers (~60 per cent of deposits as at FY22 have a maturity >3 years). With consistent beat in core profitability, analysts anticipate the re-rating to continue for Federal Bank.

Meanwhile, analysts at Emkay Global Financial Services believe that the bank is consistently delivering on growth, margins and RoA.

"The management guides for continued improvement in the RoA trajectory. We revise our earnings upwards by 3 per cent-5 per cent for FY23E-25E, factoring-in a better margin trajectory and expect the bank’s RoA/RoE at 1.3 per cent/16 per cent by FY25E (without factoring-in capital raise),” the brokerage firm said.

Federal Bank reported a strong Q3FY23, with a sharp beat in net earnings, driven by lower provisions. NII reflected a strong momentum, backed by healthy business growth and re-pricing of advances portfolio.

Liability franchise, too, remained strong, with a retail deposit mix at ~90 per cent and CASA ratio at ~34.2 per cent. Headline asset quality ratio, meanwhile, improved, led by healthy recoveries and upgrades and controlled slippages, said analysts at Motilal Oswal Financial Services.

"We raise its FY23/FY24 earnings estimate sharply by 7 per cent/5 per cent, factoring in higher NII and lower provisions and expect an RoA/RoE of 1.3 per cent/15.2 per cent in FY25," the brokerage firm added.

In the past six months, the stock of Federal Bank rallied 40 per cent, as compared to 12 per cent rise in the S&P BSE Sensex. Further, it surged 37 per cent in the past one year, as against 1.5 per cent decline in the benchmark index.