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Strong quarter with all-round performance

About the stock: Federal Bank is an old private sector bank based out of Kerala with 1305 branches and 1876 ATM across various states.

* Market share in advances and deposits was at 1.24% and 1.08%, respectively, as of September 2022

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

Q2FY23 Results: Strong performance on growth, earnings and asset quality.

* Advances grew 19.4% YoY, 6.1% QoQ at | 1.63 lakh crore. Deposits were up 10% YoY, CASA growth at 11% YoY

* NII up 19.1% YoY, 9.8% QoQ. NIMs up ~10 bps QoQ at 3.3%

* GNPA down 23 bps QoQ to 2.4%. Restructured book at 1.98%

What should investors do: Federal Bank’s share price has increased ~37% in the past year. The management maintained its growth guidance for FY23E. With healthy business traction, steady asset quality and provisioning to aid earnings growth.

* Thus, we upgrade our rating from HOLD to BUY

Target Price and Valuation: Federal Bank is expected to deliver credit growth higher than industry growth and RoA of ~1.25% in FY24E. Thus, we value Federal Bank at ~1.5x FY24E ABV and revise our target price from | 135 to | 155 per share.

Key triggers for future price performance:

* The management has guided for advances growth to be in high teens and deposits growth to be in early teens. In addition, partnerships with fintechs will enhance deposit franchise

* Bank’s focus on high yielding products (CV/CE, micro, credit cards & personal loans) to aid yields

* Sustainable business growth, steady margins at ~3.3% and exit RoA of ~1.25% in FY23-24E 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 | 1330

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