Federal Bank delivered a strong performance in Q3FY26, with profit after tax rising 9% both year-on-year and quarter-on-quarter to ₹10.40 billion. The results exceeded analyst expectations by 7%, demonstrating the bank's robust operational efficiency and strategic execution.

Financial Performance Highlights

The bank's financial metrics showed consistent improvement across key parameters during Q3FY26:

Margin Expansion and Cost Management

Net interest margins expanded significantly by 12 basis points quarter-on-quarter to 3.18%, surpassing Motilal Oswal's estimate of a 3 basis points decline. This improvement was primarily driven by effective cost of funds management, with costs reducing by 11 basis points quarter-on-quarter. The margin expansion, combined with healthy loan growth in medium and high-yield segments, contributed to the bank's strong net interest income performance, which grew 9.10% year-on-year and 6.30% quarter-on-quarter, beating estimates by 5%.

Growth Momentum Across Segments

Federal Bank's advances growth of 10.90% year-on-year and 4.50% quarter-on-quarter exceeded both analyst and market expectations. The growth was characterized by broad-based expansion across most segments, with retail being the only exception. This diversified growth strategy helped the bank maintain a balanced portfolio while capturing opportunities in higher-yielding segments.

Deposit Performance and CASA Improvement

The bank's deposit base grew 11.80% year-on-year and 3.10% quarter-on-quarter, providing a stable funding foundation. Particularly noteworthy was the CASA (Current Account Savings Account) performance, which registered impressive growth of 18.90% year-on-year and 6.60% quarter-on-quarter. This strong CASA growth led to an improvement in the CASA ratio to 32.10%, compared to 31% in Q2FY26.

Analyst Outlook and Recommendations

Based on the strong Q3FY26 performance, Motilal Oswal has revised its profit after tax estimates upward by approximately 2.50% for FY26 and 2.30% for FY27. The revision factors in the sustained net interest margin expansion and healthy loan growth trajectory. The brokerage estimates Federal Bank to deliver FY27E return on assets of 1.26% and return on equity of 12.20%. Motilal Oswal has reiterated its BUY rating with a target price of ₹310, representing 1.7 times September 2027 estimated adjusted book value.

Federal bank has received a maintained Buy rating from Prabhudas Lilladher, with the brokerage firm raising its target price to ₹275 from the previous ₹250, reflecting confidence in the bank's strong operational performance and improving financial metrics.

Strong Quarterly Performance Drives Optimism

The bank delivered an impressive quarterly performance with a 4.2% beat on Net Interest Income (NII), demonstrating robust operational efficiency. The standout metric was the Net Interest Margin (NIM) which rose by 12 basis points quarter-on-quarter to reach 3.18%, marking a seven-quarter high despite the repo rate cut implemented in December.

Organic Growth Factors Support NIM Expansion

The improvement in NIM was attributed to organic factors rather than external market conditions. The brokerage identified four key drivers behind this positive development:

• Fall in higher cost liabilities
• Reducing share of interest-bearing liabilities
• Better investment yield performance
• Benefits from the CRR (Cash Reserve Ratio) cut

Based on these positive surprises and superior balance sheet mix, Prabhudas Lilladher has raised its NIM projections by 5 basis points each for FY27 and FY28 estimates.

Asset Quality and Business Mix Improvements

The bank's asset calibration strategy is progressing effectively, with good growth observed across multiple segments during Q3FY26. The Current Account and Savings Account (CASA), Business Banking, and gold loan portfolios all demonstrated healthy expansion. Corporate lending accretion remained robust while maintaining focus on mid-corporate segments, ensuring that growth did not dilute the NIM performance.

Revised Financial Projections and Valuation

The brokerage has updated its financial projections based on the strong performance indicators:

The target price revision reflects the rolling forward to March 2028 Adjusted Book Value (ABV) with an increased multiple of 1.4x, up from the previous valuation framework. This adjustment is based on the improved core Return on Assets (RoA) projection of 1.2% for FY28E.

Key Monitoring Areas

While maintaining an optimistic outlook, Prabhudas Lilladher has identified specific areas requiring continued monitoring. The brokerage remains watchful of operational expenses (opex) trends and the bank's transition to Expected Credit Loss (ECL) methodology, which could impact future financial performance and risk management practices.