Federal Bank's 'Inexpensive' Stock Gets CLSA Initiation, 18% Upside Seen

Federal Bank Ltd.'s inexpensive stock, deposit composition and lending practices, and management's push to transform into a larger bank have moved analysts at CLSA to initiate coverage with a bullish price target.

The brokerage has an 'outperform' rating on the stock, with a 12-month target of Rs 230 apiece, an 18% return potential over the previous close.

A relatively 'local' bank with average profitability and dominance in Kerala, Federal Bank is unique given its strong non-resident deposit base, which contributes to 30% of total deposits. The bank also has lesser reliance on bulk deposits than other medium-sized private sector banks, CLSA said.

"With a new managing director and chief executive officer at the helm, the target is to gradually transform into a larger bank with return metrics closer to those of the six large private sector banks. While the near-term outlook is muted, we expect the bank to pluck low-hanging fruit and improve returns over the next three years," the note said.

The current fiscal is expected to be a year of recalibration for Federal Bank, prioritising profitability over loan growth. This shift may lead to a compression in Net Interest Margin — a measure of a bank's profitability — due to around 50% of loans being linked to the repo rate, the analysts said.

Initially, NIM is expected to decline by approximately 20 basis points over the next three quarters, followed by an improvement, as the cost of deposits reprices with a lag.

The private sector bank is projected to achieve 17% loan growth from FY25 to FY28, accompanied by a 200 basis point improvement in return on equity over the same period.