Federal Bank, IDFC First Bank, Indian Bank: Should you buy these banking stocks?

Brokerage firm Anand Rathi has shared its views on three banking stocks—IDFC First Bank, Federal Bank, and Indian Bank—after they reported their Q2 earnings.
As of 11:28 AM, shares of IDFC First Bank were trading 0.60% lower at Rs 66.71 on the Bombay Stock Exchange (BSE), while Federal Bank saw a notable increase of 6.85%, reaching Rs 197.35, and Indian Bank climbed 2.99% to Rs 567.45.
With varied performances and growth prospects, the question remains: should investors seize the opportunity in these banking stocks or tread cautiously? Let’s delve deeper into what the analysts are saying.
IDFC First Bank reported healthy growth in Q2; however, increased provisioning costs resulted in a significant 73% year-on-year decline in profit after tax (PAT). In response to higher credit costs and lower growth estimates, Anand Rathi has revised their FY25 and FY26 earnings forecasts downwards.
Despite this, the brokerage maintains a “Buy” rating, valuing the bank at 1.4 times FY26 estimated book value, down from the previous 1.6 times.
The bank demonstrated strong performance in both advances and deposits. Advances grew by 23% year-on-year and 6.2% quarter-on-quarter, with retail lending—particularly in housing and consumer segments—growing rapidly. Additionally, deposits increased by 32% year-on-year, with retail deposits now accounting for 80% of the total.
Improved operating leverage is crucial for enhancing return on assets (RoA). While the net interest margin (NIM) declined by 12 basis points to 6.2%, the bank’s credit-deposit ratio improved from 108% to 96% in Q1 FY24. Despite a high cost-income ratio of 70% due to ongoing investments in technology and liability franchises, Anand Rathi expects this ratio to decrease to 69% by FY26.
One-off provisioning negatively impacted results, as delinquencies in the microfinance institution (MFI) segment increased, leading to higher provisioning costs. Management also prudently recognized a toll-infrastructure player as a non-performing asset (NPA), resulting in unexpected provisioning levels. For FY25 and FY26, the brokerage has factored in higher credit costs of 2.2% and 1.7%, respectively.
Federal Bank has reported steady operating profits with moderate provisioning, leading to a return on assets (RoA) of 1.28%, a slight increase from the previous quarter. The bank’s balance sheet showed strong growth, with stable headline asset quality. Anand Rathi maintains a “Buy” rating, projecting continued growth in the high teens and a sustainable RoA of 1.2%.
The target price is set at Rs 242, based on a valuation of 1.3 times the FY27 estimated adjusted book value.
Headline asset quality remains stable, with slippages amounting to Rs 4.3 billion (0.8% of loans), consistent with the prior quarter and better than anticipated. The retail segment experienced lower slippages, and the standard restructured book fell by 10% quarter-on-quarter to Rs 16.4 billion, representing 0.7% of loans, with approximately 15% coverage.
Looking ahead, Anand Rathi projects credit growth to be in the high teens, driven by strong retail and SME segments, with expectations of approximately 18% growth for FY25-27.
The bank’s strong liability franchise and a focus on higher-yielding products are expected to maintain medium-term margins near current levels, supporting a RoA around 1.2% throughout FY25-27.
Indian Bank reported improved operating performance with a RoA increase of 13 basis points quarter-on-quarter to 1.33%. The bank’s asset quality continues to show signs of improvement, with a decline in both gross non-performing assets (GNPA) and net non-performing assets (NNPA).
Anand Rathi maintains a positive outlook, forecasting a sustainable RoA of over 1.1% in the medium term and has set a target price of Rs 685, valuing the bank at 1.1 times its FY27 estimated book value.
The bank benefited from lower slippages and higher write-offs, contributing to an overall improvement in asset quality. Slippages for Q2 FY25 were recorded at Rs 14.5 billion (1.1% of loans), with significantly better performance in the retail and SME segments. The standard restructured book decreased to Rs 71.4 billion, or approximately 1.3% of loans, further indicating improving asset quality.
With expectations of a pick-up in loan growth of around 16% for FY25 and a manageable slippage run-rate, credit costs are anticipated to remain modest. Anand Rathi projects a stable operating environment with robust profitability, estimating a RoA of over 1.1% and a return on equity (RoE) of over 15% through FY25-27.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)