Federal Bank Q1 Review — Rise In Provisions Impact Earnings, Says Dolat Capital Maintaining 'Add'

While initiatives towards organic sourcing, shifting branch focus to sales, and liability approach to enhance net interest margin are appreciated, Federal Bank's execution remains key.

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Dolat Capital Report

Federal Bank Ltd. reported in-line net interest income growth of 3% YoY, with 18 bps sequential net interest income decline as faster re-pricing of EBLR loans, higher interest reversals, and Q4’s day-count impact hurt reported NIM.

Strong treasury gains helped pre-provision operating profit; though PAT (RoA at 1%) was impacted by rise in credit costs to 65 bps as MFI slippage increased. Healthy traction in CASA balances (12% YoY) is positive.

MFI delinquencies made a large chunk of slippage in Q1. Rise in retail and BB slippage QoQ was mainly owing to seasonality, as YoY slippage ratio remains unchanged.

FY26 credit cost guidance has been raised to 55 bps (45 bps earlier) as MFI related provisions will continue over Q2/Q3. Barring MFI, management is not alarmed by any other segment, with only marginal deterioration in CV/BuB books. Loan growth to be at the lower end of guided range.

We factor in lower NIM and growth, along with rise in credit costs, with 10%/5% decline in FY26E/27E earnings.

Maintain ‘Accumulate’ rating with target price of Rs 210, valuing the bank at 1.3x FY27E P/adjusted book value against RoA/RoE of 1.3%/14%. Limited seasoning of newer retail portfolios remains a key risk

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