Whalesbook
The banking sector continues to capture investor attention, with Federal Bank emerging as a favored counter following a bullish report from Prabhudas Lilladher. The financial services firm has issued a 'BUY' rating, anchoring its optimism on a robust quarterly performance that saw Net Interest Income (NII) surpass expectations by 4.2%.
Net Interest Margins (NIMs) are a key highlight, climbing 12 basis points quarter-on-quarter to reach 3.18%, a seven-quarter peak. This impressive growth was achieved despite a repo rate cut in December 2025. The margin expansion was primarily organic, driven by a strategic reduction in high-cost liabilities, a decreased reliance on interest-bearing liabilities, enhanced investment yields, and the benefit from a Cash Reserve Ratio (CRR) cut.
Outlook and Earnings Revision
Prabhudas Lilladher has revised its earnings projections upwards, anticipating a 5 basis points increase in NIM for both FY27 and FY28. Asset calibration efforts are yielding positive results, with notable growth observed in the Corporate Back Office (CoB), Business Banking (BuB), and gold loan segments during Q3 FY26. While corporate accretion was healthy, the bank maintained a focus on mid-corporates, ensuring the growth was not NIM dilutive. The brokerage remains watchful of operating expenses (opex) and the transition to the Expected Credit Loss (ECL) accounting framework.
Core Profit After Tax (PAT) for FY27 and FY28 has been raised by an average of 4.0%. The projected increase in core Return on Assets (RoA) for FY28 to 1.2% has prompted Prabhudas Lilladher to elevate its valuation multiple to 1.4 times, while extending the valuation roll-forward to March 2028 Asset Book Value (ABV). Consequently, the target price has been increased to Rs 275 from the previous Rs 250, with the 'BUY' recommendation reiterated.