Shares of Federal Bank tumbled 4% on May 2 as concerns over margin pressures in a changing rate environment outweighed the company’s healthy March quarter earnings.
The lender posted a solid set of numbers for the March quarter with net profit rising 13.7% year-on-year to Rs 1,030.2 crore, up from Rs 906.3 crore last year. Net interest income grew 8.3% to Rs 2,377.4 crore, while the net interest margin improved to 3.12%, helped by strategic moves during the quarter.
On the asset quality front as well, there was clear progress. Gross NPAs dropped to Rs 4,375.5 crore from Rs 4,553.3 crore in the previous quarter, and net NPAs fell to Rs 1,040.4 crore from Rs 1,131.2 crore. As a percentage, gross NPA eased to 1.84% from 1.95%, while net NPA improved to 0.44% from 0.49%. The provision coverage ratio (excluding technical write-offs) stood at a comfortable 75.37%.
Now while the lender managed to improve its profitability in Q4, changing rate conditions have sparked concerns over pressure in the coming quarters. Analysts at Nomura touted the quarter under review as mixed, flagging that the near-term outlook for Net Interest Margins (NIM) remains soft.
Nomura also expects NIM moderation of 17 basis points and 9 basis points in FY26 and FY27, respectively, bringing them to 2.9% and 3.1%. To that effect, the brokerage also lowered its earnings-per-stock (EPS) estimates for FY26-27 by 8-10%.
Along similar lines, Morgan Stanley flagged caution for the lender’s Pre-Provision Operating Profit (PPoP), anticipating it to come under pressure as the interest rate cycle changes and operating expenses continue to rise.
According to Morgan Stanley, sustaining FY25 return ratios, such as Return on Assets (RoA) of 1.2% and Return on Equity (RoE) of 13%, may turn out to be a challenge for Federal Bank. Factoring these headwinds, Morgan Stanley has downgraded its earnings estimates for Federal Bank by 4% for FY26 and 2% for FY27. The firm also shared that in the near-term, the lender faces the risk of intensifying competitive intensity that could weigh on its profitability.
