LKP Securities has maintained a BUY recommendation on Federal Bank following its Q3FY25 results, setting a 12-month price target of Rs 213, indicating a potential upside of 16% from the current market price of Rs 184. Despite facing pressure from a one-time provision expense, the bank has demonstrated strength through robust loan and deposit growth, improved asset quality, and steady net interest margins (NIM). Federal Bank’s ongoing strategic shift toward high-quality deposits and mid-yield assets positions it for stable, long-term profitability.

Q3FY25 Performance Highlights: Loan Growth and Profit Trends

Federal Bank reported a 14.5% YoY increase in net interest income (NII), reaching Rs 24 billion for Q3FY25. Advances grew by 15.7% YoY, supported by strong retail and commercial loan demand. However, higher provisions impacted profitability, resulting in a 5.1% YoY decline in profit after tax (PAT) to Rs 10 billion.

Key Performance Metrics:

Net interest margin (NIM): 3.11% (down 8 basis points YoY).
Pre-provision operating profit (PPP): Rs 16 billion, up 9.2% YoY.
Cost-to-income (C/I) ratio: 53.1%, up 120 basis points YoY due to increased operating expenses.
Provisions: Rs 3 billion, up from Rs 0.9 billion in Q3FY24.
The bank's PAT was impacted by precautionary provisioning aimed at future non-performing loans (NPLs), reflecting prudent risk management in an uncertain economic environment.

Asset Quality and Balance Sheet Strength

Federal Bank showed notable improvements in asset quality, driven by recoveries and write-offs. Gross NPAs decreased to 1.95% from 2.29% in the previous quarter, while net NPAs stood at 0.49%, down from 0.64%.

Breakdown of Advances Growth:

Retail loans: Increased 18.0% YoY, supported by growth in housing and gold loans.
Corporate loans: Grew by 8.0% YoY, reflecting demand from key sectors.
Commercial loans: Increased by 25.0% YoY, driven by expansion into tier-2 and tier-3 cities.
Deposit Growth:

Deposits increased 11.2% YoY, with term deposits growing 11.9% and current/saving account (CASA) deposits rising 9.5% YoY.
CASA ratio stood at 30.2%, indicating a balanced funding profile despite higher interest rates.
The improved balance sheet metrics reflect Federal Bank’s focus on granular deposits and stringent credit underwriting.

Strategic Initiatives and Management Outlook

Federal Bank has implemented several strategic measures aimed at enhancing both loan and deposit quality. The bank is shifting its focus toward secured retail loans and mid-yield segments, such as housing loans, while reducing exposure to high-risk microfinance and personal loans.

Key Strategic Highlights:

Housing loans: Grew by 8.8% YoY, with continued competitive positioning in the market.
Gold loans: Expanded by 30% YoY, though future growth could be impacted by potential regulatory changes.
Commercial auto loans: Management expects above-industry growth, supported by pan-India presence and customer diversification.
Credit cards: The bank aims to increase its credit card portfolio over the next two quarters.
Management has also provided guidance for FY25 credit costs, targeting 0.40-0.45% of assets under management (AUM). Liquidity coverage ratio (LCR) improved to 119%, ensuring a solid liquidity position.

Financial Projections and Valuation

LKP Securities expects moderate loan growth in the near term as the bank reduces exposure to unsecured lending. However, profitability is forecasted to remain strong, driven by higher margins and improved operating efficiency.

The stock is currently trading at 1.0x FY27E BVPS, below its three-year average of 1.2x, indicating attractive valuation levels for long-term investors.

Technical Analysis: Price Trends and Key Levels

Federal Bank's stock shows support and resistance levels that are critical for traders and investors.

Support Levels:

Rs 175
Rs 168
Resistance Levels:

Rs 190
Rs 213
Candlestick Analysis:
The stock recently formed a Bullish Engulfing pattern, indicating potential upward momentum if it sustains above Rs 190.

Bottomline for Investors

Federal Bank's Q3FY25 results underscore its ability to balance growth with risk management. The bank's focus on high-quality deposits, secured lending, and cost efficiency has positioned it for sustainable profitability. With LKP Securities’ target price of Rs 213 and improving technical indicators, the stock offers an attractive opportunity for both long-term investors and short-term traders.