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Federal Bank (FB) reported a strong PAT of Rs13.9bn (ROA: 1.3%), beating our estimates by 8%, driven by higher NII and a sharp uptick in other income, partly offset by higher opex. Loan growth remained robust at 22% yoy, while growth excluding FCNR(B)-led leverage stood at 18%. Deposit growth accelerated to 19% yoy/7% qoq, supported by healthy CASA accretion, with the CASA ratio stable at 32%; the bank also mobilized Rs149bn in FCNR(B) deposits. NIM was stable at 3.3%, as residual benefits from deposit repricing offset pressure on lending yields from FCNR(B) funding. The management expects the recent rate hike to support margins and reiterated its guidance of a 5–6bps quarterly NIM improvement, albeit non-linearly, alongside mid-teen-plus loan growth. NPAs were at an all-time low, with specific PCR at 87%. The bank remains open to acquisition opportunities that are accretive and add new capabilities or build scale. 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; this may lead to further rerating. We expect ROA to improve to 1.3-1.4% over FY27-29E. We retain BUY while raising our TP by 5.0% to Rs420 from Rs400, rolling forward on 1.9x Sep28E ABV and subs value of Rs20

Healthy business momentum with stable margin in 2Q

FB’s credit growth remained robust at 22% yoy/7% qoq, led by the commercial and corporate segments, partly aided by Rs94.4bn of FCNR(B) leverage. Within retail, growth remained healthy across LAP, gold loans, and CV/CE, while the unsecured book also continued to grow well. Deposit growth accelerated to 19% yoy/7% qoq, supported by healthy CASA accretion, keeping the CASA ratio stable at 32%; the bank also mobilized Rs149bn of FCNR(B) deposits. NIM was stable at 3.3%, as residual benefits from deposit repricing offset pressure on lending yields from FCNR(B) funding. The management expects the recent rate hike to support margins, although deposit competition could intensify as system liquidity normalizes. The bank guides for 5–6bps of quarterly NIM improvement over the next 3–4 quarters, albeit non-linearly, and reiterates mid-teenplus loan growth, with scope to outperform its guidance.

Asset quality at an all-time low, with strong specific PCR

Gross slippages rose marginally to Rs4.3bn/0.7% of loans, while higher recoveries and write-offs drove a 20bps improvement in GNPA to 1.3%. Specific PCR remained strong at 87%. The bank has not observed any material impact from the prevailing macroeconomic environment so far, but remains watchful of emerging risks

We retain BUY; raise TP by 5% to Rs420

We largely retain our earnings estimates and expect ROA to improve to 1.3-1.4% over FY27-29E. We retain BUY, while raising our TP to Rs420 (from Rs400), valuing the SA bank at 1.9x Sep-28E ABV and subs at Rs20. Key risks: Slower-than-expected growth, margins, and fee improvement, and fresh NPA risks in the SME portfolio.

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