Federal Bank shares jump 5% after MOFSL reiterates 'Buy' with 23% upside

Federal Bank shares surged to Rs 196.05 a piece in intraday day deals, rising up to 4.64 per cent on Monday after Motilal Oswal Financial Services (MOFSL) gave a target price of Rs 230, a 23 per cent upside to the company’s Friday’s closing price of Rs 187. 

Analysts at Motilal Oswal are bullish on Federal Bank as the company has demonstrated a strong growth trajectory over FY22-24, with 20 per cent compound annual growth rate (CAGR) in its loan book and 18 per cent deposit growth. This was despite the bank facing net interest margin pressure (NIM) and higher cost ratios due to rising funding costs and operational expenses. 

 

The bank has also maintained a strong asset quality, with its gross non performing assets as well as net non performing asset  ratios improving to 2.1 per cent and 0.7 per cent in FY24, driven by controlled slippages and robust recoveries. This success is attributed to strategic customer selection and strong underwriting practices, which remain effective even in co-lending partnerships. 

“Over FY25-27, we believe the bank is well poised to deliver an 18 per cent loan CAGR, aided by effective risk management and fintech partnerships,” the brokerage said in a note on Monday. 

The bank management views fintech partnerships as vital for product distribution, tech integration and network expansion to boost customer acquisition in FY25, as it is optimistic about the lifting of regulatory restrictions on card issuance soon. 

Analysts reckon that the implementation of liquidity coverage ratio (LCR) draft guidelines in their current form will impact FB’s LCR by 1240bp. However, in that scenario, if the bank were to raise required deposits to restore its LCR back to 110 per cent than  FB’s RoA and margins would be impacted by 3bp and 8bp, respectively, analysts at the brokerage noted.

Further, RBI's approval for KVS Manian as the new MD and CEO beginning Sep’24 is expected to drive strategic changes and drive the 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 return on assets and return on equity of 1.3 per cent and 15.2 per cent, respectively by FY27, making its current valuation at 1.2x FY26 basket value (BV) attractive for long-term growth; thus, we maintain our ‘Buy’ rating with a target price of Rs 230 (1.5x FY26E average BV),” analysts at MOFSL said. 

The bank has a total market capitalisation of Rs 47,728.85 crore. Its shares are trading at a price to earnings multiple of 11.83 times and at an earning per share of Rs 15.84. 

At 2:51 PM, the stock price of the company advanced by 4.35 per cent at Rs 195.50 a piece on the BSE. By comparison, the BSE’s Sensex was up 0.71 per cent to 81,962.19 level.