Federal Bank shares in focus after Q1 profit drops 15% YoY. Should you stay invested?
will be in focus on Monday, August 24, after the lender reported a 14.6% year-on-year (YoY) decline in standalone net profit to Rs 861.75 crore for the June quarter, compared to Rs 1,009.53 crore in the same period last year.
Net interest income
(NII) rose 2% YoY to Rs 2,336.83 crore from Rs 2,291.98 crore. Despite the profit decline, the bank posted its highest-ever other income of Rs 1,113 crore, up 21.6% YoY, while total income grew 7.6% to Rs 7,799.61 crore.
Managing Director & CEO KVS Manian said the quarter 'reaffirmed the strength of our diversified model,' highlighting momentum in commercial banking, credit cards, and gold loans. 'Our mid-yielding engines are firing well too. We delivered a strong operating performance with improving productivity. Fee income hit a record high, and CASA ratios continued to improve steadily,' he added.
Deposits and Advances
Total deposits rose 8.03% YoY to Rs 2.87 lakh crore, while net advances increased by 9.24% to Rs 2.41 lakh crore. Retail advances grew 15.6% to Rs 81,047 crore, commercial banking loans surged 30.3% to Rs 25,028 crore, and corporate loans rose 4.5% to Rs 83,680 crore.
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Asset Quality
Asset quality
remained stable, with gross non-performing assets (NPAs) at 1.91% and net NPAs at 0.48%. The provision coverage ratio (excluding technical write-offs) stood at 74.41%. Manian noted that elevated credit costs during the quarter were largely due to slippages in the agriculture and microfinance (MFI) portfolios. He expects these slippages to moderate, leading to normalised credit costs going forward.
What should investors do? Here's what brokerages say
Avendus
Avendus has cut Federal Bank's target price to Rs 209 from Rs 216 but maintained an 'Add' rating.
It expects RoA to bottom out at 1.0% due to NIM compression and has trimmed its credit growth estimate for FY26 to 10%, despite better liquidity. The bank is expected to continue focusing on system upgrades and operational improvements. NIM for FY26E is projected at 3.0%, aided by savings account rate cuts.
Avendus values Federal Bank at 1.2x its June 2027 estimated adjusted book value (ABV), with a sum-of-the-parts (SOTP) valuation of Rs 17 for its subsidiaries FedFina and Ageas Federal. It also factors in a CAGR of 10.3% in EPS and 11.7% in ABV over FY25–27.
Motilal Oswal
Motilal Oswal Financial Services (MOFS) has reduced Federal Bank's target price to Rs 235 from Rs 250, while retaining a 'Buy' rating.
The brokerage said NIM contraction was in line with expectations, but MFI stress remained evident in Q4 and worsened in Q1FY26, with peak slippages in May. Some improvement was seen in June and July.
MOFS expects credit costs of 55 bps for FY26 and the cost-to-income ratio to remain in the mid-50s range. It has lowered earnings estimates by 7% for FY26 and 4% for FY27. For FY27, MOFS forecasts a RoA of 1.18% and RoE of 13%.
(
Disclaimer
: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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