Target: ₹290
CMP: ₹260.85
Federal Bank (FB) continues to prioritise NIM improvement, supported by growth in the chosen mid-yielding segments and realigning the liability mix with focus on CASA deposits, primarily CA deposits.
Growth in the mid-yielding portfolio tends to result in slightly higher credit costs vs the lower-yielding segments, while adequately compensating with better yields. FB has guided for credit costs to be contained between 55 bps and 60 bps in FY26.
It continues to witness strong traction in the focus segments and will continue to drive growth momentum as it exits FY26. With growth capital infusion by Blackstone, FB intends to deliver a steady-state growth of 1.2-1.5x nominal GDP growth and aims to grow at about 16 per cent in FY27E.
The bank has seen a growth pick-up in Q3 following a muted performance over H1, and the outlook around growth continues to remain encouraging.
We expect FB’s RoA improvement to 1.3-1.4 per cent over FY27-28E, compared with a relatively subdued 1.1 per cent in FY26E, supported by healthy risk-adjusted credit growth, margin improvement levers playing out with portfolio mix shift towards better-yielding segments and lower CoF, strong deposit franchise with improving CASA mix, strengthened fee income profile, and stable asset-quality metrics keeping credit costs under control.
Valuation: Trading at 1.5x September 2027E BV
We recommend a Buy with a target price of ₹290/share.