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Federal Bank (FB) reported improvement in credit growth at ~13% YoY, though below system levels, as it remains focused on profitability and kept corporate growth contained compared to peers. Core margins were largely stable at 3.2%, while reported margins increased to 3.7% due to one-off interest on an IT refund. The bank utilized these one-off gains to accelerate its PCR to 88% (made an adhoc provision of Rs4.6bn to build ECL buffer) and still delivered a healthy PAT of Rs12.6bn and RoA of 1.4% (1.2% adj for one-off IT refund interest). The bank plans to accelerate growth with a clear focus on better yielding loans to improve margins and increase fees through stronger traction in transaction banking and retail lending. Based on current assessment, the bank does not see any meaningful risk to asset quality or NRI deposit flows from the West Asia conflict, though it remains vigilant. Recently, FB issued convertible share warrants to Blackstone for a 9.99% stake, with overall capital infusion expected to the tune of Rs62bn over 18M. Factoring in growth acceleration, steady improvement in margins, and contained credit costs, we expect RoA to improve to 1.3-1.6% over FY27-29E from a low of 1.1% in FY26E, which, coupled with credible management, should support a stock re-rating. We retain BUY while raising our TP by 9% to Rs350 (rolling forward on 1.6x FY28E ABV and subs value of Rs20) from Rs320

Calibrated credit expansion with clear focus on margins

FB’s credit growth improved further to 12.7% YoY/3.5% QoQ, though remained below system levels as the bank avoided corporate book expansion, unlike peers, to protect margins. Select retail segments like gold, CV, and LAP are witnessing steady acceleration. Deposit growth remained moderate at 11% YoY, while NRI deposits grew strongly at 12.4% YoY/7% QoQ, which could be partly due to seasonality and some preponement amid the West-Asia conflict. Core margins were largely stable QoQ at 3.2%, despite rate cuts mainly due to a better portfolio mix, while they stood at 3.7% including one-off interest on IT refund.

Steady improvement in asset quality, with ECL provision buffer build-up

Gross slippages were range-bound at Rs4.7bn (0.8% of loans), however, higher recoveries and write-offs drove a 10bps improvement in the GNPA ratio to 1.6%. Separately, the bank recently made additional provisions (Rs4.6bn) absorbing one-off income from IT refund, to build its ECL buffer rather than toward the West Asia conflict. Based on current assessment, the bank does not see any meaningful risk to asset quality or NRI deposit flows from the West Asia conflict, though it remains vigilant. The bank maintains its credit cost guidance of ~55–60bps.

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 Rs350, valuing the SA bank at 1.6x FY28E ABV and subs at Rs20. Key risks: Slower-than-expected growth/margins/fees and fresh NPA risks in the SME portfolio due to the West-Asia conflict

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