Private sector lender Federal Bank reported its highest-ever quarterly net profit in Q2 FY27, supported by strong net interest income growth, improved margins and healthy loan expansion.
Federal Bank Q2 results have garnered differing views from brokerages. While Kotak Institutional Equities retained its ‘Add' rating, citing strong core business performance, Citi maintained a ‘Neutral' stance.
Federal Bank reported a 45.1% year-on-year (YoY) increase in net profit to Rs 1,386.09 crore in the September quarter. Net interest income (NII) rose 26.38% YoY to Rs 3,153.40 crore, while net interest margin (NIM) expanded 26 basis points to 3.32%. Lower funding costs supported profitability, with the cost of funds declining 40 basis points and the cost of deposits falling 39 basis points to 5.18%.
Kotak Institutional Equities maintained its Add rating on Federal Bank with an unchanged fair value of Rs 375. The brokerage highlighted strong loan growth of 20% YoY, supported by healthy traction in retail and business banking, alongside stable asset quality and controlled slippages.
Slippages stood at 0.6%, while improved profitability and lower funding costs could support further gains in return on assets (RoA). Fee income, insurance distribution and treasury gains also supported the bank's performance.
However, Kotak flagged uncertainty surrounding a potential merger and acquisition (M&A) transaction as a key concern.
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The brokerage raised its near-term earnings estimates following the stronger-than-expected first-half performance but said it would await greater clarity on the proposed transaction before revisiting its rating.
Although the long-term strategic rationale could prove sound, we believe that the market is likely to discount execution and integration risks upfront, creating meaningful downside to valuations, Kotak Equities said.
Citi maintained its ‘Neutral' rating on Federal Bank shares with a target price of Rs 360. It highlighted accelerating loan growth driven by retail lending, gold loans and corporate banking, with foreign currency non-resident (FCNR)-linked lending contributing meaningfully.
The brokerage said lower deposit costs helped offset pressure on margins from overseas leveraged-loan exposure. Management expects further NIM improvement over the medium term, supported by policy rate transmission and a shift towards higher-yielding loan segments.
Citi also noted healthy asset quality, credit costs below 50 basis points and strong fee income. However, elevated operating expenses, partly due to employee stock option (ESOP)-related costs, and a slight moderation in the CASA ratio remain areas to monitor.
Overall, strong business momentum supports Federal Bank's earnings outlook, but clarity on the potential acquisition could prove crucial for the stock's near-term performance.
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