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Federal Bank (CMP - ₹229, Mcap - ₹56,421 crore, Target price – 215, Rating - Hold) – “Healthy revival in Q2; further recovery expected in H2FY26…”

ICICIdirect Research 24 Oct 2025 DISCLAIMER

Federal Bank delivered a healthy revival in Q2FY26, on the back of margin recovery, healthy fees income, and steady credit cost. NIM expanded 12 bps sequentially to 3.06% aided by lower funding costs and a better loan mix towards mid-yield segment. However, advance growth remained slower at 6% YoY (2% QoQ) to ₹2,55,613 crore, with traction in commercial banking while deposits rose 11% YoY (2.5% QoQ) to ₹2,88,920 crore, with CASA ratio improving 66 bps QoQ to 31.01%.

After pressure in Q1FY26, NIM improved 12 bps QoQ to 3.06%, led by 19 bps reduction in deposit cost, lower borrowing rates, and a better asset mix towards mid-yield segments such as gold loans, LAP, CV finance, and commercial banking. Asset quality remained resilient with slippages from MFI segment easing month-on-month, and credit cost guidance was maintained at ~55 bps for FY26E.

Management continues to execute well on its strategy of improving yields, though margin pressure and slower growth in H1FY26 is seen to impact FY26 performance. However, anticipating recovery in H2FY26, we maintain our multiple at ~1.25x FY27E BV.

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