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Multi-quarter high RoA / RoE at 1.45% / 17.5% despite 18bps QoQ decline in NIM,
steady decline in net stressed asset portfolio to 1.6%, advance growth at 20% YoY
and 34% YoY growth in core fee income summarise Federal Bank’s (FB) strong
financial performance in Q4FY23. This is an outcome of the management’s
successful execution of its new business strategy revolving around scaling up of
high-margin products like CV / CE, MFI, MSME and credit cards (put together
contributes 21% of total loans), focus on profitable growth and derivation of
synergies from fintech partnerships. Launching of digital personal loan with Paisa
Bazaar for NTB customers and cross-selling of personal loans on Fi platform are
steps taken in the right direction to reap benefits from fintech partnerships.

Broad-based recovery in credit growth (up 20% YoY), likely steady margin in
FY24E and strong PCR @71% reinforce our view that earnings trajectory would

continue to remain strong. While the bank was investing towards franchise build-
up and new business lines, asset quality remained of utmost importance as

reflected in its stressed asset portfolio in Q4FY23 (net NPA + std. restructured
book + net SR) declining to 1.6% vs 1.78% QoQ. Given the improving visibility on
higher credit growth and sustainability of >1.2% RoA in FY24E/FY25E, we
maintain BUY with a revised target price of Rs180 (earlier: Rs170), valuing the
stock at PABV of 1.6x on Sep-24 BVPS (earlier FY24 BVPS).

* RoA sustained at >1.3%; 2% QoQ decline in NII was offset by strong 37% QoQ
growth in other income. Improving trajectory in core operating performance
continued for sixth consecutive quarter as reflected in strong 12% QoQ growth in
PAT despite 2% QoQ decline in NII, thereby, driving RoA improvement to 1.45%
during Q4FY23 vs 1.02% / 1.03% / 1.08% / 1.21% / 1.33% during Q3-Q4FY22/ Q1-
Q2-Q3FY23, respectively. Strong other income at 37% QoQ and lower provision at
Rs1.2bn (credit cost at 19bps) drove the earnings during Q4FY23. NII was primarily
impacted by 18bps QoQ NIM contraction. Cost/income ratio increased marginally to
49.5% Q4FY23 vs 49% QoQ. Total provision during 9MFY23 remained at 40bps, in
line with its full year (FY23) guidance of ~40-50bps.

Launched cross-selling of personal loans on Fi platform. In line with its

increased focus on reaping benefits from fintech partnership, it launched cross-
selling of PL on Fi platform to tap salaried customers who are digitally native. During

the short span since launch, it had already disbursed 12,500 loans. FB is already
live with Paisa Bazaar for NTB personal loans.

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