Shares of Federal Bank Ltd fell over 8% on Friday after the net interest margin (NIM) for the March quarter (Q4FY23) came in below expectations. The rising cost of funds is the main villain of this story. The result: Federal Bank’s reported NIM declined by 18 basis points sequentially in the fourth quarter to 3.31%.
The bank does not expect any further increase in the cost of deposits as 80% of the deposit base was reassessed in the last quarter. Federal Bank’s product expansion into high-yield areas, including personal loans, credit cards, commercial vehicle loans and microfinance, could help NIM grow further. Gyanada Vaidya, Research Analyst, Axis Securities, said, “With the revaluation of a major portion of the deposit base in Q4 and the balance revaluation in the next two quarters, Federal Bank’s NIM is expected to soften in H1FY24, But is expected to stabilize in the second quarter. Half of FY24.”
On the other hand, there is limited scope for improvement in loan yield, given that 50% of the books are repo-linked and have already been reprinted. That said, there is still some room for improvement as around 13-14% of the loan book is MCLR-linked, which will get further renegotiated. However, the extent of profit on loan yield may be limited.
As such, NIM compression overshadowed some of the other positives in Q4 results. For instance, Federal Bank saw a healthy year-on-year (yoy) loan growth of 20.4% and the management expects to maintain growth in the high teens for FY24. Bank deposits grew at a slower rate of 17.4%. Furthermore, asset quality was stable. Overall, higher treasury gains and lower provisions meant standalone net profit rose sharply to 67% 903 crores.
Federal Bank’s return on equity (RoE) in FY23 was at a multi-year high of around 15%. On Monday, shares of the bank were up about 1%, having gained as much as 41% over the past year. Thus, the stock is likely to witness a sharp rally in the near future due to pressure on margins in the near future.
Analysts at Elara Securities (India) said, “While FB has achieved FY23 exit return on assets (RoA) guidance and management has expressed confidence in the same, we believe sectoral headwinds ( on NIM) can cause some frustration.” Report on 6 May. To be sure, management’s commentary on NIM guidance provides comfort. Investors were concerned about the core operating performance and thus, the bank’s delivery on the stated parameters (for FY24- NIM of 3.30-3.35%; ROA of 1.30- 1.35%) is expected to boost confidence and boost confidence, say analysts at Elara. Needed to help with rerating.
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