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Nirmal Bang Report
Federal Bank Ltd. Q2 FY24 result was better than our estimates, with net interest income/ pre-provision operating profit/profit after tax coming at a variation of 2.6%/-5%/12.6% versus our estimates. Net interest margin (based on net earning assets) showed a satisfactory trend, marginally improving by 2 basis points QoQ to 3.22%.
Other income registered a healthy growth of 19.8% YoY and flat QoQ. However, due to operating costs increasing at a higher rate of 26.2% YoY/8.4% QoQ, operating profit growth was lower at 9.3% YoY/1.7% QoQ.
Asset quality continued to improve. With credit costs falling to 13 bps, net profit grew by 35.5% YoY/11.7% QoQ. 
The management has maintained a loan growth guidance of 18-20% for FY24. NIMs should improve further and guidance for FY24 is at 3.25%. However, cost-to-income ratio should remain north of 50% in FY24 and improve thereafter. 
We roll forward our valuation to September-25E adjusted book value while keeping our target multiple at 1.25 times, which along with subsidiary value per share of Rs 16.2 leads to a target price of Rs 176. Maintain 'Buy'.
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