Federal Bank has reported a robust year-on-year earnings growth of 36%, according to a research report by Sharekhan. The bank's strong performance is largely attributed to a significant 84% reduction in credit cost and a 9% increase in pre-provision operating profit (PPoP) compared to the same period last year.
The bank's annualized core credit cost stood at a mere 13 basis points, a substantial decrease from 41 basis points in the previous quarter and 53 basis points from the same period last year. This reduction in credit cost contributed significantly to the bank's earnings growth.
Net interest income (NII) surged by 17% year-on-year and 7% quarter-on-quarter, backed by stable net interest margin (NIM) and strong loan growth. Core fee income also witnessed a rise of 22% year-on-year and 23% quarter-on-quarter.
However, the bank's operating expenses (opex) increased by 26% year-on-year and 8% quarter-on-quarter due to higher business volumes. This resulted in moderate PPoP growth and partially offset the revenue growth.
The report also highlighted an improvement in the bank's asset quality metrics, led by lower slippages and higher upgrades. These factors resulted in negligible core credit costs with net slippages limited to Rs. 14 crore for the quarter.
At present, Federal Bank's stock trades at 1.2 times its estimated book value for fiscal year 2024 and 1.1 times for fiscal year 2025 at the current market price, with a price target of Rs. 170 and a return on assets (RoA) of over approximately 1.2%.
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