Emkay Global Financial has given Buy recommendation for Federal Bank with a target price of Rs. 150 in its research report issued on Oct 15, 2022
Emkay Global Financial’s research report on Federal Bank
Federal Bank reported a strong beat on PAT yet again, at Rs7bn (vs est: Rs 6.3bn), mainly backed by better delivery on growth/margins, fees and treasury, and partly offset by higher provisions to shore-up PCR. The bank has clocked 1.2% RoA in Q2 and is gaining confidence on growth/margins, given that it has upped its RoA guidance for FY22 to 1.2% (Q4 exit RoA to 1.25%). Bank delivered a strong 20% YoY/6% QoQ credit growth, mainly led by acceleration in the corporate book and continued traction in Retail/SME. This, coupled with continued asset re-pricing and lower NPA drag, led to healthy improvement in margins, by 8bps QoQ to 3.3%. Bank expects margins to remain elevated, supported by the enduring strong growth and some additional benefit expected to flow from asset re-pricing. Overall asset quality continues to trend well, with GNPA ratio down by 23bps QoQ to 2.5%, which the bank expects to retain despite some macro-dislocation. Tier I capital remains reasonable at 13.6% (Calc), while Management maintains that it is in no hurry to raise capital.
Outlook
We revise our earnings estimate by 7% for FY23 and by 4% for FY24-25, factoring-in better delivery on margin/fees, and expect RoA/RoE to steadily improve to 1.2%/16% by FY25E (without accounting for capital raise). We retain BUY on the stock, with revised TP of Rs150/share, valuing the bank at 1.2x Sep-24E ABV and subs value at Rs8/share.