Brokerage sees 23% upside on Federal Bank; recommends ‘buy’ after Q1FY24 results; do you own?

LKP Securities has recommended a ‘buy’ on Federal Bank with a target price of ₹160, representing a 21 per cent increase over the stock's closing price of ₹132.55 on July 17. Shares of Federal Bank gained over 3 per cent to touch an intra day high of ₹1,33.65, setting 2.51 per cent higher at ₹132.55 apiece during the trading session on Monday. The stock quotes a 52-week high price of ₹143.35 with an upper price band of ₹145.80, according to BSE data.

Federal Bank reported a net profit of ₹853.74 crore in the April-June quarter of current fiscal, registering a growth of 42.2 per cent from ₹600.66 crore in the corresponding period last year. The bank’s net interest income (NII) in Q1FY24 rose 19.6 per cent to R 1,918 crore in the said quarter, from ₹1,604.5 crore in the year-ago period. 

The bank's net interest margin (NIM) contracted marginally by 7 basis points to 3.15 per cent from 3.22 per cent in the June quarter last year. Federal Bank has reported mixed 1QFY24 earnings, according to LKP Securities and some of the key pointers were as follows: 

-NPA ratio slightly weak (GNPA: 2.38 per cent v/s 2.36 per cent in the previous quarter) on the back of higher slippages and slower recoveries
-Reported slippages were up with slower recoveries
-Restructuring pool declines further with 21 per cent coverage
-Robust business growth with credit off-take of 21 per cent and deposit traction of 21.3 per cent.

LKP Securities believes that the bank's NIMs are likely to have bottomed out. Faster yield expansion driven by favorable loan mix and business growth to drive NIMs expansion. Non-interest income has witnessed growth of 62 per cent YoY and flat sequentially because of high treasury profit,'' said the brokerage.

LKP added that Federal Bank's retail book contributed 51 per cent of the fresh slippages while agriculture book contributed 20 per cent of total slippages. ‘’There is almost negligible corporate slippages reported and write-offs are insignificant at ₹4 crore,'' it said. GNPA ratio (2.38 per cent v/s 2.36 per cent in 4QFY23) increased marginally on the back of lower upgrades and higher slippages,'' said the brokerage house.

On the asset quality front, the Federal Bank's gross non-performing assets (GNPA) in the June quarter increased 6 per cent to ₹4,434.8 crore from ₹4,183.8 crore in the March quarter. Net NPA rose by 5.8 per cent to ₹1,274.6 crore from ₹1,205 crore sequentially.

The gross NPA ratio during the quarter rose by 2 bps to 2.38 per cent from 2.36 per cent, while the net NPA ratio remained stable at 0.69 per cent sequentially.

‘’We believe the asset quality is likely to stay stable with significant improvement in profitability. We have incorporated steady provision requirements along with stable growth in the balance sheet and expect it to deliver RoA/ RoE of 1.2 per cent/15 per cent by FY24E. We reiterate BUY with target price of ₹160 (based on 1.2x FY25E Adj. BVPS); a potential upside of 23 per cent,'' said LKP Securities on Federal Bank's outlook after April-June quarter results.