This Mid Cap Banking Stock Gets 'Buy' Rating For 33% Gains, Reported Steady 1QFY23 With Rs 6b PAT

Motilal Oswal Financial Services is bullish on Federal Bank and recommends 'buy' for a target price of Rs 130 apiece. The brokerage published a report on the bank and suggested buying for 33% potential gains. Federal Bank reported a steady 1QFY23, with a PAT of Rs 6b up by 64% YoY and 19% beat. Margin improved by 6bp QoQ to 3.22%.

Stock Outlook & Performance

Friday, 15 July, the shares of Federal Bank closed at Rs 98.14 apiece after gaining 1.49% in trade. The was opened at Rs 97.80 apiece. Both the 52-week and low were recorded last year. Its 52-week low is Rs 77.50, and the 52-week high is Rs 107.65 apiece.

Federal bank is a mid-cap banking stock with a market capitalization of Rs 20,773 crore. The ROE of the stock is 10.07. PE is 10.47. PB is 1.06. TTM EPS is 9.43. Its dividend yield is 1.82%. Irs face value is Rs 2.

The stock of Federal Bank in terms of returns on equity has given decent returns in the past 1 year as compared to 3 and 5 years. In the past 1 week, its share price gained 1.28% and 10.77% in the past 1 month, respectively. The stock has moved up 11.71% in the last 1 year. On 3 and 5 years, the stock has given negative returns of 7.45% and 14.72%, respectively.

Investors who buy the stock of the Federal bank at the Current Market Price of Rs 98.14 a piece could expect potential gains of 33% in 12 months, considering the estimated target price of Rs 130 apiece by the brokerage firm.

On track to deliver improved return ratios

Federal Bank reported a steady 1QFY23, with a PAT of Rs 6b (up 64% YoY and 19% beat). Margin improved by 6bp QoQ to 3.22%. Gross advances grew by 16.3% YoY, led by a broad-based pickup across all business segments. SME grew the fastest at 20% YoY, followed by Agri/ Corporate/Retail at 19%/15%/14%. CASA ratio was steady QoQ ~36.8%. Slippages (including an increase in the balance of existing NPAs) stood at R 4.6b (~1.2% of loans), led by a 137% QoQ rise in the Retail segment. GNPA/NNPA ratio moderated slightly to 2.7%/0.94%. PCR stood stable at ~66%, while restructured loans improved by 22bp QoQ to ~2.2%.

Broad-based growth in advances; margin improves 6bp QoQ to 3.22%

Federal Bank reported a net profit of ~Rs 6b (up 64% YoY; 19% beat), led by a 74% YoY decline in provisions to Rs 1.7b. NII grew by ~13% YoY to INR16b (up 5% QoQ, in line), aided by a 6bp QoQ improvement in NIM to 3.22%. Core fee income grew 77% YoY (down 2% QoQ), led by healthy business activity, while treasury income declined by 97% YoY. OPEX grew by ~16% YoY, while C/I ratio improved to 52.7% v/s 59.9% in 4QFY22. PPOP fell by ~14% YoY due to a muted performance in treasury income, though core PPOP grew 30% YoY.

On the business front, gross advances grew 16.3% YoY and 4.6% QoQ to Rs 1.54t, led by a broad-based pick-up across segments. Its Corporate portfolio grew 6% QoQ, while the Retail, SME, and Agri each rose 4% QoQ. Deposits grew 8.2%, led by CASA growth of ~15% YoY. The CASA ratio increased to 36.8% (flat QoQ), while Retail deposits stood at 94%. GNPA/NNPA moderated by 11bp/2bp QoQ to 2.7%/0.94% in 1QFY23. This was supported by a healthy recovery and upgrades, even as slippages stood at Rs 4.6b (~1.2% of loans). PCR ratio stood largely stable ~66%. Restructured loans declined to ~Rs 33.7b (~2.2%).

 

Highlights from the management commentary

The management expects loans to grow in the mid- to high-teens in FY23. NIM is expected to improve by 5-7bp to 3.25-3.27%. Asset quality remains strong, helping limit credit cost to 50bp.
Loan mix: EBLR/MCLR-linked and fixed rate book stands at 48%/28% and 26%, respectively.

Motilal Oswal Suggests Buy For Target Price of Rs 130/share

Federal Bank reported a healthy 1QFY23, with net earnings supported by lower provisions. NII growth was boosted by a slight expansion in margin. Business growth is gaining traction, while the liability franchise remains strong, with the Retail deposit mix ~94% and CASA ratio ~36.8%. Headline asset quality ratio saw a marginal improvement, led by healthy recoveries and upgrades.

"We marginally raise our FY23/FY24 earnings estimate by 3%/4% and expect a RoA/RoE of 1.1%/13.6% in FY24. We maintain our Buy rating with a Target Price of Rs 130 per share (1.3x FY24E ABV)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Ventura Securities. 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 check with certified experts before taking any investment decision.