Slump of 5% in Federal Bank: Three reasons explanations why stock analysts predict a 20% surge, despite being confounded by Q1's developments
Despite a weak Q1 performance, Federal Bank's stock price is maintaining a positive outlook, according to brokerages. This optimism stems from the belief that medium to long-term factors, such as economic recovery, policy shifts, and improved market conditions, will drive a stock rally.
The signs of inflation cooling and potential shifts in Federal Reserve policy, including rate cuts or pauses, are expected to ease borrowing costs and improve credit conditions for banks like Federal Bank. Investors often look beyond a single quarter's earnings, focusing on upcoming rate cuts or stimulus measures that can boost GDP growth, corporate earnings, and overall market sentiment.
Even in turbulent macroeconomic conditions, investors and strategists anticipate eventual economic stabilization and recovery, which supports the bullish outlook on bank stocks known for their linkage to interest rate cycles and economic growth.
Motilal Oswal expects the trajectory of Federal Bank's asset quality to improve in the second half, supported by a recovery in margins and delinquency rate. They maintain a Buy recommendation for Federal Bank with a target of Rs 235 per share. HDFC Securities shares a similar sentiment, maintaining a Buy on Federal Bank with a target of Rs 225 per share.
However, Federal Bank's Q1 was impacted by higher-than-expected provisions and a sharp decline in net interest margins. The asset quality of the bank weakened due to stress in the MFI segment, resulting in elevated credit costs during the quarter. Motilal Oswal has reduced their earnings estimates by 7% for FY26 and by 4% for FY27, factoring in a slight margin contraction and elevated provisions.
The bank's loan growth was primarily driven by the SME segment, Gold, and Agri portfolios, while the MFI book contracted due to rising stress. Federal Bank's net interest margins dropped down 18 bps QoQ in Q1FY26, mainly due to repo rate cuts and T+1 loan repricing. The sharp rise in credit cost for Federal Bank is largely driven by MFI and partly by BUB/CV.
Nuvama has reduced its target price for Federal Bank to Rs 225 per share but maintains a 'Buy' recommendation for Federal Bank, calling it the "safest mid-sized bank with potential to deliver strong growth." They expect Federal Bank's credit cost to remain high in Q2, but decrease in H2FY26.
The MFI slippages peaked in May for Federal Bank, given its 20% exposure to Karnataka. HDFC Securities highlights that elevated provisioning towards the MFI portfolio, coupled with muted growth on both sides of the balance sheet, offset by stronger traction in fee income, continues to be a key near-term concern for Federal Bank.
Despite these challenges, the bank's CEO does not see "any major stress build-up in BUB, which is secured." The positive anticipation of interest rate policy easing and economic stimuli, coupled with the bank's fundamental prospects, likely underpin the brokerage's optimistic outlook.
- Investors are optimistic about Federal Bank's stock due to expectations of inflation cooling, potential shifts in Federal Reserve policy, and improved market conditions, believing these factors will drive a stock rally.
- Despite a weak Q1 performance, Motilal Oswal expects an improvement in Federal Bank's asset quality in the second half, maintaining a Buy recommendation for the bank with a target of Rs 235 per share.
- Federal Bank's Q1 was impacted by higher-than-expected provisions and a sharp decline in net interest margins, with the MFI segment being a significant contributor to the stress.
- Nuvama, despite reducing its target price for Federal Bank to Rs 225 per share, maintains a 'Buy' recommendation for the bank, calling it the "safest mid-sized bank with potential to deliver strong growth."
- The CEO of Federal Bank does not see any major stress build-up in BUB, a secured segment, and the positive anticipation of interest rate policy easing and economic stimuli likely underpins the brokerage's optimistic outlook.
