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Business News/ Markets / Stock Markets/  Federal Bank vs IndusInd Bank: Which lender should you pick for long term?
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Federal Bank vs IndusInd Bank: Which lender should you pick for long term?

Federal Bank and IndusInd Bank are two lenders that have also posted stellar earnings in the September quarter. Let's analyse between bank stocks Federal Bank and IndusInd Bank, which one has better growth opportunities for the long term.

Federal Bank vs IndusInd Bank (Agencies)Premium
Federal Bank vs IndusInd Bank (Agencies)

Indian banks have been the healthiest in a decade. In the September quarter, the banking sector is again likely to lead the earnings growth driven by a recovery in asset quality, loan growth, and improvement in margins. Federal Bank and IndusInd Bank have also posted stellar earnings in the September quarter.

But let's analyse between bank stocks Federal Bank and IndusInd Bank, which one has better growth opportunities for the long term.

Stock Price Trend

In the last one year, both IndusInd Bank and Federal Bank gave double-digit returns, outperforming the benchmark massively. While IndusInd was higher, jumping 25 percent in this period; Federal rose 13 percent. In comparison, benchmark Nifty Bank gained over 8 percent in the last 1 year.

Similarly, in 2023 YTD, both IndusInd and Federal surpassed the benchmark again. IndusInd advanced almost 19 percent whereas Federal added 6 percent. Meanwhile, the benchmark index Nifty Bank was up only around 2 percent in this time.

IndusInd gave positive returns in 6 of the 10 months so far in this current calendar year, falling in 4. It rose the most in May, up 11.6 percent and fell the most in January, down 11.2 percent.

Federal has also given positive returns in 6 of the 10 months of the current calendar year, declining in 4. The stock gained the most in July, up 7.5 percent and declined the most in May, down 7.2 percent.

IndusInd Bank hit its 52-week high of 1,475.65 in September 2023. Currently trading at 1,447.80 (down 2 percent from a 52-week high), it is still 29 percent away from its record high of 2,038, hit in August 2018. Meanwhile, it has advanced over 46 percent from its 52-week low of 990, hit in February 2023.

On the other hand, Federal Bank hit its record high of 152.60 earlier this week, on October 16, 2023. Currently trading at 147, it has gained over 21 percent from its 52-week low of 120.90, hit in December 2022.

In the long term, 3 years, both lenders have given multibagger returns but Federal has emerged as the winner. It has soared over 158 percent whereas IndusInd has rallied over 131 percent. In comparison, Nifty Bank has surged over 80 percent in this duration.

Earnings

In the September quarter (Q2FY24), Federal Bank reported a 35.5 percent year-on-year (YoY) jump in net profit at 954 crore owing to lower provisions. While the lender's other income grew 20 percent YoY to 730 crore, its net interest income grew 17 percent YoY to 2,056 crore in Q2 FY24. Its net interest margin, meanwhile, rose a mere 1 bps sequentially to 3.16 percent as on 30 September. Its total provisions were at 371 crore, down 27 percent YoY.

Federal Bank’s asset quality improved as its gross bad loans as a percentage of gross advances stood at 2.26 percent, down from 2.38 percent in the June quarter and 2.46 percent in the September quarter of FY23.

On the other hand, IndusInd Bank reported a 22 percent year-on-year (YoY) rise in its September quarter standalone net profit to 2,181.5 crore on the back of higher income and lower provisions. The bank's total provisions stood at 974 crore in the three months through September, down 15 percent from the year-ago period. Net interest income (NII) of 5,077 crore in Q2 FY24 climbed 18 percent YoY. Its net interest margin (NIM), a key measure of profitability, remained unchanged from the previous quarter at 4.29 percent.

The bank witnessed a slight improvement in asset quality as compared to the June quarter. Its gross bad loans stood at 1.93 percent of its total advances, down 1 basis point sequentially. Its net NPA ratio was at 0.57 percent, down 1 basis point from the June quarter.

Which stock has better long-term investment opportunities? The experts seem to be divided.

 

Veer Trivedi, Research Analyst, SAMCO Securities, prefers Federal Bank over IndusInd.

Both IndusInd and Federal Bank have reported solid Q2FY24 results and their growth trajectory across parameters has been encouraging. However, between them, if we had to pick one, then Federal Bank would be our pick. Federal Bank has been doing a good job in granulising its loan book. Its corporate book has come down from 42 percent in 2019 to 35 percent in Q2FY24. This would aid the bank’s Net Interest Margin (NIM) and considering the fact that asset quality has never really been a big issue for the bank, the bank’s ROA is expected to see further improvement from current high levels. Despite the return ratios and credit environment being at a multi-year high, the stock is trading near its historical valuation. Therefore, the risk-reward appears attractive for Federal Bank.

Dnyanada Vaidya, Senior Research Analyst - BFSI, Axis Securities, also favours Federal.

With growth visibility remaining robust with no immediate signs of slowing down, we expect Federal Bank's business growth to remain buoyant. As margins are likely to have bottomed out, the gradual increase in CoF/CoD will be offset by the improvement in the share of high-yielding products in the portfolio, thereby supporting yields. Opex ratios will remain slightly higher in the near term, and improving productivity is expected to drive down the C-I Ratio over the medium term. Thus, stable margins, improving fee income, and benign credit costs should offset higher Opex impact and enable FB to deliver RoA of 1.3+ percent over FY24-25E. We like Federal Bank over the medium-to-long term.

Sonam Srivastava, Founder and Fund Manager, Wright Research, has also chosen Federal over IndusInd.

Both Federal Bank and IndusInd Bank are good private sector banks with a strong track record of growth. However, the Federal Bank has a more conservative approach to lending and has better asset quality than IndusInd Bank. Federal Bank also has a lower cost-to-income ratio and a higher net interest margin than IndusInd Bank.

IndusInd Bank has a higher growth potential than Federal Bank due to its exposure to the faster-growing retail and corporate segments. However, IndusInd Bank also has a higher risk profile due to its higher exposure to corporate loans.

Overall, Federal Bank is a better stock for the long term due to its conservative approach to lending, better asset quality, and lower cost-to-income ratio.

On the contrary, Vinit Bolinjkar, Head of Research, Ventura Securities, selected IndusInd between the two.

IndusInd Bank outperforms Federal Bank and is positioned favorably in the current cycle due to its improving operational efficiencies and robust Q2FY24 results.

In Q2FY24, IndusInd Bank reported significant YoY growth in its NII by 18 percent to 5,077 crore and advances by 21.3 percent to 3,155 crore. This growth was primarily driven by a strong increase in retail advances by 27.4 percent YoY to 1,226 crore, backed by a high CD ratio of 89 percent and a CASA ratio of 39.3 percent. Consequently, the NIM improved by 18bps to 4.3 percent in Q2FY24. Additionally, both gross and net NPAs saw a decline, reaching 1.9 percent and 0.6 percent, respectively.

In comparison, Federal Bank's NII and advances grew at a slower YoY rate of 16.7 percent to 2,056 crore and 19 percent to 1,960 crore, trailing behind IndusInd Bank's performance. Federal Bank faced challenges with a declining CD ratio, dropping by 245 bps to 83 percent in Q2FY24, and a decreasing CASA ratio, falling by 524 bps to 31.2 percent in the same period. Consequently, Federal Bank's NIM decreased by 14 bps, reaching 3.1 percent, a figure lower than that of IndusInd Bank.

Anirudh Garg, Partner and Head of Research at Invasset PMS, has also picked IndusInd.

When considering the long-term prospects of Federal Bank and IndusInd Bank, a comprehensive analysis of their financial and valuation metrics is essential. Starting with the NIM, IndusInd leads with 4.29 percent compared to Federal Bank's 3.16 percent,  suggesting superior profitability. IndusInd also operates more efficiently with a Cost to Income ratio of 46.88 percent versus Federal Bank's 52.47 percent. Furthermore, in terms of asset quality, IndusInd has an advantage with lower Net Non-Performing Assets (NNPA) and Gross Non-Performing Assets (GNPA). 

Moreover, IndusInd's superior Price to Book value of 2.02 against Federal's 1.40 signifies stronger market perception. Balancing these financial and valuation metrics, IndusInd emerges as a potentially more attractive long-term stock, but investors should consider other factors and perform due diligence before making decisions.

Jignesh Shial, Director - Research; Head of BFSI Sector at InCred Capital, also opted for IndusInd. However, it is important to note that the brokerage doesn't have coverage on Federal Bank.

We don’t have coverage of Federal Bank. However, we like IndusInd Bank as we believe it’s a favorable play during the current cycle amid a balanced asset mix and improved asset quality. We believe it offers decent risk-reward and should do well in the mid to long term.

Ajit Kabi, banking analyst at LKP Securities, likes both lenders.

Both IndusInd Bank and Federal Bank have reported a strong set of numbers. Credit growth across segment remains healthy. Asset quality woes are way behind for the banks. However, the valuation of Federal Bank is cheaper than IndusInd Bank. Given the strong asset quality and growth potential, we expect further re-rating for both banks.

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Published: 20 Oct 2023, 02:06 PM IST
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