This mid-cap bank stock saw profits tank 21% in Q4 but brokerages are still bullish, here’s why

By: |
Published: June 2, 2020 12:30 PM

Brokerage firms have equivocally reinforced a buy rating on one private sector lender, currently trading just slightly above its 52-week low trading value.

35% of the total portfolio of Federal Bank in value terms opting for the moratorium.

While financials have been on everyone’s mind on Dalal Street, the worry is how will the balance sheets of India’s lenders look after the moratorium period ends. Despite this, brokerage firms have equivocally reinforced a buy rating on one private sector lender, currently trading just slightly above its 52-week low trading value. The stock is Federal Bank, which reported a 21% fall in profits on-quarter basis but saw a 27% jump in operating profit. Top brokerage firms might have trimmed their target price estimates but see Federal Bank’s retail re-orientation, healthy liability profile, and lower valuations among midsize banks as a positive.

The RBI-suggested loan moratorium has been one of the concerns that analysts have highlighted when talking about financials. Looking at Federal Bank, the lender has 35% of the total portfolio in value terms to have availed the moratorium. Among this, business banking and commercial banking sectors make up most of the moratorium value. “Federal Bank has been taking a cautious approach in building the loan mix toward high-rated corporates and retail loans. Also, the bank’s liability franchise remains strong with CASA + Retail TD of 91% and one of the highest LCR amongst banks,” said Motilal Oswal in a research note. The brokerage firm has a target price of Rs 65 per share on the stock, an upside of over 50%.

Federal Bank saw standalone profit after tax dip to Rs 301 crore in the March quarter from Rs 440 crore in the same period last year. However, total deposits grew by 12.8% in the last fiscal while gross advances grew by 11% and retail advances went up by 19%. Federal Bank reported a 8 basis points fall in gross non performing assets to 2.84% of the loan book while net non-performing assets fell by 17 basis points.

HDFC Securities has cut the target price to Rs 62 per share from Rs 71 per share, based on “NIM compression as the fall in yields is likely to outstrip any CoF reduction given the significant proportion of floating rate loans and higher provisions, given low PCR and extrinsic factors,” the brokerage said. “Given FB’s significant floating rate book (~70%, of which ~25% is linked to the external benchmark rates), the fall in its yields is likely to outpace the fall in its CoF resulting in spread compression,” HDFC Securities said.

Concerns on asset quality are likely to take precedence over core business performance for the foreseeable future given Federal Bank’s higher exposure to vulnerable segments. “While the stock’s valuation at 0.5x FY22E P/ABV lends a modicum of incremental comfort, >35% of book under moratorium and uncertainty on top management change are key monitorables,” said Edelweiss Securities with a target price of Rs 127 per share. The target price is beyond the Federal Bank’s current 52-week high of Rs 110. The brokerage sees softer loan growth as one of the risks aligned with the stock along with the higher dependence on NRI segment deposits.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Equity Strategy: Muted earnings were largely in line
2Markets rise 466 points to close at four-month high
3JP Morgan Funds buys TCS shares worth Rs 247 crore