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Growth outlook getting stronger; RoA trajectory to improve

FY26-28E earnings to clock 29% CAGR

* Federal Bank’s pivot toward margin-accretive growth, strengthening its liability profile and improving fee intensity is now further bolstered by the proposed ~INR62b preferential capital infusion from Blackstone.

* This capital enhances the bank’s balance sheet flexibility and supports its journey toward structurally higher RoA. We estimate ~17% loan CAGR over FY26-28E, with the mix shifting towards better-yielding assets.

* With CASA-led liability improvement, calibrated build-out of high-yielding segments, and credit cost discipline, Federal Bank is progressing on a clear profitability path enabling RoA expansion over coming years.

* We estimate NIMs to improve gradually as the Blackstone infusion boosts capital ratios, which, along with the benefits from CRR cuts, enables higher LDR with a focus on high-yield segments like LAP, CV/CE, BB and gold loans.

* We estimate RoA to improve to 1.2%/1.4% over FY27/28E, with exit RoA potential of ~1.5%. We estimate ~29% PAT CAGR over FY26-28, supported by improving NIMs, fee intensity and stable asset quality.

* India’s policy shift is boosting foreign participation in the banking segment. Approvals for higher strategic ownership and marquee deals (Warburg–IDFCFB, ADIA–IDFCFB, Emirates NBD–RBL) reflect rising investor confidence and a more facilitative regulatory approach.

* We reiterate BUY with a revised TP of INR260, valuing the bank at 1.5x FY27E BV, factoring in enhanced capital strength, a steady earnings outlook and the sector-wide rerating potential from rising strategic foreign ownership in mid-size private banks.

Capital infusion to boost growth

Federal Bank has strategically prioritized profitable growth by accelerating its shift toward medium- and high-yielding lending segments while maintaining asset quality discipline. Core retail and commercial engines such as LAP, CV/CE, gold and business banking continue to scale well while providing better yields for the bank. Gold loans are likely to remain a key growth driver, now forming 12.6% of the book, supported by healthy demand and branch-led distribution. The bank remains conservative in unsecured credit but has indicated a calibrated re-entry as the risk-reward now seems favorable. The proposed Blackstone capital infusion will materially enhance growth headroom. We thus estimate FB to deliver a robust ~17% CAGR over FY27-28E, led by a continued mix shift toward higher-yield products.

Focus remains on improving CASA mix

Deposit momentum is likely to remain modest in the near term as the bank continues to prioritize granularity over volume, consciously pruning high-cost wholesale deposits. CASA, particularly current accounts, remains the focus area but accretion will be gradual and led by productivity rather than pricing for SA deposits. Consequently, we expect the bank to sustain overall deposit growth at ~15% CAGR over FY26-28E. This capital cushion allows the bank to stay focused on structurally improving the CASA mix, scaling CA toward 10%+ through SME, NR and branch realignment and thereby easing funding costs more sustainably rather than chasing transient bulk flows.

NIMs to improve led by better asset mix, LDR optimization and capital raise

Federal Bank’s NIM trajectory is set to improve gradually as the bank consciously improves its asset mix in favor of higher-yielding assets while focusing on improving its liability profile. With capital buffers strengthening, the bank can comfortably raise its LDR (the phased reduction in CRR will nevertheless enable the bank to operate on higher LDR), allowing a more efficient balance sheet mix while maintaining liquidity prudence. This supports greater participation in high-yield segments such as LAP, CV/CE, gold and business loans. As CA mobilization and liability repricing gains compound in parallel, the twin tailwinds of stronger asset yields and improved funding efficiency should drive a visible NIM uplift from FY27E onward. We expect NIMs to improve to 3.27% by FY27E and to 3.55% by FY28E.

Estimate RoA to recover to 1.35% by FY28E

Federal Bank is entering a clear RoA upgrade cycle, backed by four reinforcing levers — 1) margin expansion from FY27E supported by an improved asset mix and controlled deposit costs as CASA mix increases, 2) improvement in fee intensity as the bank scales up business banking, 3) mid-corporate segment along with improved run-rates in credit card portfolio, and 4) improvement in operating leverage from scale efficiencies. The stable asset quality outlook will control the credit cost and enable healthy growth in profitability. While MFI-related stress is yet to get over, trends in asset quality are already normalizing, and management has reiterated its 55bp credit cost guidance for FY26 with a stronger 2H. We estimate RoA to improve meaningfully and scale toward ~1.35% by FY28E (exit RoA ~1.5%), marking a stable improvement in return ratios vs. its historical 0.9-1.3% band. Our projected RoA implies 29% earnings CAGR over FY26-28E.

Changing stance from regulatory conservatism to facilitative expansion

India’s long-term policy direction is now unambiguously aligned with its Viksit Bharat vision by 2047. The government remains committed to its stated ambition to make India the world’s third largest economy by 2030. To accelerate this growth ambition and to further strengthen/diversify the global ties the policymakers and the RBI are adopting a more enabling stance to facilitate such large foreign capital participation in the banking system. This signals a calibrated shift from regulatory conservatism to facilitative expansion. Regulator has thus signaled a more pragmatic view that well-capitalized shareholders will strengthen the banking system and support systemic resilience. This policy posture will enable large cross-border deals and expedite the path from commitment to capital deployment. These transactions thus set interesting precedents and pave the way for many more such meaningful transactions over the coming years.

Mid-size Pvt banks: Investment thesis getting stronger; sentiment positive

The spate of recent marquee transactions has opened up a new chapter in the Indian banking space, with the mid-size private banking space witnessing renewed investor interest. Many private banks are looking to shore up their capital base to capitalize on the next leg of growth as the unsecured stress is now showing signs of abatement and the recent policy and government measures will drive consumption and aid consumer loan demand. Global financial investors and sovereign funds have participated in some of the recent fund raises via sizeable preferential issues (Warburg Pincus and ADIA in IDFCFB; Emirates NBD’s proposed majority investment in RBL, SMBC in Yes Bank, Fairfax in CSB Bank, DBS bank merger with Lakshmi Vilas Bank). We curiously look forward to potential divestment of government stake in IDBI Bank as well, which will be another large deal in the sector. These transactions reflect growing investor confidence in India’s growth story as the fastest-growing economy, offering a strong balance of government stability, healthy corporate governance and a more predictable and transparent policy framework.

Valuation and view

* Federal Bank’s pivot toward margin-accretive growth, strengthening the liability profile and improving fee intensity is now further strengthened by the proposed ~INR62b preferential capital infusion from Blackstone. This enhances the bank’s balance sheet flexibility and supports its journey toward structurally higher RoA.

* With CASA-led liability improvement, calibrated build-out of high-yield segments, and credit cost discipline, the bank is progressing on a clear profitability path. The bank’s digital-led sourcing, branch productivity unlock, and scale-driven operating leverage provide RoA expansion visibility from FY27 onward.

* We estimate RoA to improve to 1.2% in FY27, with a further rise toward ~1.4% in FY28 and exit RoA potential of ~1.5%. We estimate ~29% PAT CAGR over FY26-28, supported by improving NIMs, fee intensity and continued asset quality stability.

* We reiterate BUY with a revised TP of INR260, valuing the bank at 1.5x FY27E BV, factoring in enhanced capital strength, steady earnings outlook and the sector-wide re-rating potential from rising strategic foreign ownership in highquality private banks.

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