Hidden Gem Alert: Federal Bank Set to Outshine Peers with 20% CAGR & ₹250 Price Target 26.06.2025

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🚀 Federal Bank Stock:  20% Earnings Boom – Here’s Why It’s a “BUY” Now!

Federal Bank (NSE: FEDERALBNK) is quietly preparing for a major transformation. Often overlooked, this mid-sized private bank could be your next multi-bagger. As per Motilal Oswal’s June 2025 report, a 20% earnings CAGR and a potential ₹250 target (19% upside) make it a compelling BUY.

🔍 Why You Should Watch Federal Bank NOW

  • ✅ Motilal Oswal Rating: Strong BUY with ₹250 Target Price
  • 📈 Upside Potential: 19% from current price of ₹209
  • 💹 Earnings Boom: Targeting 20% CAGR (FY25-FY28)
  • 📊 Return on Assets (RoA): Expected jump from ~1.2% to 1.5% by FY28
  • 💸 Undervalued: Trading at a discount vs peers – perfect re-rating candidate

⚙️ What’s Fueling the Growth?

🔄 Smart Portfolio Shift – More Profits, Less Risk

  • 💼 Focus on High-Yield Loans:

    • Gold Loans
    • Loans Against Property (LAP)
    • Used Commercial Vehicles (CVs)
    • Credit Cards

  • 🧹 Cutting Low-Yield Corporate Loans

  • 📈 Loan Growth to Accelerate to ~17% CAGR till FY28

  • 🪙 Gold Loan Rebound expected with RBI’s relaxed LTV norms

  • 🧠 Cautious on Unsecured Loans – Ready to re-enter when risk moderates

💰 Strong Deposit Strategy = Long-Term Margin Power

  • 🏦 Focus on Low-Cost Deposits:
    • Aggressively boosting Current Account (CA) share
    • Expanding beyond Kerala using NRI deposit strength (29% of total)
  • 🔧 Branch Transformation: Converting outlets into deposit hubs
  • 💧 High Liquidity: LCR at 142% (FY25)
  • 📊 Deposit Growth Projection:
    • 15%+ CAGR (FY25-FY28)
    • CASA Ratio to rise to 34–35%

📉 Margins Under Pressure Now, But Big Gains Coming

  • 🔻 Short-Term NIM Pressure:

    • Higher cost of funds
    • Repo-linked loan repricing
    • Slower CASA growth

  • 📈 FY28 NIM Target: 3.5%, driven by:

    • High-yield loan focus
    • Better deposit mix (more CASA)
    • Exit from low-margin segments (corporates, mortgages)

  • 📆 NIM to bottom in FY26, then rebound strongly

🛠️ Cost Control: Investment Today, Efficiency Tomorrow

  • 💸 C/I Ratio High for Now:

    • 4QFY25: ~56.7%, FY25 avg: ~54%
    • Due to: New branches, marketing, and digital projects (Neo & Udaan)

  • 📉 Long-Term Target:

    • C/I Ratio to drop to ~48.8% by FY28
    • Driven by scale, tech, and centralization

🛡️ Asset Quality = Best-in-Class Stability

  • 🏆 Top-Notch Asset Quality:

    • GNPA: 1.84%, NNPA: 0.44%
    • PCR >75%
    • Restructured book down to just 0.6%

  • 🧠 Proactive Risk Control:

    • Low slippages, strong recoveries
    • Cautious in high-risk lending (e.g., microfinance, cards)

  • 📈 FY28 Projections:

    • GNPA: 1.7%, NNPA: 0.4%
    • Credit costs contained at ~35–45 bps

🔁 Return Ratios: Big Jump in Profitability Ahead

  • 📊 RoA Transformation:

    • From historical 1.2% to 1.5% by FY28
    • RoE to climb to 15.6%

  • 🚀 Driven by:

    • Higher NIMs
    • Lower costs
    • More fee income (cards, wealth, fintech)
    • Controlled credit losses

💎 Valuation: Still Cheap – Not for Long!

  • 📉 Current Valuation Lagging Peers
  • 💥 Re-Rating Trigger:
    • Strong execution, rising NIMs, lower costs, higher RoA/RoE
  • 📌 Target Price: ₹250
    • Based on 1.5x FY27E Adjusted Book Value

✅ Final Verdict: Federal Bank is a Must-Watch BUY

Why It Stands Out:

🔍 Key Metric 💥 Target by FY28
Loan CAGR ~17%
NIM ~3.5%
C/I Ratio ~48.8%
RoA 1.5%
RoE 15.6%
Target Price ₹250

📢 Bottom Line:

If you're looking for a fundamentally strong, under-the-radar bank with massive upside potential, Federal Bank is a hidden gem. Strategic execution + low valuations = multi-year wealth creation opportunity.

🔐 Disclaimer: Based on Motilal Oswal’s June 2025 report. Stock investing is subject to market risks. Please consult a SEBI-registered advisor before investing.


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