Federal Bank Q2 Review — Dolat Capital Maintains 'Add' On Improved Margins; Steady Asset Quality

While initiatives towards organic sourcing, shifting branch focus to sales, and a 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 a good quarter with sequential net interest margin expansion (+12 bps to 3.06%) and contained credit costs (50 bps ex of management overlay).

Loan growth at 1.5% QoQ/6% YoY was muted as the bank strategically slowed down in lower-yielding portfolios (home loan and corporate).

Medium yielding secured segments continue to post healthy growth - CoB (+7% QoQ), commercial vehicle (4%), gold (3.5%).

Slippage% moderated to sub 1%, with FY26 credit cost guidance sustained at 55 bps. Bank made a management overlay of Rs 460 mn in Q2 on few standard accounts as a precautionary measure. MFI slippages have peaked and are moderating, but not yet in a comfortable or normalized territory.

We tweak estimates and factor in improved NIM but lower growth for FY26E.

Maintain ‘Accumulate' rating with target price of Rs 235, valuing the bank at 1.3x FY27E P/adjusted book value against RoA/RoE of 1.3%/14%.

While early traction in key metrics towards structural RoA improvement is healthy, limited seasoning of newer retail portfolios and modest profitability metrics limit valuations for us.

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