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Federal Bank's recently released Q3 earnings report sent ripples through the market, causing a significant intraday dip in its share price. The bank reported a net profit of ₹955 crore, representing a 5% decrease compared to the ₹1007 crore earned in the same period last year. This decline, while notable, needs to be contextualized within the broader financial performance. Despite the decrease in net profit, the bank achieved its highest-ever pre-provision operating profit, signaling underlying strength in its core operations. This discrepancy highlights the impact of increased provisions, a key factor influencing the overall profit figure. The surge in pre-provision operating profit to ₹1570 crore from ₹1437 crore in the previous year’s corresponding quarter underlines the bank's robust performance in generating revenue before accounting for potential losses. This growth was fuelled by a notable 14.5% expansion in net interest income, reaching ₹2,431 crore, and a 21% year-on-year increase in fee income. These figures indicate a healthy and growing revenue base for the bank, suggesting a positive outlook for future profitability despite the current challenges.
The market reacted swiftly to the earnings report. Shares of Federal Bank experienced a sharp intraday decline of 7%, plummeting to ₹178.15 before recovering slightly to close at ₹184.10, still representing a 3.61% drop compared to the previous day's closing price. This volatility underscores the sensitivity of the market to even slight deviations from expectations. The stock's performance also needs to be considered in the context of its recent history. The stock hit a 52-week low of ₹139.80 on March 14, 2024, highlighting the fluctuating nature of its value. The significant volume of shares traded – 10.25 lakh shares amounting to a turnover of ₹18.62 crore on BSE – further illustrates the market's active engagement with the bank's performance and the investor sentiment surrounding it. The relatively high trading volume indicates a considerable level of investor interest and engagement with the stock, which could be attributed to a variety of factors, including the previous involvement of the late investor Rakesh Jhunjhunwala.
The increase in provisions played a critical role in shaping the overall results. Total provisions reached ₹292 crore in the December quarter, significantly higher than the ₹91 crore reported in the same quarter of the previous year. This increase, while impacting the net profit, also reflects a proactive approach to managing risk. The bank's provision coverage ratio rose to 74.21% from 71.08%, indicating an improved capacity to absorb potential losses. Furthermore, there were positive signs in the bank's asset quality. The gross non-performing assets (GNPA) ratio decreased to 1.95% from 2.29% a year ago, and the net NPA ratio also improved to 0.49% from 0.64%. These improvements suggest that the bank is effectively managing its risk profile and mitigating potential losses from non-performing assets. However, the higher-than-expected provisions caused some concern among analysts, leading to revisions in target prices by several brokerages.
Several brokerage firms responded to Federal Bank's Q3 results with varying analyses and target price adjustments, although generally maintaining a positive outlook. Nuvama, for instance, reduced its target price to ₹215 from ₹235 but maintained its 'buy' call, citing strong asset quality despite soft PPOP and growth. They acknowledged the impact of slower-than-normalized growth and higher credit costs. JPMorgan also maintained a 'buy' rating with a target price of ₹215, noting that the operating performance exceeded expectations, but higher provisions led to an overall result that missed expectations. They also pointed out that FY25 estimates may be revised downward, while FY26 guidance will largely depend on the newly appointed CEO's strategic direction. UBS, another major brokerage, echoed similar sentiments, retaining a 'buy' call but decreasing its target price to ₹235 from ₹250, emphasizing that profit after tax (PAT) was below expectations due to increased provisions and subdued loan and deposit growth. They also anticipated a downward revision in the management's previous guidance for FY25. The consistent 'buy' calls from multiple brokerages indicate a relatively optimistic long-term view on Federal Bank's prospects, despite the short-term dip caused by the Q3 earnings report.
Technically, the stock's relative strength index (RSI) stands at 42.8, indicating that it is currently neither in oversold nor overbought territory. This neutral technical indicator suggests that there might be potential for future price movements in either direction. However, the fact that the stock is trading below its 5-day, 20-day, 50-day, 100-day, and 200-day moving averages suggests a bearish trend in the short to medium term. This technical analysis further informs the understanding of the market's response to the bank's Q3 earnings, adding another layer of interpretation to the stock's current state and potential future trajectory. The involvement of the late Rakesh Jhunjhunwala's wife, Rekha Rakesh Jhunjhunwala, who held a 1.42% stake in the bank at the end of December 2024, adds another dimension to investor sentiment, underscoring the ongoing influence of the late investor’s legacy on market perceptions and potentially adding to the stock's volatility and attractiveness to investors.
Source: This Jhunjhunwala stock falls 7% on Q3 earnings, here's what brokerages say