Legendary investor Rakesh Jhunjhunwala, who passed away in August 2022, had immense faith in India’s private sector banks and he picked Federal Bank as his biggest pick from the sector. He has stayed invested in the Kerala-based lender for quite a long period, consistently increasing the stake in the bank.
Late Rakesh Jhunjhunwala and his better half Rekha Jhunjhunwala cumulatively hold more than 7.27 crore shares or a 3.48 per cent stake in Federal Bank. Their holding in the lender is worth more than Rs 980 crore as of its current price at Rs 134.8 apiece.
Federal Bank reported its highest-ever net profit at Rs 804 crore during the quarter that ended December 2022, up 54 per cent compared to Rs 522 crore in the same quarter in the previous fiscal. The private lender’s net interest income grew by 27 per cent to Rs 1,956 crore for the third quarter of FY23, compared to Rs 1,539 crore in the year-ago period.
Shares of Federal Bank have delivered a return of 10 per cent in the last six months, whereas the counter has jumped over 40 per cent in the last one year. However, the stock is slightly down in the ongoing calendar year.
The private lender recently hosted its investors meet to showcase its growing capabilities and a larger roadmap in its medium-term journey to emerge as a top-tier bank The bank intends to increase its focus on high-yielding loan businesses.
Select domestic brokerage firms including ICICI Securities, Axis Securities, HDFC Securities, Prabhudas Lilladher Motilal Oswal and B&K Securities remain positive on the stock and see an up to 30 per cent upside potential in the private lender. Here’s what brokerages firm say about Federal Bank:
| HDFC Securities | Rating: Buy | Target Price: Rs 175 | Upside Potential: 30% |
Federal Bank fortifies its existing moats on the deposit side of the balance sheet, the bank is aiming to judiciously improve the mix of high-yielding businesses, especially on the back of its maturing FinTech partnerships in the areas of credit cards, personal loans, and MFI loans.
The bank is confident of leveraging its FinTech ecosystem partnerships and expanding the contours of ETB and NTB product offerings, thus driving further business productivity on both sides of the balance sheet. The brokerage has marginally tweaked its FY23E and FY24E earnings estimates to factor in the changes and maintained a ‘Buy’ with a target price of Rs 175.
| Prabhudas Lilladher | Rating: Buy | Target Price: Rs 175 | Upside Potential: 30% |
For Federal Bank, fey levers for RoA expansion would be to maintain pristine asset quality; consistently grow business with digital focus; enhance the share of higher NIM lending segments by leveraging fintech partnerships; increase fee to assets; and improve efficiency.
For the next 3 years, the lender is targeting to double higher yielding segments that contribute 20.53 per cent to loans, compared to the overall loan growth guidance of high teens. Share of these segments would rise to 25 per cent suggesting a 15bps NIM improvement. Current valuation at 1.1x is attractive and it has retained a ‘buy’ rating with a target price of Rs 175.
| Axis Securities | Rating: Buy | Target Price: Rs 170 | Upside Potential: 26% |
Federal Bank continues to progress well on most key operational metrics and remains well-poised to deliver a healthy performance over the medium term, which would be driven by robust credit growth with an improving share of the high-yielding products, granular liability franchise with a higher share of retail-dominated deposits and healthy CASA Ratio,
improving fee income profile, gradually moderating Opex, and improving asset quality metrics.
Federal Bank is remains Axis’ most preferred pick in the mid-sized private banks and has reiterated its ‘buy’ recommendation on the stock with a target price of Rs 170.
| ICICI Securities | Rating: Buy | Target Price: Rs 170 | Upside Potential: 26% |
Taking cognizance of its business resiliency, enhanced distribution network, fintech partnership and asset quality performance during covid, it now plans to accelerate business growth and become the top-5 private sector bank in India.
While pursuing a high-growth strategy, it highlighted that incremental credit growth would be primarily driven by high-margin products like credit card, personal loans, CV/CE, MSME, MFI, gold loan and others. It has maintained a ‘buy’ rating with a target price of Rs 170 on the stock.
| Motilal Oswal | Rating: Buy | Target Price: Rs 170 | Upside Potential: 26% |
Federal Bank reiterated its focus on delivering a healthy performance across all key parameters. The management aims to grow the loan book in the high teens, driven by digital and fintech partnerships. It will continue to focus on growing its high-margin products by leveraging data analytics.
The management also discussed growth opportunities and key levers for the ROA expansion. It expects Federal Bank to deliver an earnings CAGR of 16 per cent over FY23-25 with RoA and RoE of 1.3 per cent and 15.2 per cent, respectively by FY25. It has ‘buy’ rating on the lender with a target price of Rs 170.
| B&K Securities | Rating: Buy | Target Price: Rs 160 | Upside Potential: 20% |
The brokerage believes that the Federal bank has a strong liability franchise with amongst highest share of retail deposits, which along with a favorable loan mix should keep NIMs reasonably healthy. It expects the bank to deliver 16 per cent loan CAGR FY24-25 and steady RoAs at 1.2 per cent for FY23-25, along with healthy 15 per cent RoEs and 13-13.5 per cent RoEs post capital raise.
Risk rewards appear excellent with the stock trading at 1.1x FY24E ABV for healthy loan growth, comfortable asset quality and steady RoAs and RoEs. It has maintained ‘Buy’ rating with an unchanged target price of Rs 160.
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