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Good quarter, strategy execution key

Federal Bank (FB IN) reported a good Q3FY26, marked by better NIMs, stronger growth and curtailed credit cost enabling the bank to deliver RoA of 1.15% (up 8bps QoQ). The key highlights were: a) stronger NII with NIM surprise (up 12bps QoQ), drawing support from better funding costs, b) better loan growth, with FB choosing to grow in areas of focus while capturing some corporate opportunities as well, c) much stronger CASA growth – With ongoing changes to both the loan and deposit mix, near-term volatility is likely, even as these steps may unlock longer-term benefits, and d) asset quality outcomes were better with lower slippages (70bps) feeding into curtailed credit cost. FB continues to transition under the new management and believes related outcomes will take time to be fully visible, but the focus hereon will be on direction and drift. The stock has outperformed >25% in the past three months and now trades at 1.4x FY28E P/BV, implying that near-term stock performance may be range-bound. We thus revise FB to Accumulate from BUY with TP raised to INR 290 (as we roll over to December 2027E). 

Transition underway; growth momentum shaping well; trajectory key: Q3 reflected a transition phase as FB is realigning strategy under new leadership. Business momentum picked pace with loan growth at 11% YoY / 4.5% QoQ, deposit growth at 11.8% YoY / 3.1% QoQ and stronger CASA growth. Growth was driven by medium-yielding segments (commercial banking and gold loans) and growth in the corporate segment. NIMs improved 12bps QoQ (better than our expectations) feeding into NII growth of >6% QoQ, taking benefit from balance sheet management and re-orientation. While FB seems to manage the transition well, delivery on core profitability is key. Durability of growth and margin trajectory are key.

Credit cost curtailed; improvement likely to sustain: Slippages stood at ~INR 4.43bn (~sub-80bps of lagged loans versus 1.0% QoQ), with broadly steady slippage trend across various segments. As a result, credit cost was curtailed at 47bps (50bps QoQ), with FB maintaining its full year FY26 guidance (we expect the bank to undershoot its guidance). PCR (>74% versus ~50% in FY20) and low NNPA at 42bps lend comfort. The absence of buffer pool may further brew volatility. Monitor asset quality trends, especially given the changing nature of asset portfolio (move towards mid-high yielding segments, in the near to medium term, given limited levers on other variables to maintain RoAs.

Revise to Accumulate with a higher TP of INR 290: FB saw a better Q3FY26 amid a challenging operating environment. While the bank is focused on making the right strategic shifts, the ongoing transition may bring near-term challenges and earnings variability. The stock has outperformed >25% in past three months and now trades at 1.4x FY28E P/BV, stretching risk-reward. FB has limited near term triggers. We thus revise to Accumulate from Buy. We raise our SoTP-TP to INR 290 (from INR 250), on 1.5x December ’27E P/BV and subsidiary value of INR 13.

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