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On Tuesday, UBS analysts, led by Anish Rai, adjusted the price target for Federal Bank Ltd (FB:IN) shares to INR235, down from the previous INR250, while sustaining a Buy rating on the stock. The revision follows Federal Bank's third-quarter financial results for fiscal year 2025, which did not meet UBS and consensus expectations. The bank reported a Profit After Tax (PAT) of Rs9.6 billion, with the shortfall primarily attributed to increased credit costs, which reached approximately 60 basis points (bps) on an annualized basis in the third quarter compared to about 30 bps in the second quarter.
The bank's gross and net slippages remained relatively stable quarter-over-quarter, with a minor increase attributed to higher agricultural loan slippages. The third quarter also saw a significant rise in write-offs, reaching approximately 80 bps on an annualized basis, a notable increase from negligible amounts in the previous quarter. Despite this, the bank's Provision Coverage Ratio (PCR) improved by 240 bps quarter-over-quarter to 74.2%.
The bank's Net Interest Margin (NIM) remained unchanged from the previous quarter at 3.11%. The loan book showed no quarter-over-quarter growth but marked an approximate 16% year-over-year increase. Meanwhile, deposits saw a 1% sequential decrease, although they were up roughly 11% compared to the same period last year. Pre-Provision Operating Profit (PPOP) grew by 9.2% year-over-year.
UBS highlighted the bank's consistent delivery on Return on Assets (ROA) accretion, with a 9-month fiscal year 2025 ROA exceeding 1.2%. This performance, along with a rise in NIM, improvements in the bank's Current Account Savings Account (CASA) deposit franchise, and stable asset quality, are seen as key factors for a potential re-rating. The bank's stock is considered to have an attractive risk-reward profile, trading at approximately 1.1 times the estimated Price to Book Value (P/BV) for fiscal year 2026. UBS has revised its earnings per share (EPS) estimates for the bank, which has led to the reduced price target. Further details on the provisions and write-offs are anticipated to be discussed in the management call scheduled for 8:30 AM IST on Tuesday.
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