How Federal Bank Can Achieve its Target Price of Rs 161.47

Federal Bank: A Strong Buy for Long-Term Investors

Federal Bank is one of the leading private sector banks in India, with a network of over 1,300 branches and 2,000 ATMs across the country. The bank has a diversified portfolio of products and services, catering to retail, corporate, SME and NRI customers. The bank has also invested in digital transformation and innovation, launching various initiatives such as FedBook Selfie, FedMobile, FedBiz and FedFast.

Federal Bank has delivered a robust performance in the recent quarters, despite the challenging macroeconomic environment and the impact of the COVID-19 pandemic. The bank reported a net profit of Rs 903 crore for the quarter ended March 2023, up 67% year-on-year and beating analyst estimates by 9.7%. 

The bank’s net interest income grew by 17% year-on-year to Rs 1,722 crore, while its net interest margin improved by 10 basis points to 3.15%. The bank’s asset quality also improved, with its gross non-performing assets (NPAs) ratio declining by 18 basis points to 2.96% and its net NPA ratio declining by 14 basis points to 0.89%. The bank’s provision coverage ratio stood at 68.62%, while its capital adequacy ratio was at 15.38%.

Federal Bank has a strong growth potential in the long term, given its focus on expanding its retail and SME segments, which have higher margins and lower risk. The bank has also been increasing its fee income through cross-selling and third-party products, such as insurance, mutual funds and credit cards. The bank’s digital initiatives have also helped it to acquire new customers, enhance customer loyalty and reduce operational costs. The bank has also been prudent in managing its costs and risks, maintaining a healthy balance sheet and liquidity position.

Federal Bank is currently trading at an attractive valuation, compared to its peers and historical averages. The bank’s stock price is Rs 127.75 as on May 5, 2023, which implies a price-to-earnings (PE) ratio of 9.66 and a price-to-book (P/B) ratio of 1.39. The bank’s PE ratio is lower than the sector average of 22.54, while its P/B ratio is lower than the sector median of 1.77. The bank’s return on equity (ROE) is 14.45%, which is higher than the sector average of 12.02%.

Several brokerage houses and research analysts have given a buy rating to Federal Bank, with an average target price of Rs 161.47, which implies an upside potential of 26.40% from the current level3. Some of the prominent analysts who have recommended buying Federal Bank are 

HDFC Securities (target price Rs 175), ICICI Direct (target price Rs 165), Prabhudas Lilladhar (target price Rs 175), ICICI Securities (target price Rs 170), 

Axis Direct (target price Rs 170) and Motilal Oswal (target price Rs 170).

In conclusion, Federal Bank is a strong buy for long-term investors, who can benefit from its consistent performance, growth prospects, digital strategy, asset quality improvement and attractive valuation.