CLSA initiates on Federal Bank with 'Outperform,' sees 18% upside; stock up

The upward movement in Federal Bank's stock price came after the Hong Kong-based brokerage CLSA initiated coverage on the stock with an 'Outperform' rating.

CLSA on Federal Bank: Despite the overall market weakness, Federal Bank shares rose on Friday, April 4, 2025, after global brokerage CLSA predicted an upside of nearly 18 per cent in the stock, from current levels, over the next one year. CLSA has initiated coverage on Federal Bank shares with an 'Outperform' rating. The brokerage has set a target price of ₹230.

 

This, the Hong Kong-based brokerage said, is on the back of the lender's substantial non-resident (NRE) deposit base, contributing 30 per cent to total deposits.

 

Also, unlike its peers, it has been able to scale up much faster. Over the past decade, its loan book has grown at a 17 per cent CAGR versus 8-9 per cent for peers such as J&K Bank and South Indian Bank. Its loan book stands at ₹2.3 trillion, as against sub-₹1 trillion for peers.

 

 

On the bourses, Federal Bank shares rose 1.44 per cent, to hit an intraday high of ₹197 per share on the BSE. However, at 2:33 PM, Federal Bank shares were off day’s high and were trading 0.39 per cent higher at Rs 194.95. In comparison, BSE Sensex was trading 1.26 per cent lower at 75,330.91 levels.  ALSO READ | Bandhan Bank slips 3% after reporting Q4 update; CASA deposits down 5% YoY

 

“While the near-term outlook is muted, we expect the bank to pluck low-hanging fruit and improve returns over the next three years (~14 per cent return on equity (ROE) in FY27/28CL versus an average of 11 per cent over the past decade). The stock is inexpensive at 1.1x price-to-book (PB)/9x price-earnings (PE) [FY27]. We initiate coverage with an Outperform (O-PF) rating and target price (TP) of Rs 230 (1.4x PB),” said Piran Engineer and Roshny Munshi of CLSA, in a note dated April 3, 2025.

 

Meanwhile, here are the key factors behind the initiation of coverage on Federal Bank

 

Decent performance historically with robust asset quality

 

According to CLSA analysts, Federal Bank stands as the largest ‘old private sector’ bank in India and has outpaced peers in growth over the past decade. What sets Federal Bank apart is its substantial non-resident (NRE) deposit base, contributing 30 per cent to total deposits. 

 

The bank, analysts highlighted, is also less reliant on bulk deposits compared to other mid-sized private banks. 

 

“Despite having meaningful corporate exposure, the bank sailed through the corporate credit crisis of the past decade thanks to its low-risk lending philosophy. Its average credit costs of the past 5/10 years are in line with those of high-quality private sector banks like HDFC Bank,” analysts at CLSA said.  ALSO READ | Bajaj Finance shares gain 2% on reporting Q4 update; check details here

 

Aiming at capturing low-hanging fruit

 

Federal Bank benefits from its unique deposit base, though it lags behind peers in terms of CASA ratio, particularly in current account deposits, CLSA analysts said. 

 

Under the leadership of the new CEO, analysts believe, there is a clear focus on increasing the share of current account deposits and expanding branch outreach. 

 

Analysts noted that the bank has also underutilised its deposit base in cross-selling retail loans, unlike its larger private-sector peers. “Management will look to tap the opportunity to cross-sell retail loans as well as para-banking products like insurance more actively. These initiatives should help to improve NIM and fees by 25-30bp over FY26-28, in our view,” according to CLSA.

 

Near-term NIM pressure due to rate cuts; profitability expected to improve from FY27 

 

CLSA analysts said that FY26 is expected to be a year of recalibration as the bank prioritises profitability over loan growth. 

 

During this period, analysts highlighted, Net Interest Margin (NIM) may face some compression, as approximately 50 per cent of loans are linked to the repo rate. Analysts predict a decline in NIM of about 20 basis points (bps) over the next three quarters, followed by an improvement as deposit costs adjust with a lag.   ALSO READ | YES Bank down 4% after Q4 business update, stock nears 52-week low

 

Loan growth, they said, is expected to be 17 per cent over FY25-28, with return on equity (ROE) improving 200bps over the same period.

 

However, the key risk identified by analysts is the potential failure to execute on CASA deposit growth, which could lead to downgrades in profit after tax (PAT).