Kotak Institutional Equities has reiterated a BUY call on Federal Bank, raising its fair value target to Rs235 from Rs225, reflecting confidence in the bank’s strategic execution and underlying fundamentals. The report underscores Federal Bank’s focus on expanding revenue streams, enhancing net interest margins (NIM), and maintaining a robust cost structure while bridging leadership gaps. Despite near-term earnings headwinds, Kotak believes the bank’s medium-term prospects are compelling, with attractive valuations and a clear path to higher return ratios.

Quick Take
Federal Bank, under the scrutiny of Kotak Institutional Equities, is positioned for renewed growth as it sharpens its focus on higher-yielding retail and MSME segments, while maintaining cost discipline and leveraging its strong liability franchise. The management’s strategy involves less disruptive but impactful tweaks, aiming to boost NIMs and fee income, with a particular emphasis on expanding current account deposits and enhancing operational efficiency. While short-term earnings may face pressure due to the interest rate cycle, the medium-term outlook remains positive, supported by prudent risk management and ongoing investments in human capital. Investors are advised to maintain a constructive stance, with a target price of Rs235 and expectations of over 15% returns in the next 12 months.

Key Investment Thesis: BUY Recommendation from Kotak Institutional Equities

Kotak Institutional Equities maintains a BUY rating on Federal Bank, with a revised fair value of Rs235, indicating potential upside from the current market price of Rs208. This endorsement is rooted in the bank’s robust execution capabilities, attractive valuation multiples, and strategic initiatives to drive sustainable growth.

The sector view remains ‘Attractive’, and Federal Bank is seen as a candidate for multiple expansion as it closes the gap with larger private peers.

Strategic Focus: Leveraging Franchise Strength and Expanding Revenue Streams

Federal Bank’s management is intensifying efforts to build new revenue streams across retail, corporate, and MSME segments, particularly through higher-yielding products like loan against property (LAP), used vehicles, tractors, and SME loans. These segments offer better pricing power and can significantly enhance NIMs, though the bank remains vigilant on risk management.

The bank is also prioritizing the expansion of current account deposits, targeting mid- and large-corporate clients as well as retail customers, to further improve its liability mix and reduce funding costs.

Operational Discipline: Cost Control and Human Capital Investments

Federal Bank is committed to keeping its cost structure stable, with incremental investments directed towards strengthening its franchise and reducing operational workload for frontline staff. The bank is shifting operational tasks to its efficient subsidiary, allowing revenue-generating teams to focus on growth.

Leadership gaps in product segments are being addressed through a blend of internal promotions and selective external hiring, with key appointments expected to be completed in the first half of FY26.

Short-Term Challenges vs. Medium-Term Opportunities

The short-term outlook is tempered by potential earnings risk from NIM compression, with limited immediate levers for offsetting this pressure. Kotak has marginally revised down FY2026 earnings estimates to reflect the prevailing rate cycle.

However, the medium-term narrative is one of execution and transformation, as management’s vision for the bank’s evolution is measured against relative performance improvements in loan mix, cost of funds, and non-interest income contributions.

Loan Book Evolution: Pursuing Higher Yields with Prudent Risk

The bank is recalibrating its loan origination strategy, shifting towards medium-risk and higher-yielding segments such as unsecured retail loans, credit cards, and personal loans, while maintaining a strong presence in gold financing and MSME/SME lending.

This approach is expected to gradually elevate credit costs, but the increase will be measured and aligned with the evolving loan mix.

Liability Franchise: Deepening Current and NR Deposits

Federal Bank continues to outperform mid-tier peers in liability management, especially in its core Kerala market, and is now focusing on increasing its share of current account deposits through targeted product innovation and deeper engagement with mid-market and micro-SME clients.

The bank is also strengthening its non-resident (NR) deposit mobilization, expanding into new international corridors to capture deposit flows from the Indian diaspora.

Fee Income and Cost Efficiency: Building Sustainable Profitability

Management is intent on boosting fee income, particularly from credit cards and wealth management products, where current contributions lag the bank’s potential.

Cost ratios are tightly managed, with technology upgrades largely complete and future investments focused on simplifying infrastructure and supporting revenue growth.

Financial Snapshot and Valuation Metrics

Below is a summary table of key financial metrics and projections for Federal Bank, as estimated by Kotak Institutional Equities:

Stock Levels and Investor Targets

Current Market Price (CMP): Rs208

Target Price (12-month Fair Value): Rs235

52-week Range: Rs172 – Rs217

Expected Return: Over 15% in the next 12 months, as per Kotak’s BUY rating definition.

Conclusion: Attractive Valuation, Execution Key to Re-rating

Federal Bank is trading at a significant discount to larger private sector peers, with a one-year forward P/B of 1.4x, offering a compelling risk-reward profile for investors willing to look beyond short-term earnings volatility.

The successful execution of management’s strategy—particularly in loan mix optimization, liability deepening, and fee income enhancement—will be pivotal in unlocking further upside and supporting a re-rating of the stock.

Investors with a medium- to long-term horizon are well-positioned to benefit from Federal Bank’s transformation journey, with Kotak Institutional Equities’ BUY call and Rs235 target price providing a clear benchmark for potential upside.