Target: ₹230

CMP: ₹190.60

Federal Bank is the largest ‘old private sector’ bank in India, with a dominant presence in the southern State of Kerala. While the bank has done well in the past decade, it has been a relatively ‘local’ bank with average profitability. Its strengths lie in its large non-resident deposit franchise and its conservative lending practices.

With a new MD and CEO at the helm, the target is to gradually transform into a larger bank with return metrics closer to those of the six large private sector banks. While Federal has a unique deposit franchise, it lags peers in its CASA ratio, particularly CA deposits. With the new CEO at the helm, there is particular emphasis on scaling up current account deposits, with a branch outreach. At the same time, Federal is under-indexed to retail loans compared with large private sector banks.

While the near-term outlook is muted, we expect the bank to pluck low-hanging fruit and improve returns over the next three years (about 14 per cent ROE in FY27/28CL versus an average of 11 per cent over the past decade). The stock is inexpensive at 1.1x PB/9x PE (FY27).

We initiate coverage with an O-PF rating and TP of ₹230 (1.4x PB).

Published on April 7, 2025