Home / Markets / Mark To Market /  Federal Bank sets high expectations for September quarter

Investors in shares of Federal Bank Ltd are sitting on decent gains. The stock is up by 24% so far in FY23, meaningfully beating the Nifty Bank index, which has gained 7.5%.

The bank’s recently released provisional business update for the quarter ending September (Q2FY23) shows strong momentum. Gross advances grew by 6.2% quarter-on-quarter (q-o-q) in Q2, comparing favourably with 4.6% growth in Q1. Year-on-year (y-o-y), advances rose by 19%.

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Healthy momentum

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The systemic improvement in credit growth augurs well for all banks, including Federal Bank. “Factoring in the strong growth momentum for the industry and the bank, we revise our credit growth for Federal Bank to 18% in FY23E from 16%," according to a report by Emkay Global Financial Services Ltd dated 3 October.

Federal Bank’s total deposits in Q2 rose at a relatively slower pace of 3.16% sequentially with growth in current and saving accounts (CASA) deposits at 2%. Analysts at Axis Securities Ltd are of the view that Federal Bank has been among the few mid-tier banks that have consistently improved its deposit base. The upshot is that the CASA ratio fell by 43 basis points (bps) sequentially to 36.41%. One basis point is 0.01%.

Effective 1 October, Federal Bank has raised interest rates on savings bank deposits across various buckets, but still has a wide gap to bridge compared to the Reserve Bank of India’s repo rate hiking trajectory. Accordingly, the impact on the bank’s margins needs to be watched in the coming quarters.

In Q1, Federal Bank’s net interest margin (NIM) stood at 3.22%, up 6bps q-o-q. During the Q1 earnings call, the bank’s management had said their margins would be in the range of 3.25-3.27% in the upcoming quarters.

Asset quality will be another focus area. The management expects FY23 slippages to be around Rs1,800 crore and return on asset (RoA) is expected to improve to 1.1% as it exits this financial year. Steady provisions, healthy growth in the balance sheet and NIMs would help the bank to deliver RoA of 1.1% by FY24, said the Axis report.

Given that Federal Bank’s shares have outperformed in FY23 so far, investors seem to be capturing a good share of the optimism.

“Potential value unwinding in its NBFC subsidiary (FedFina) via an initial public offering could be an additional catalyst for the stock and also shore up receding capital levels," said Emkay’s analysts.

On the flipside, moderation in loan growth or deterioration in asset quality are downside risks.

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