Buy Federal Bank Ltd For Target Rs. 265 By Axis Securities Ltd
Recommendation Rationale
* NIMs Surprise; Improving Trajectory from Hereon: FB’s NIMs surprised, expanding by 12 bps, led by sharper improvement in CoD/CoF against yield compression, CRR cut aiding margins by 1 bps, and optimisation of other assets and liabilities by ~2 bps. NIMs also benefited as the bank’s advances repriced on a T+1 basis, and a larger hit was taken in Q1. The management continues to prioritise NIM improvement through (a) Rebalancing the asset mix; (b) Shifting away from repo-linked loans (mix down to 49% vs ~50– 52% YoY); (c) Realigning the liability mix with focus on CASA deposits, primarily CA deposits. The bank’s focus is on growing the medium-yielding segments, which are expected to do a bulk of the heavy lifting in NIM improvement.
* MFI Stress Peaks Out, Overall Asset Quality Not Worrisome: Slippages in the MFI segment peaked in May’25 and have been on an improving trend MoM thereafter. The asset quality metrics in other segments continue to behave well. During Q2, the bank proactively made an accelerated provision of Rs 46 Cr towards a standard asset for connected entities in the retail segment. The management remains confident of containing credit costs within the guided range of 55 bps for FY26. FB also indicated that the impact of the ECL provisions is not likely to be material.
* Strong RoA Delivery to Continue: The bank’s strategy reorientation under the new management is seeing green shoots across most key metrics. NIMs have started expanding earlier than expected and should continue their upward trajectory over H2. While growth has been muted in H1, the bank will look to capitalise on growth opportunities in select target segments as it intends to gradually accelerate profitable growth. Backed by expectations of impeccable strategy execution, we expect FB’s RoA improvement to 1.2–1.4% over FY27–28E, supported by (1) healthy risk-adjusted credit growth; (2) margin improvement levers playing out with portfolio mix shift towards better-yielding segments and lower CoF; (3) strong deposit franchise with improving CASA mix; (4) strengthened fee income profile; (5) stable asset quality metrics keeping credit costs under control.
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