The share price of Federal Bank took a sharp hit on Monday, slipping over 5% during the day. The stock dropped as much as 5.59% to Rs 185.10, marking its steepest intra-day fall since January 28 this year. The street is worried about the higher provisioning, the jump in credit cost the rising slippages. The big question is why are brokerages still positive?
Here is a look at the key brokerage views and the long-term outlook for Federal Bank-
Motilal Oswal on Federal Bank: Near-term headwinds to continue
Motilal Oswal reiterated Buy with a target of Rs 235 per share. This implies upside of nearly 20% for the share price at current levels though they expect near-term headwinds to persist.
The Bank reporter a weak quarter, impacted by higher-than-expected provisions and a sharp decline in NIM. Loan growth was primarily driven by strong traction in the SME segment, along with Gold and Agri portfolios, while the MFI book contracted due to rising stress.
It has clocked modest deposit growth supported by healthy traction although the seasonal outflow in the CA book (post Q4) led to only a marginal improvement in the CASA mix. Federal Bank’s NIM contracted in Q1 due to repo rate cuts and T+1 loan repricing, with the bank guiding a further 5-10bp dip in NIM in Q2FY26.
The asset quality weakened due to stress in the MFI segment, resulting in elevated credit costs during the quarter, although the PCR ratio remained stable. Motilal Oswal expects “the trajectory to improve in the second half, supported by a recovery in margins and delinquency rate. We reduce our earnings estimates by 7% for FY26 and by 4% for FY27, factoring in a slight margin contraction and elevated provisions.”
Nuvama on Federal Bank: Target price cut
Nuvama has cut its target price for Federal Bank to Rs 225 per share Rs 230 per share earlier. However, they maintained the ‘Buy’ recommendation and called it the “safest mid-sized bank with potential to deliver strong growth.”
Federal Bank posted a soft Q1FY26 numbers and the net interest margins for the bank dropped down 18 bps QoQ. Slippages too nosedived 34% QoQ and credit cost jumped QoQ to 66 bps from 24 bps. This sharp rise in credit cost is largely driven by MFI and partly by BUB/CV. The MFI slippages peaked in May (Given the 20% exposure to Karnataka). However, the Bank’s CEO does not see “any major stress build-up in BUB, which is secured.
The bank has guided for higher credit cost going into Q2 as well with MFI ageing provisions, but would decrease in H2FY26. The full year credit cost guidance has been retained at 55 bps. NIMs are expected to see a 5–10 bps decline in Q2FY26 and then stabilise.
HDFC Securities on Federal Bank: Poised to capitalise balance sheet strength
HDFC Securities too maintained a Buy on Federal Bank with a target of Rs 225 per share. They pointed out that “elevated provisioning towards the MFI portfolio, coupled with muted growth on both sides of the balance sheet, offset by stronger traction in fee income,” continues to be a key near-term concern.
The Deposit growth in Q1 was soft as well, up 1% QoQ and the CASA ratio was largely stable at 30.3% (+12 bps QoQ), driven by pick-up in savings account balances. The management indicated that the “MFI stress has peaked out, with other asset classes remaining stable. Federal Bank continues to scale its mid-yielding asset segments, increasing its mix of fixed-rate loans to improve profitability and quality of earnings,” added the brokerage house. They believe that the Bank “is well-placed to capitalize on its balance sheet strengths (quality deposit franchise and superior underwriting standards), with clear catalysts for earnings.”