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Yet another strong quarter with all-round performance

About the stock: Federal Bank is an old private sector bank based out of Kerala with 1333 branches and 1896 ATM across various states.

* Market share in advances and deposits was at 1.26% and 1.12%, respectively, as of December 2022

* Balanced loan mix with retail: wholesale mix of 54:46

Q3FY23 Results: Strong set of numbers; optimistic outlook

* Advances grew 19.1% YoY, 4.3% QoQ at | 1.71 lakh crore. Deposits were up 14.8% YoY, CASA growth at ~7% YoY

* NII up 27.1% YoY, 11.1% QoQ. NIMs up ~19 bps QoQ at ~3.5%

* GNPA largely steady at 2.4%. Restructured book at 1.78%

What should investors do? Federal Bank’s share price has increased ~43% in the past year. Healthy business growth, steady asset quality and improvement in RoA in line with guidance are positives

* Thus, we maintain our BUY rating

Target Price and Valuation: Federal Bank is expected to deliver credit growth higher than industry growth and RoA of ~1.25%/ 1.35% in FY23E/ 24E. Rolling to FY25E, we value Federal Bank at ~1.4x FY25E ABV and revise our target price from | 155 to | 165 per share

Key triggers for future price performance:

* The management maintained their guidance of high teen growth in advances. Pressure on deposits accretion should ease gradually.

* Target of doubling CV/CE, micro, credit cards & personal loans segments in next 2 years to keep yields healthy.

* Sustainable business growth, steady margins at ~3.4% and guidance of 10 bps improvement in RoA in FY24E is encouraging

Alternate Stock Idea: Besides Federal, in our coverage we also like IndusInd Bank.

* IndusInd Bank is a Hinduja group promoted newer age private sector bank with a strong pan-India presence of 5939 branches

* BUY with a target price of | 1450

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