Federal Bank — Focused On Fixing The Right Gaps; Execution Remains Key, Says HDFC Securities Maintaining 'Buy'

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HDFC Securities Institutional Equities

Federal Bank Ltd. hosted an analyst meet to spotlight the bank’s key priorities over the medium term to better monetise its balance sheet strengths:

1. better current account-savings account mobilisation (especially CA balances) reflecting in lower cost of funds;

2. scaling its medium-yield businesses driving stronger risk-adjusted returns; and

3. higher fee income traction by building capabilities in areas of trade/FX income, wealth management, and CMS.

Under the new MD, Federal Bank is embarking on a journey to address its deposit mix and the pricing power handicap on both sides of the balance sheet (highlighted in our Sep-24 update).

While the strategic focus on profitability is a welcome move, the franchise is likely to go through an extended investment phase, which is likely to push the operating leverage benefits more towards FY27.

With a rejig in priorities, we believe Federal Bank is well-placed to capitalise on its current balance sheet strengths (quality deposit franchise and superior underwriting standards) with clear catalysts for earnings reflation, compared to larger peers that are nearly-fully optimised.

We tweak our estimates to factor in elevated opex intensity in FY26E, while building in operating efficiencies in FY27E. We maintain Buy with a revised target price of Rs 210 (1.3 times Sep-26 adjusted book value per share).

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