Federal Bank Trails Nifty Bank in 2025, But PL Capital Sees a Turnaround in the Making
- 6th August 2025
- 01:30:00 PM
- 3 min read
Mumbai | August 6 – Federal Bank has been among the weakest performers on the Nifty Bank index this year, slipping nearly 2% while the benchmark gained 9.3%. But Prabhudas Lilladher (PL) Capital believes the tide could turn as early as FY27, calling FY26 a “transition year” in its latest banking report.
The brokerage points to easing funding costs, steady fee momentum, and a pivot towards higher-yielding assets as reasons for optimism. “Weak NII/NIM and asset quality led to an 8.6% miss on core PAT, but structural changes in asset-liability mix and branch processes are underway, which could enhance efficiency and profitability,” PL’s analysts noted.
Federal Bank’s Position vs. Peers
Q1FY26 net interest margin fell to 2.90% from 3.06% in Q4FY25, hit by lower loan yields and higher slippages. Gross NPAs edged up to 1.91%, ending a year-long improvement trend, while credit costs rose to 65 basis points from the 50 bps norm of the last two years.
The microfinance portfolio — heavily concentrated in Karnataka — saw advances drop 4% sequentially to ₹3,939 crore. PL Capital said stress peaked in May, with June and July showing signs of recovery, but provisions will likely remain elevated this quarter.
Q1FY26 Results at a Glance
- NII: ₹2,336 crore, +2% YoY, below estimates due to weaker margins
- Loan Growth: 9.2% YoY, driven by corporate, commercial vehicle and SME segments
- CASA Ratio: Stable at 30.3%
- Core PPoP: ₹1,430 crore, aided by healthy fee income and lower opex
- Provisions: ₹400 crore, reflecting agri/MFI stress
- Net Profit: ₹861 crore, down 14.6% YoY
Margins Could Recover After Q2
Funding costs eased to 5.85% from 6.06%, helped by June deposit rate cuts. Fixed-rate loans increased by three percentage points, while EBLR-linked loans declined by the same amount — steps aimed at defending NIMs.
Fee income stayed resilient, driven by wealth management, transaction banking and cards. PL Capital expects fee growth to outpace loan growth in FY26, with Q2 also benefitting from Priority Sector Lending Certificate income.
Execution Risks Remain
PL Capital maintains a ‘BUY’ rating on Federal Bank with a ₹220 target price, valuing the stock at 1.3x FY27 ABV. However, analysts caution that execution will be critical:
“The roadmap is ambitious—ranging from branch process standardisation to technology upgrades—but execution risks could outweigh immediate upside. That said, we believe return ratios have bottomed out, and margins should improve post Q2FY26 as funding cost benefits flow through.”
Valuation and Outlook
At 1.3 times one-year forward P/ABV, the stock trades at a discount to large peers. PL Capital forecasts RoA at 1% for FY26 and 1.1% for FY27, with RoE seen rising from 10.8% to 12.2%. While near-term earnings will likely stay under pressure, growth in mid-yielding assets, steady CASA and stronger fee income could set up a re-rating over the next 18–24 months.
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PL Capital
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
