Buy This Midcap Banking Stock, Says Broking Firm Sharekhan

Broking firm Sharekhan has recommended buying the stock of Federal Bank for good gains. The firm has set a price target of Rs 120 on the stock.

"Federal Bank reported strong operating performance for Q1FY2023 despite muted treasury performance. Net interest income (NII) grew by 13% y-o-y and 5% q-o-q, led by healthy net advances growth of 17% y-o-y and improvement in NIMs. Core fee income grew by 73% y-o-y on a lower base. Other income fell by 96% y-o-y due to lower treasury gains and loss on revaluation of investments. Total operating expenses grew by 16% y-o-y and declined by 9% q-o-q. Cost-toincome ratio was reported at 52.7% in Q1FY2023 vs 60% in Q4FY2022 (impacted by one off item). Core PPoP grew robustly by 27.8% y-o-y and 19.4% q-o-q due to contained opex and healthy NII and core fee income. Provisions were lower by 69% y-o-y," Sharekhan has said.

However, sequentially, core credit cost was reported higher at 0.41% in Q1FY2023 versus 0.27% in Q4FY2022 due to higher slippages in the retail and business banking segments. PAT grew by 64% y-o-y and 11% q-o-q on account of healthy core PPoP and contained core credit cost. Net advances grew by 17% y-o-y/5% q-o-q. Retail advances grew by 16% y-o-y and among retail loans, housing, business banking (SME) and agri books constituting 67% of the total retail loans, grew by 17% y-o-y, 18% y-o-y & 19% y-o-y respectively.

Under Wholesale segment, Commercial banking rose 20% while corporate book grew by 15% y-o-y. Deposits grew by 8% y-o-y while CASA balance grew by 14.6% y-o-y. CASA ratio remained stable q-o-q. Slippages reported were up 16% q-o-q at Rs. 463 crore mainly due to higher slippages from retail segment which were up 137% q-o-q and in business banking segment, it increased by 57% q-o-q. Restructured book stood at 2.2% of total average advances vs 2.4% q-o-q. The bank's asset quality improved during the quarter, with GNPA ratio and NNPA ratio declining by 11 bps q-o-q and 2 bps q-o-q, respectively, to 2.69% and 0.94% led by recoveries, upgrades and write-offs.

Buy the stock for a target price of Rs 120 per share

At the current market price, the stock currently trades at 1.0x and 0.9x its FY2023E and FY2024E Core BV, which we believe is reasonable. "Factors such as better digital capabilities, sustaining healthy loan growth outlook, stable asset quality with higher-rated corporate book and continued focus to increase its retail mix with higher yielding businesses such as commercial vehicles, credit cards, and micro credit are expected to augur well for the bank's growth going ahead.

Asset quality should improve further with better risk management practices and higher collection efficiencies across segments. Focus on growing assets and liabilities in a granular manner along with improved return ratio outlook should augur well for the bank going ahead. Low cost deposits mobilization would be key monitorable," Sharekhan has said.