Broking firm, Anand rathi has recommended buying the stock of Federal Bank, with a price target of Rs 115.
The broking firm believes that lower margins, less treasury income and higher opex led to a 500bp weakened C/I ratio; moderating provisions, however, counterbalanced the weak operating performance keeping RoA at 1% for Federal bank.
"Asset quality improved as slippages were less than anticipated. With the lower formation of stress than earlier envisaged, recoveries in earnings would be better. Given the bank's strong liability franchise and capitalisation, it is set to gain market share in the near term. We maintain our positive view on it with a Rs.115 target, valuing it at 0.9x P/ABV on its FY24e book," the brokerage has said.
Slippages for the quarter were contained at Rs3.6bn (1% of loans), less than we estimated. Overall, the restructured standard restructured portfolio declined 5% q/q to Rs35.4bn (~2.4% of loans). With the bulk of the pandemic-related stress already recognized/restructured and economic activities normalising, we expect further moderation in the slippage run-rate.
RoA to persist over 1%. With a higher interest-rate environment, NIM is expected to increase from current levels. Higher margins combined with expected moderation in operating expenses would keep RoA above 1%. With a pick-up in business growth and normalisation of credit cost, profitability is expected to gradually improve from current levels. We estimate a 1.2% RoA and ~13.4% RoE for FY24.
"Our May'23 sum-of-parts target price (0.9x FY24e book value, Rs20 a share for Fedfina and IDBI-Federal Life) works out to Rs 115 a share,"the brokerage has said.
According to Anand Rathi, the key risks are Lumpy slippages from the corporate book.