Federal Bank share price jumps 7% after Q1 profit rises; here’s why brokerage firms favour this stock

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Updated: Jul 16, 2020 10:37 AM

While the banking and financial sector continues to stay under the scanner with investors expecting a sharp jump in non-performing assets that will affect the profitability of lenders, Federal Bank is finding itself to be favoured by brokerage firms.

Federal Bank, life insurance JV, IDBI Federal Life Insurance, IDBI Bank, latest news on federal bankThe stock, which finds ace investor Rakesh Jhunjhunwala as one of its shareholders, also saw improvement in NPAs in the first quarter of this fiscal year.

While the banking and financial sector continues to stay under the scanner with investors expecting a sharp jump in non-performing assets that will affect the profitability of lenders, Federal Bank is finding itself to be favoured by brokerage firms. The private-sector lender jumped over 7% on Thursday morning after having reported a standalone profit of Rs 400 crore, up over 4% from the year-ago period. The bank also saw a jump in total income along with a surge in interest income. The stock, which finds ace investor Rakesh Jhunjhunwala as one of its shareholders, also saw improvement in NPAs in the first quarter of this fiscal year.

In the April-June quarter, Federal Bank increased its coverage ratio to 60%, highest in the last 20 quarters, and also made provisions to tackle the coronavirus pandemic. “While the cumulative Covid-related contingency buffer at Rs1.86bn (~15bps of loans) appears lower, the bank expects credit costs to remain at manageable levels in FY21 on the back of favourable loan mix and current PCR at 60%,” said ICICI Securities in a note. The brokerage firm is expecting a favourable risk-reward at the current valuation of 0.7x / 0.7x FY21E / FY22E ABVPS in the Federal Bank stock. ICICI Securities has a BUY call with a target price of Rs 65 per share.

Moratorium has scared investors and has kept them risk-averse from financial stocks. Federal Bank in the first quarter witnessed a decline in the portfolio under moratorium to 24%. The same stood at 35% earlier. If partial repayments are to be considered in the second moratorium, the figure would drop to 11% or 12%, analysts say. “The net loan moratorium rate in value terms stood at 24% vs. 35% in Phase 1, but it was higher in retail at 33% vs. 40% earlier. As per management, customers with no EMI paid as a percentage of total moratorium book stands lower at 12% and will be closely watched,” Emkay Global said in a note. Core retail growth of Federal Bank was at 16% on-year, while under the MSME guarantee scheme, the bank has disbursed Rs12bn as of June. However, deposit growth improved to 17% from the previous year.

“We have increased our earnings estimates for FY21/FY22 by 6/8%, mainly factoring in lower opex due to cost rationalization measures, including shifting some operations to its service subsidiary,” analysts at Emkay Global said while putting a BUY call on the stock. A 16% upside on the stock price from current levels is expected by Emkay Global. Rakesh Jhunjhunwala often touted as the Big Bull of the Indian stock markets, held 6.03 crore shares of Federal Bank at the end of the March quarter of the financial year 2020.

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