Prabhudas Lilladher has issued a ‘BUY’ recommendation for Federal Bank, setting a target price of Rs. 210. The bank’s medium-term strategy, articulated by MD & CEO Mr. Manian, focuses on improving net interest margins (NIM), increasing the CASA (current account and savings account) ratio, enhancing fee income, and better cost efficiency. While upfront investments may lead to higher short-term costs, these initiatives are expected to yield substantial benefits over the medium term. Check out the detailed breakdown of the key investment insights and financial targets for Federal Bank, as suggested by Prabhudas Lilladher research team.

Focus on NIM Improvement

Targeting NIM Growth: Federal Bank aims to position its margins between the top-3 and next-3 private sector banks by improving the liability mix, with a specific focus on CASA growth.

NIM is currently lower compared to larger peers, with an aspiration to reach levels near the industry average of 3.5-4.9%.
The strategy involves increasing the share of mid-to-high yielding assets, while avoiding aggressive growth in low-yielding products.
Key initiatives include RARoC-based pricing and focusing on high-yielding secured products such as used vehicle finance, micro-LAP loans, and affordable housing.

CASA Ratio Expansion

Scaling Up CASA Share: Federal Bank aims to increase its CASA ratio from 30% to 36% by FY28E, driven by an improved current account (CA) balance and greater outreach in key markets.

The strategy focuses on strengthening the bank’s presence in Kerala while tapping into untapped opportunities in other regions.
Digital onboarding, relationship management (RM) expansion, and a stronger focus on government and institutional CASA are key growth drivers.
The bank plans to re-orient branch strategies towards garnering higher CASA to support its profitability goals.

Fee Income Enhancement

Improving Fee-Based Revenue: Federal Bank’s fee income, currently at 90 bps of average assets, lags behind peers who average between 120-165 bps.

Initiatives include cross-selling products, increasing trade and forex income, and launching new financial services like insurance and wealth management.
The bank aims to reduce dependency on third-party products by increasing the proportion of self-originated credit cards and cash management services.
Investments in new talent and re-skilling current employees are also planned to drive growth in fee income.

Branch Transformation Strategy

Enhancing Productivity and Customer Engagement: Federal Bank aims to transform its branch operations by focusing on customer-centric sales and service.

The ‘Free the Branch’ initiative aims to transfer operational workloads to centralized hubs, enabling branches to focus more on sales and customer interactions.
Plans include opening 400-450 new branches over the next 3-5 years, with an emphasis on strategic locations in metro cities and Tier-2 towns.
The bank intends to increase the productivity of existing branches before aggressively expanding its branch network.

Expansion of Product Portfolio

Strengthening the Product Mix: Federal Bank is diversifying its product offerings to drive growth over the medium term.

Plans include scaling up secured high-yielding products such as micro-LAP loans, tractor loans, and real estate lending.
The bank aims to increase the share of mid-yielding loans, which offer a better balance of risk and return.
The introduction of new corporate products and capital market-linked services is also on the agenda to enhance the bank’s fee-based income.

Cost Optimization for Long-Term Profitability

Balancing Investments with Cost Control: While initial investments in technology, marketing, and employee training may increase costs in the short term, the bank expects improved productivity to drive medium-term profitability.

The bank is leveraging automation, centralization, and outsourcing to reduce operational workloads and improve efficiency.
Improved branch efficiency will help increase the sales force, focusing on organic sourcing of credit cards and other products.
Cost optimization measures are expected to partially offset the higher expenses related to these initiatives.

Financial Targets and Stock Performance

Key Metrics and Projections:

NII Growth: Federal Bank’s net interest income is projected to grow from Rs. 82,935 million in FY24 to Rs. 1,26,635 million in FY27, reflecting a compound annual growth rate (CAGR) of 15.5%.
Profitability: The bank’s PAT is projected to rise from Rs. 37,206 million in FY24 to Rs. 51,497 million in FY27, driven by higher fee income and cost efficiencies.
EPS Growth: Earnings per share (EPS) is expected to increase from Rs. 15.3 in FY24 to Rs. 21.0 in FY27, reflecting an 18% growth rate.
Return Ratios: Return on Assets (RoA) is projected to remain steady at 1.2%, while Return on Equity (RoE) is expected to improve from 12.4% in FY26 to 13.0% in FY27.

Investment Outlook and Target Price

Recommendation: Prabhudas Lilladher maintains a ‘BUY’ rating on Federal Bank with a target price of Rs. 210. The bank’s strong focus on CASA growth, NIM improvement, fee income enhancement, and cost optimization are expected to drive medium-term profitability.

Potential Upside: The target price of Rs. 210 represents a potential upside of approximately 16.7% from the current market price of Rs. 180.

Conclusion: Federal Bank’s well-defined strategy and focus on sustainable growth make it a compelling investment opportunity. However, successful execution of these initiatives remains key to realizing the bank’s medium-term goals and achieving higher return ratios.