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Federal Bank (FB) reported a strong PAT of Rs 11.8bn (1.2% of ROA) driven by higher-than-expected NII and lower provisions, partly offset by lower other income. Loan growth remained healthy at 15% yoy, largely led by commercial and corporate segments, with the management re-engaging in corporate lending and increasing the mid-market mix to support yields. Deposit growth improved to 11.4% yoy, while CASA ratio was stable at 32.2%, with CASA growth expected to improve through healthy CA accretion and growth in highervalue SA. NIM expanded to 3.3%, driven by a 21bps decline in COF following deposit repricing, with further benefits expected in 2Q. NPAs are at an all-time low with PCR of 87%, while the one-time ECL transition impact is estimated at 1.5–2.0% of NW. The management expects mid-teens plus growth with a clear focus on better-yielding loans, and 5–6bps quarterly NIM improvement (not linearly). We like the new MD’s approach, entailing calibrated growth while focusing on delivering healthy and sustainable RAROC led by margin/fee uptick—a long unresolved conundrum for the bank—leading to a further rerating. We expect ROA to improve to 1.3-1.5% over FY27-29E. We retain BUY while raising our TP by 14% to Rs400 (from Rs350) rolling forward on 1.8x Jun28E ABV and subs value of Rs20.

Healthy credit growth with focus on better-yielding loans to support margin

FB's credit growth stayed healthy at 15.0% yoy/4.9% qoq, led by commercial and corporate segments. The management has re-engaged in corporate lending where pricing is attractive and meets underwriting standards, while raising exposure to higher-yielding mid-market corporates. Within retail, gold, CV, LAP, and cards saw steady traction, while PL/MFI turned positive. NIM expanded to 3.3% on a 21bps fall in COF as deposit repricing played out, with residual benefits in 2Q and ~2bps from an interest tax refund. The bank guides 5–6bps quarterly NIM improvement over the next 3-4 quarters (not linearly) and expects mid-teen-plus loan growth, with scope to exceed guidance.

Asset quality continues to improve

Gross slippages improved further to Rs4.1bn (0.7% of loans); this, coupled with higher recoveries and write-offs, drove a 10bps improvement in the GNPA ratio to 1.5%. The bank has not witnessed any significant stress in the CV segment, with exposure primarily to medium-sized fleet operators (5-10 trucks). While comfortable with current portfolio quality, it continues to monitor the segment closely. The one-time ECL transition impact is expected to be limited to ~1.5-2.0% of NW

Federal Bank remains one of our preferred picks among SMID banks

We like the new MD’s approach, entailing calibrated growth while focusing on delivering healthy and sustainable RAROC led by margin/fee uptick a long unresolved conundrum for the bank, leading to further re-rating. We retain BUY on FB, while revising up our TP to Rs400, valuing the SA bank at 1.8x Jun-28E ABV and subs at Rs20. Key risks: Slowerthan-expected growth/margins/fees and fresh NPA risks in the SME portfolio due to the West-Asia conflict.

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