This Banking Stock Grew 65.36% In 1 Year, Trading Near 52 Week High, Buy For 25% Upside: Sharekhan

Leading brokerage firm Sharekhan assigns "Buy" rating to Federal Bank Limited for a target price of Rs 165 apiece. Considering the given target price by the brokerage, the stock is likely to give up to 25% gains in 12 months if it is purchased at the current market price. Federal Bank is a private sector midcap bank. The market capitalization of the bank is Rs 20,039.78 crore.,

Stock Outlook & Returns on Investment

On NSE, the current market price of the stock after Friday's close is Rs 132.95 apiece, trading 1.33% down from its previous close. Its current market price is 6.96% down from its 52 week high. The 52-week high level was recorded on 15 December 2022 at Rs 142.20, and the 52-week low level was recorded on 27 December 2022 at Rs 78.60, respectively.

The stock over the past 3 months gave 8.51% positive return, whereas, in the past 1 week it gave 2.6% negative returns. Whereas, in the past 1 year, the stock gave a maximum 65.36% positive return. In the past 3 years, it gave 52.23% positive returns. In the past 5 years, it gave 23.39% positive returns.

 

Consistent steady performance a key to drive re-rating

Key factors such as loan growth acceleration, margin improvement, reduction in impaired loans in turn lower credit cost, and stable asset-quality outlook, required for re-rating of the stock have already played out. "We believe now consistent steady performance could drive re-rating in the stock as the probability of improvement in return ratios is less likely going forward. The bank is upbeat about the credit growth outlook and has guided for ~20% credit growth for FY2023E. We believe higher-rated corporate book along with continued focus to increase its retail mix with higher-yielding businesses such as commercial vehicles, credit cards, personal loans, and micro credit are expected to augur well for the bank's loan growth going ahead. Fintech partnership and digital platforms are helping in gaining more traction in the card business and personal loans, CV/CE, gold loans, and microloans. Asset quality is expected to remain stable going forward. On the margin front, margins are likely to peak out at the end of FY2023E, led by the faster repricing of loans over cost of funds," the brokerage said.

 

Strong liability franchise likely to support healthy loan growth

The bank is targeting ~20% growth in loan book for FY2023E. Loan growth is expected to be broad-based across retail, agri, SME, and corporate segments. CASA and retail TD (less than Rs. 2 crore) constitute ~94% of total deposits. However, CASA ratio has been broadly flat over the past year at 36-37% as overall deposits and CASA growth was tepid at 11% y-o-y. Slower deposit growth was primarily on account of slower growth in NRE deposits. NRE deposits make up ~36% of overall deposits for the bank. However, the bank has been consistently improving its remittance market share. The bank is also engaged in partnerships with neo banks (Epifi and Jupiter), which is helping the bank to garner deposits. The bank has guided that it expects these partnerships to contribute ~25% to incremental deposit acquisitions during FY2023.

 

Asset-quality outlook stable

NPL ratios for the bank have improved to multi-year low levels. GNPL and NNPL ratios are at 2.5% and 0.8%, respectively. Provision coverage ratio is at ~69%. Slippage ratio stood at ~1.3% (annualised calc. as a % of 12M trailing loans) for H1FY2023. This run-rate is in line with management's guidance. Slippages in the corporate segment have been negligible in the past few quarters. Over the past years, the bank has been building its loan mix towards higher-rated corporates and secured retail loans. However, the restructured book stands higher compared to peers at ~2.4% of loans. The bank has ~20% coverage on the restructured book.

 

Valuation – Maintain Buy rating on Federal Bank with a revised PT of Rs. 165

At the CMP, the stock currently trades at 1.3x/1.2x/1.0x its FY2023E/24E/25E BV. 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 remain stable due to the benign credit cycle. Focus on growing assets and liabilities in a granular manner along with an improved return ratio augur well for the bank going ahead. We believe now consistent steady performance could drive re-rating in the stock," the brokerage has said.

According to the brokerage, the key Risks to the buy call would be Economic slowdown leading to slower loan growth and higher-than-anticipated credit cost.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.