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Systematix Research Report
Federal Bank Ltd. reported Q2 FY24 earnings of Rs 9.54 billion, above our and consensus estimates of Rs 8.6 billion, mainly driven by strong fee income growth coupled with lower-than-expected credit costs during the quarter.
On a standalone basis, the earnings increased by +36% YoY and +11.7% QoQ. However, Federal Bank's core operating performance continued to remain weak on account of-
whilst deposit growth was strong at 4.7% QoQ, high value deposits (deposits other than current account and savings account and term deposits less than Rs 20 million) continued to grow faster (+10.5% QoQ), than the lower value retail deposits at ~+3% QoQ. This was reflected in the cost of deposits increasing 20 bps QoQ whilst yield on advances increased 14 bps,
cost to income ratio increased to 52.8% from 51.5% in Q1 FY24 on account of higher volume lead cost pressures in the higher yielding products.
Considering the recent run-up in the share price, we downgrade our rating to 'Hold' with December 2024 target price of Rs 164 (from Rs 155), valuing the bank at 1.25 times Dec-25 adjusted book value per share.
We estimate net interest margins to be relatively stable, in the near term, factoring in the increased proportion of higher yielding assets compensating for the continued pressure on the funding side.
We retain our earlier cautious outlook on credit costs over the forecast period and factor higher credit costs in line with the increased contribution of the higher yielding assets.
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