Synopsis:
Federal Bank reported a mixed Q1, showing a drop in profits and an uptick in stress related to retail and microfinance loans, even though their asset quality has seen some improvement. While Nuvama and CLSA are keeping a positive outlook, Morgan Stanley is taking a more cautious stance.
The shares of this sixth-largest private bank in India are in focus after the bank reported a net profit decline of 15 percent and 16 percent on a YoY and QoQ basis, respectively. Additionally, its asset quality worsened from its previous quarter. In this article, we will dive into what analysts have to say on this.
With a market capitalization of Rs 48,039 crores, the shares of Federal Bank Ltd are currently trading at Rs 195 per share, down by 11 percent from its 52-week high of Rs 220 per share. Over the past five years, the stock has delivered a positive return of 258 percent.
Q1 Highlights
The bank reported a net interest income of Rs 2,337 crore in Q1 FY26, a growth of 2 percent from its Q1 FY25 net interest income of Rs 2,292 crore. However, on a QoQ basis, it declined by 2 percent from Rs 2,377 crore.
Coming to its profitability, the bank reported a net profit decline of 15 percent to Rs 862 crore in Q1 FY26 as compared to Rs 1,010 crore in Q1 FY25. Additionally, on a QoQ basis, it declined by 16 percent from Rs 1,030 crore.
In Q1 FY26, the bank reported an improvement in asset quality on a year-on-year basis, with Gross NPA falling from 2.11 percent to 1.91 percent and Net NPA reducing from 0.60 percent to 0.48 percent. The Provision Coverage Ratio (PCR) also strengthened to 74.41 percent from 70.79 percent, indicating a healthier buffer against bad loans.
However, slippages increased, particularly in the retail segment, pushing the slippage rate from 1.29 percent to 1.90 percent, which suggests higher fresh stress in the loan book.
On the profitability side, the risk-adjusted Net Interest Margin (NIM) declined from 2.97 percent to 2.46 percent, while credit costs rose from 0.26 percent to 0.65 percent, reflecting increased provisioning. Overall, while asset quality improved, rising slippages and provisioning costs put some pressure on margins.
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Analyst Comments
Nuvama Institutional Equities maintained a “buy” rating with a target price of Rs 230, signalling an upside of 18 percent from its current price. It stated that while the quarter was soft due to rising slippages and higher credit costs, mainly from stress in the agriculture and microfinance segments, they believe stress peaked in May, and credit costs are expected to ease going forward.
CLSA also retained an “outperform” rating with the same target price of Rs 230, signalling an upside of 18 percent from its current price, citing that despite pressure on margins, the bank still outperformed peers. They credited strong other income and controlled operating costs for supporting overall profitability.
On the other hand, Morgan Stanley remained cautious, assigning an “underweight” rating and a lower target of Rs 165, signalling a downside of 15.4 percent from its current price.. They expect return on assets to moderate to 1% in FY26, citing concerns over sustained pressure from rising bad loans and elevated credit costs, especially in the microfinance book.
While Federal Bank has demonstrated some resilience with improved year-over-year asset quality and consistent other income, the significant increase in slippages, rising credit costs, and shrinking margins is cause for concern.
Given the mixed opinions from analysts and the challenges in the microfinance and retail sectors, investors should take a cautious approach and wait for clearer signs of a sustained recovery in both profitability and asset quality.
Written by Satyajeet Mukherjee
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