Emkay Global Research has issued a Buy recommendation for Federal Bank, with a target price of ₹240, which represents a 33% increase from the current market price of ₹180. Under its Plan 4.0 strategy, Federal Bank is striving to establish itself as one of the most prominent private institutions in India.
The bank’s objective is to compete with industry leaders such as ICICI, HDFC, and Kotak Mahindra Bank within the next 3-5 years by concentrating on digital expansion, improved asset management, and profitability. The four primary factors that underpin this optimistic outlook are as follows:
Strengthening Core Business & Profitability
The Federal Bank is transitioning its focus from expansion-driven growth to high-quality profitability, with the objective of achieving a Return on Assets (RoA) of over 1.4% (an increase from 1.2%). The appointment of KVS Manian (ex-Kotak) as MD & CEO has already resulted in rapid corrections, such as improved liquidity management and pricing adjustments. The bank is well-positioned to sustain long-term growth and increase earnings through strategic adjustments and strong leadership.
Expanding High-Yield Loan Portfolio
In order to enhance margins, Federal Bank is diversifying into high-yield loan segments, including SME financing, real estate lending, used vehicle loans, and micro-loans. In contrast to large corporate lending, which has lesser margins, these segments provide superior risk-adjusted returns. Additionally, the bank intends to introduce new products in mid-market corporate lending to guarantee a profitable and diversified loan portfolio.
CASA Growth & Liability Reorientation
Banks can mitigate borrowing expenses by maintaining an adequate Current Account-Savings Account (CASA) ratio. Federal Bank’s objective is to elevate its CASA ratio from 30% to 36% by FY28, with a particular emphasis on the expansion of branches in Tier 2 and 3 cities and the growth of Non-Resident (NR) deposits. The bank aspires to increase its profitability by attracting a greater number of low-cost deposits through the provision of superior transactional banking services and premium banking products.
Digital & Operational Expansion
The “Free the Branch” initiative is being implemented by the bank to modernize its operations. This initiative prioritizes business acquisition over administrative responsibilities at its branches. Customer acquisition will be stimulated by the establishment of 400-450 new branches by FY28, in addition to robust digital banking and wealth management offerings. Federal Bank endeavors to effectively compete in the digital banking sector by leveraging fintech partnerships and improving digital transactions.
Conclusion:
Emkay Global maintains a BUY rating on Federal Bank with a target price of ₹240, which suggests a 33% increase. The bank’s aggressive growth strategies and well-defined roadmap position it for a potential re-rating in the future years, despite the presence of near-term challenges. Investors who are seeking a high-growth banking stock should monitor Federal Bank’s transformation.