Boost! Federal Bank rises by 5% post Q4FY19 result; more gains expected - Here's why you should buy

Investors were quite upbeat on Federal Bank shares on Monday's trading session after the lender more than doubled its net profit in Q4FY19 result. Federal touching an intraday high of Rs 102.45 per piece, jumped by nearly 5% on Sensex. At around 1344 hours, the shares were trading at Rs 100.80 per piece up by 3.22% on Sensex. Experts have further retained a buy rating on Federal Bank. With that, there one investor who is definitely set to make more money as Federal emerges for a further rally in its stock price. This would be none other than Rakesh Jhunjhunwala who holds quite an amount in Federal, in fact, the bank is also among his favourite stocks. 

Key highlights of Q4FY19 was that Federal Bank's net profit came in at Rs 382 crore in Q4FY19, as against Rs 145 crore in Q4FY18. NII surged by 17% to Rs 1,097 crore in Q4FY19 versus Rs 933 crore in Q4FY18. Gross NPA remained stable at 2.92% with net NPA at 1.48% during the quarter. 

Should you buy Federal Bank shares post Q4FY19?

Reliance Securities:

The Bank continues to enjoy a strong retail liability franchise with a high share of retail deposits. Healthy traction in fee-based income over the last few quarters is also expected aid earnings. Additionally, low incremental stress from corporate book should aid overall slippages. Nonetheless, we would remain watchful of the Bank’s Kerala portfolio for any likely volatility in slippages. Maintain our BUY recommendation on the stock with an unchanged Target
Price of Rs115, implying an adjusted PBV of 1.5x FY21.

Kotak Institutional Equities:

Federal Bank reported strong earnings growth at 1.6X yoy driven by robust revenue growth at 21% yoy, modest rise in operating expenses at 14% yoy while provisions declined ~50% yoy. Growth in revenues was on the back of a steep increase in non-interest income at ~30% yoy while NII growth was at 17% yoy (NIM flat qoq at 3.2%). Treasury gains led to a rise in noninterest income while fee income maintained momentum. Cost-income remained elevated but is showing improvement at 50%. Deposit franchise saw strong growth (up 21% yoy) owing to strong CASA growth (up 21% yoy). CASA ratio was flat qoq at 33%.

Federal Bank has suffered on account of various factors in the past few years. (1) RoE has been below normalized levels led by high credit costs or weak cost ratios. (2) Inconsistent momentum with FY2015/17/19 being strong years while FY2016/18 being moderate to weak due to various factors. (3) Slippages have been inconsistent making it difficult to forecast credit costs or NPLs across years for various factors making it difficult to give an opinion on the bank’s underwriting.

With FY2019 having gone quite well, Kotak experts said, "we still see there is further scope for improvement in return ratios that could enable the bank to move closer to normalized return ratios by FY2021-22. However, we are conservative at this point as there is no one single factor that would drive
this improvement. We are building stable NIM though management is forecasting an improvement and we are marginally higher on loan-loss provisions at 60bps as compared to management expectation of ~50-55bps."

Maintain positive view with fair value revised to Rs130 (from Rs115), valuing the bank at ~1.6X book and 12X March 2021 EPS for RoEs in the range of ~14% in the medium term and strong earnings growth ~25% CAGR in FY2019-21E.

HDFC Securities:

Analysts here said, "We have upgraded our FY20/21E ABVs by 1/3% to factor in an improvement in asset quality. With RoAAs of 1.05%, we believe the stock is fairly valued at 1.3x FY21E ABV. We maintain that a consistent performance across parameters is essential for an upgrade of multiples (and recommendation). FB has struggled on this crucial front, in sharp contrast with comparable peers. We remain skeptical despite the good 4QFY19 show."

Maintain NEUTRAL rating (TP Rs 98, 1.3x FY21E ABV of Rs 75.5). We are not yet confident that FB can meaningfully deliver > 1% RoAA over FY20-21E.

Rakesh Jhunjhunwala well placed:

Among stocks which have given Jhunjhunwala above Rs 500 crore gains, would also be Federal Bank. His wealth currently stands at Rs 662.5 crore in Federal, as per TrendLyne.com data.

Interestingly, Jhunjhunwala has recently reduced his holding in Federal by 0.06%. Now he has a total 3.39% stake in Federal with 66,221,060 equity shares. 

If compared the highest target price then, Federal is seen to rise by nearly 29%, adding more money to Jhunjhunwala's kitty. Hence, at the current level, Federal Bank does become a hot stock on Dalal Street.