Shares of Federal Bank crashed 6% in Monday’s intraday trade, hitting a 14-week low of ₹185 apiece after the bank’s June-quarter numbers came in below Street estimates. The performance was weighed down by a significant jump in provisions, elevated credit costs, and higher slippages. However, the stock has recovered smartly from intraday lows and is now trading with a mild 0.20% decline at ₹195 as of noon.
Slippages increased to ₹6.6 billion from ₹4.9 billion in Q4FY25, mainly due to higher stress in the MFI segment. The GNPA and NNPA ratios deteriorated marginally to 1.91% and 0.48%, respectively, compared to 1.84% and 0.44% in the previous quarter. Provisions grew 177.4% YoY to ₹400 crore, with credit costs rising to 67 basis points versus 27 basis points YoY and 24 basis points QoQ.
The elevated credit costs were primarily driven by higher MFI agri slippages. About 20% of the MFI portfolio is concentrated in Karnataka (KA), which contributed significantly to the stress. Kerala (KL), constituting 30% of the MFI portfolio, maintained stable asset quality metrics. However, the bank has proactively tightened its underwriting norms in Kerala.
Management highlighted that MFI slippages peaked in May 2025 and have been trending downwards month-on-month through June and July 2025. Similarly, the SMA pool and collection efficiency in the MFI book have shown improvement, possibly indicating that the worst is behind.
The bank has guided for 55 basis points credit costs for FY26. In the Business Banking and Commercial Vehicle (CV) portfolio, there has been a slight increase in stress; however, it is not alarming, according to domestic brokerage Axis Securities.
Meanwhile, the bank’s NIMs declined sharply by 18 basis points due to a 27 basis points drop in yields and a 4–5 basis points impact from interest reversals, partially offset by a 20 basis points decline in CoD. With most of the repo rate cut impact already reflected in yields (given the T+1 pass-through), the quantum of NIM compression in Q2 is expected to be significantly lower at 5–10 basis points, Axis added.
On the bottom line, the bank reported a net profit of ₹862 crore, down 14.6% YoY and 16.4% QoQ, while Net Interest Income (NII) grew 1.96% YoY from ₹2,291.98 crore to ₹2,336.83 crore.
What should you do with the stock post Q1 numbers?
Following the Q1 performance, Axis Securities retained its ‘Buy’ rating on the stock with a target price of ₹240 apiece. Assuming near-term headwinds and unfavorable macros dampen growth momentum, the brokerage cut its growth estimates for FY26 by 3% while building in a strong growth rebound from FY27E onward. It also trims its NII and earnings estimates by 1–4% and 6–7% for FY26–27E, respectively.
The brokerage expects credit costs to gradually normalize and settle at 50 basis points (±5 basis points) over FY26–28E, leading it to revise earnings estimates lower by 6–7% for FY26–27E. “We factor in robust Credit/Deposit/NII/Earnings CAGR of 16%/16%/17%/18% over FY25–28E,” it said.
Motilal Oswal also reduced its earnings estimates by 7% and 4% for FY26 and FY27, respectively, factoring in slight margin contraction and elevated provisions. It estimates Federal Bank to deliver an FY27 RoA/RoE of 1.18%/13.0%. However, the brokerage reiterated its ‘Buy’ rating with a target price of ₹235, based on 1.4x FY27E ABV.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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