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Strong quarter; earnings momentum on a roll Adj NIM improves 13bp QoQ

* Federal Bank (FB) reported 1QFY27 PAT of INR11.8b (up 37% YoY/down 7% QoQ, 3% beat), led by healthy NII beat and lower-than-expected provisions.

* NII grew 26% YoY to INR29.5b (5% beat). Adjusted NIMs improved 13bp QoQ to 3.33%.

* Advances grew 15% YoY/5% QoQ, led by SME, gold and corporate segments. Deposits grew by 11% YoY/2% QoQ, with CASA deposits flat QoQ. As a result, CASA mix declined by 71bp QoQ to 32.2%.

* Provisions decreased by 21% YoY/57% QoQ to INR3.2b. Slippages fell 15% QoQ to INR4.12b. GNPA/NNPA ratios improved 10bp/2bp QoQ to 1.52%/ 0.18%. PCR improved 39bp QoQ to ~88.2%.

* We raise our PAT estimates by ~4.6%/1.8% for FY27/FY28, factoring in NIM expansion, steady fee, and healthy loan growth outlook. We estimate FB to deliver FY27E RoA/RoE of 1.25%/12.1%. Reiterate BUY with a TP of INR400 (based on 2.0x FY28E ABV).

Advances growth healthy at 5% QoQ; slippages decline 15% QoQ

* FB reported 1Q earnings of INR11.8b (up 37% YoY/down 7% QoQ, 3% beat) amid healthy NII beat and lower-than-expected provisions.

* NII grew by a healthy 26% YoY to INR29.5b (down 7% QoQ due to interest on IT refund in 4QFY26). Adj NIMs improved by 13bp QoQ to 3.33%, led by 21bp QoQ reduction in CoF to 5.25% even as loan yield declined 4bp QoQ to 8.73%.

* Other income declined by 6% YoY/8% QoQ to INR10.5b (10% miss) amid muted treasury income of INR220m vs. INR2.65b in 1QFY26. ? Opex grew by 11% YoY/3% QoQ (in line). C/I ratio thus stood at 52.5%. The bank expects the C/I ratio to be range-bound in the near term. PPoP increased by 22% YoY/fell 17% QoQ to INR18.9b (in line).

* On the business front, advances grew by a healthy 15% YoY/5% QoQ to INR2.77t, driven by robust growth in SME (17% YoY/4% QoQ), gold (33% YoY/ 8% QoQ) and corporate (14% YoY/4% QoQ). Retail book grew by 1.9% YoY (flat QoQ), with HL declining by 2% QoQ, whereas PL and CC grew by a healthy 4% and 10% QoQ, respectively.

* Deposits grew by 11% YoY/2% QoQ, led by 3% QoQ growth in TD. CASA ratio declined by 71bp QoQ to 32.2% amid flat QoQ growth in CASA deposits.

* Provisions declined by 21% YoY/57% QoQ to INR3.2b (bank had created floating provisions, benefitting from IT refund in 4QFY26).

* Slippages declined to INR4.12b (INR4.83b in 4QFY26), leading to 10bp/2bp QoQ improvement in GNPA/NNPA ratios to 1.52%/0.18%.

Valuation and view: Reiterate BUY with TP of INR400

FB reported a strong quarter, supported by healthy NII growth, robust NIM expansion and lower credit costs. Adj NIMs expanded 13bp QoQ, aided by a reduction in CoF. Loan growth remained healthy, led by SME, gold loan and corporate segments, and the bank guided for loan growth at the higher end of the mid-teen range. The focus on select yield-accretive segments is expected to improve the product mix, which should continue to support NIMs going forward. Deposit growth stood at 11% YoY, driven by TD mobilization. CASA deposits remained largely flat QoQ due to seasonal factors. Asset quality improved with both GNPA and NNPA ratios declining further. We estimate credit cost to remain contained at ~50-55bp over FY27-28E. We raise our PAT estimates by ~4.6%/1.8% for FY27/FY28 and estimate FB to deliver FY27E RoA/RoE of 1.25%/12.1%. Reiterate BUY with a TP of INR400 (based on 2.0x FY28E ABV).

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