Buy Federal Bank, target Rs 117: HDFC Securities

HDFC Securities has given a buy recommendation on Federal Bank (FB) with a target price of Rs 117.

Shares of Federal Bank traded at Rs 103.55 around 3 pm on 17 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale:


Operating efficiency has long been a challenge for FB in spite of no material branch addition for several quarters.

The dip in the C-I ratio (about 240/60bps) to 49.4 per cent can be attributed to higher treasury gains (up 86/23 per cent).

The stable core C-I ratio (ex-treasury) of 52.4 per cent over the trailing three quarters points to upcoming oplev.

"We have slightly tweaked our cost assumptions, implying a C-I ratio of 47 per cent over FY20-22E," said the brokerage.

Inconsistent performance across parameters (spanning asset quality and C-I) capped valuations for FB over several quarters.

"We sense increasing stability over the last two quarters," said the brokerage.

Despite factoring higher slippages and provisions towards stressed exposures, FB can deliver earnings CAGR of about 28 per cent led by operating leverage and better core performance, especially asset quality.

To be sure, FB has stumbled in the past but several corrective initiatives are probably paying off, the brokerage added.