From ₹83 to ₹143: What to do with Federal Bank shares post Q3 results?

After Federal Bank reported strong growth in its December quarter net profit on higher net interest income and lower provisions, most analysts have retained “Buy” rating on the private sector lender. They see a potential upside of up to 20% in the banking stock. The banking heavyweight has risen 72% in the last eight months, from its 52-week low of ₹82.50 on May 26, to a fresh 52-week high of ₹143.35 in intraday trade on Monday.

Extending its gaining streak for the fourth straight session, Federal Bank share price opened 1.85% higher at ₹142.85 on Tuesday, against the previous closing price of ₹140.25 on the BSE. During the first two hours of trade so far, the banking stock gained as much as 1.9% to ₹142.85. At the time of reporting, Federal Bank shares were trading down by 0.9% at ₹139, paring opening gains, while market capitalisation stood at ₹29,618 crore. On the volume front, 5.2 lakh shares changed hands over the counter on the BSE, against the two-week average volume of 7.64 lakh stocks. The stock has risen 40% in a year, 36.5% in six months, and nearly 3% in a month.

On Monday, Federal Bank reported a 54% growth in its December quarter net profit at ₹803.61 crore as compared to ₹521.73 crore in the year-ago quarter, aided by higher net interest income and lower provisions. Net interest income (NII), or the income a bank earns by giving loans, climbed 27.1% YoY to ₹1,956.53 crore, while other income rose 10.3% to ₹534 crore as compared to the same period of the previous fiscal.

On the asset quality front, the bank’s gross NPA stood at ₹4,148 crore, which constitutes 2.43% of gross advances. The net NPA to net advances stood at ₹1,229 crore, or 0.73%, in Q3 FY23. The provisions and contingencies dropped 7.1% to ₹198.69 crore from ₹213.98 crore a year ago.

Analysts view on Federal Bank shares post Q3 earnings:

Global brokerage CitiGroup has maintained a 'Buy' rating on Federal Bank and raised the target price to ₹165 per share, a potential upside of 18% from the current market price. The brokerage house said in a note that the earnings were strong and in-line with estimates, while NIM headwinds are likely to materialise from FY24.

Domestic brokerage house ICICI Securities has also kept ‘Buy’ rating and sees a potential upside of 21% to ₹170, citing that broad-based recovery in credit growth, steady margin expansion, and strong provision coverage ratio may boost earnings. “Given the improving visibility on higher credit growth and sustainability of over 1.2% return on assets (ROA) in FY23E/FY24E, we maintain BUY with a revised target price of ₹170 (earlier: ₹155), valuing at PBV of 1.6x (1.5x earlier) on FY24E BVPS. We are not factoring value unlocking from subsidiaries,” it said.

LKP Securities has reiterated ‘Buy’ with a target price of ₹168, an upside of 20%, citing that the bank’s asset quality is likely to stay stable with significant improvement in profitability. The agency said Federal Bank’s credit quality was in check with no major hiccups, while the business growth was better than the guidance of 15% for FY23E. “Consistent growth may drive further re-rating with a higher valuation than 1.4x book,” it added.

Another brokerage, Prabhudas Lilladher has also maintained a ‘Buy’ rating on Federal Bank, saying the December quarter earnings again surpassed its previous quarter best, led by better NIM driven by lower funding cost. “With consistent beat in core profitability, re-rating should continue for FB. Rolling forward to FY25E ABV, we raise target price to ₹175 from ₹165, maintaining multiple at 1.5x,” says Gaurav Jani, Research Analyst, Prabhudas Lilladher.