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Strong quarter, RoEs to hold near current levels; maintaining a Buy

Higher margins and fee income led to a ~12% sequential increase in core operating profits for Federal Bank. The strong operating performance and benign credit cost (38bps) led to the better RoA. Asset quality was stable. Given the bank’s strong liability franchise and capitalisation, it is set to gain market share in the near term. We maintain our positive view on it, with a Rs180 target price, valuing it at 1.3x P/ABV on its FY25e book.

RoE above 15% should be sustainable. A strong liability franchise combined with increased focus on a better yielding product mix would keep medium-term margins above 3.3%. Stable margins, strong fee income (high-teen credit growth) and benign credit costs should keep the bank’s RoA near current levels in the medium term, translating to a 15%+ RoE for FY24/FY25.

Asset quality stable. Slippages for the quarter were Rs3.9bn (0.9% of loans), which were better than we expected. With most of the stress from the restructured book already recognized, the slippage run-rate is expected to hold near ~1% in the medium term. The coverage ratio also improved, by ~178bps, sequentially taking the PCR to ~69%.

Loan growth to be in high teens. The bank’s loan book was Rs1.7trn (up ~19.5% y/y), driven by secular growth across segments. With very keen competition in the deposit market and moderating inflation levels, we expect overall credit growth for the bank to slightly moderate from current levels. We have factored in ~18% credit growth over FY24/FY25.

Valuation. Our Jan’24 sum-of-parts target price (1.3x FY25e book value, Rs10 a share for Fedfina and IDBI-Federal Life) works out to Rs180 a share. Risk: Lumpy slippages from the corporate book.

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