This Stock Has A “BUY” Call From HDFC Securities With A Target Price of Rs 124

Q2FY22 results of Federal Bank

According to the brokerage, the Net Interest Income (NII) of the bank was up 7.2% YoY and 4.3% QoQ, the strong traction in fee income (+30% YoY) and lower provisions (0.8% of loans) have helped the net profit growth of 50% YoY and 25% QoQ and the improved funding cost and steady asset yields with changing asset mix has aided the NIMs (up 5bps QoQ at 3.2%) of the bank.

The brokerage has said “The bank had to make higher provisions for the family pension scheme (amortized over five years with a total liability of Rs180 cr). CASA grew by 18% YoY and CASA Ratio came at an all-time high level of 36.16%. Overall deposits grew 10% YoY and 1.5% QoQ. Advances for the quarter grew by a 6 quarter high of 10%YoY and 3.4% QoQ. (Agri was up 20% YoY, business banking up 11.9% YoY, commercial banking up 11.6% and retail were up 11.6%). Gold Loans registered a growth of 25.88% to reach Rs.159.76 bn. Recovery from DHFL during the quarter aided the PAT.”

HDFC Securities has said “The management has guided for Rs.18-20 bn of slippages for FY22, which suggests that total slippage for H2FY22 will be same or lower than H1FY22 (Rs.6.40 bn in Q1+ Rs.3.2 bn Q2). Further recoveries and upgrades are expected to be Rs.3-3.5 bn per quarter for H2FY22.”

Buy Federal Bank with a target price of Rs 124

In its research report the brokerage has said “On the back of a granular wholesale portfolio and its secured retail franchise, Federal Bank has reported an impressive asset quality with slippages at 1.1% and steady early-stage delinquencies. NPA % is now at a 5 year low. We have envisaged 14% CAGR in Net Interest Income and 24% CAGR in net profit over FY21-FY24E. Further, we have estimated that the loan book would grow at 12.9% CAGR over this period. We expect asset quality and NIM to improve gradually over FY21-24E.”

“The management has guided for Rs.18-20 bn of slippages for FY22. Further, it has guided for a Cost to income ratio of 52-53% in FY22 and ~50% by FY23. For RoA, guidance of 1% is by FY22 and 1.25% over the next two years. Potential value unlocking in 74% subsidiary FedFina (balance 26% held by True North) adds to the margin of safety. Fedfina is focused exclusively on small ticket size credits; LAP, gold loans, and small business lending. Their lending book is now at Rs.51 bn (vs Rs.44.92 bn as of March 31, 2021) and they are expected to grow at 25-30% a year or more. The net profit of the Company grew by 48% to Rs. 586 mn for the year ended March 31, 2021 as against Rs.395.4 bn for the year ended March 31, 2020” said HDFC Securities.

The brokerage has clarified “We feel that investors can buy Federal bank at the LTP of Rs.101.1 (1.02x Sep-23E ABV) and add on dips to Rs.90.25 (0.91x Sep-23E ABV) band. We expect the Base case fair value of Rs.111.5 (1.12x Sep-23E ABV) and the Bull case fair value of Rs.124 (1.25x Sep-23E ABV) over the next 2 quarters.”

Disclaimer

The above stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.