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Broad based growth in advance; deposit lags

The bank's advances increased by 21%YoY in Q3FY23, driven by broadbased growth. For FY25 and FY26, respectively, we anticipate loan growth of 20.3% and 20.4%. On the liability side, deposit growth lagged behind loan growth at 19%YoY with CASA growing at 5.8%. The CASA ratio as of Q3FY24 is 30.5%, down 10 bps from the previous quarter. Deposit growth is anticipated to be 20.6% YoY in FY25 and 22.5% in FY26.

Achieved new heights in PAT

During the quarter, interest income grew by 5% on a QoQ basis and 29.3% on a YoY basis, supported by growth in advances, while interest expenses grew by 45.6%YoY. Resultantly, net interest income increased 16.3% YoY. The net interest margin of the bank fell by 36 bps YoY and 3 bps sequentially to 3.19%. The bank has achieved a milestone of 4 digit profit (Rs.1,006.7 cr.) for the first time in the current quarter. The cost-to-income ratio of the bank had improved to 51.9% compared to 52.5% in Q2FY24, but is still at a high level compared to 48.8% a year ago.

Stable asset quality

The bank saw an uptick in slippages this quarter, totalling Rs.496cr. as opposed to Rs.373cr in the prior quarter. The slippage ratio remains stable at 0.24%. The retail segment’s slippage ratio stood at 1.29%, while the wholesale segment's was at 0.56%. The bank's credit cost was 0.31%, as opposed to 0.38% in Q3FY23. The GNPA ratio was comfortably reduced to 2.29% during the quarter, representing an improvement of 14bps YoY , while the NNPA remains stable at 0.64%. The Provision Coverage Ratio increased from 71.03% in the previous quarter to 71.08% this quarter.

Outlook and valuation

The Federal Bank has been showcasing solid performance, with advance growth of 21% and PAT growth of 25.3%YoY. The performance is expected to continue with advances growth at 20.4% and deposits at 22.5% during FY25-26E. Hence, we reiterate our Accumulate with a revised target price of Rs.156 based on 1.0x FY26E BVPS

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